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How Much Does DIY Fraud Prevention Really Cost?

posted on: Fri Jun 17 2016

DIY fraud preventionI have a friend with a sailboat. Nothing extravagant, but next to the wheel he has a plaque that his wife bought to remind him of just how expensive his little “hobby” is:

A boat is a hole surrounded by water into which money is poured.

I’ve modified this slightly to call attention to just how expensive a “hobby” DIY fraud prevention is:

A data center is a hole surrounded by geeks into which money is poured.

Sure, a DIY fraud prevention solution may have seemed like a low-cost way to fight fraud when you first started, especially if volumes were low and you could handle exceptions with a few extra manual reviews.

But as transaction volumes reach a certain level, you need automation to avoid a huge surge in manual review costs. But beware! When you factor in all the costs for DIY technology, things get expensive quickly.

Take just one component of a DIY solution: servers (I chose servers because most people are familiar with them and there is a lot of Total Cost of Ownership (TCO) data available about servers). Here’s what just one server will cost you:

Year 1 $38,347.18
Year 2 $9,063.19
Year 3 $9,063.19
Year 4 $9,063.19
Year 5 $39,347.18
Year 6 $9,063.19
Year 7 $9,063.19
TOTAL $124,010.31

Wait, those are huge numbers! Don’t servers cost something like $5,000? Well, they may start at $5,000. But then TCO rears its ugly head… 

Direct costs: In Year 1 and Year 5, you have to buy the server plus pay for the operating system, application software, installation, configuration, integration, initial maintenance and support. On top of that, every year there is the cost of power (about $731.94/year in electricity for an average server) as well as cooling.

Indirect costs: Payscale.com says an average IT System Administrator costs about $60,000 per year. Of course, not all of this cost would be attributed to a single server. But as insurance costs, healthcare costs, and taxes continue to increase, so will this indirect headcount cost. Then you also have to factor in the costs associated with adding more manual reviewers to cover any holes in your automated systems. Not to mention outside IT personnel costs, like developers and integrators that may be required to supplement the expertise of your in-house team.

Hidden costs. On-premise servers used in DIY solutions typically have about 98% uptime. That sounds good, until you do the math and figure out that equals about 14.4 hours of downtime every month (more than an entire week each year)! Information Week did some calculations and came up with an average of $55,000 in lost annual revenue for smaller enterprises. What would a 14-hour outage cost your eCommerce operation? And not just on some random Sunday night at 2 am, but on Cyber Monday at high noon?!

And these don’t even include all the other factors that make DIY fraud prevention expensive and risky:

  • Do you really want to spend the time, money and resources attempting to become fraud prevention experts?
  • Are you being smart spending valuable capital on IT infrastructure that will become obsolete in 48 months or so?
  • Will you be able to rapidly scale if/when sales volume surges?
  • Would you rather invest in enhancing your products and customer service, or in hardware and software?

IT managers don’t like to talk about these scenarios with CFOs and CEOs. After all, “It is difficult to get a man to understand something, when his salary depends upon his not understanding it!" (Upton Sinclair).

However, if optimal financial performance is your ultimate goal, it may be time to have a deeper conversation with your IT team and ask them to determine if an on-demand fraud prevention solution like Kount can deliver greater profitability by improving on these critical KPIs:

  • Increase sales by reducing false positives
  • Avoid stolen/lost merchandise costs
  • Reduce chargeback fees
  • Minimize the high cost of manual reviews (better automation)
  • Handle large changes in transaction volumes with no lag or slack

Want to assess the true cost of doing-it-yourself? Try Kount’s WHAT’S THE “F” WORD COSTING YOU? Calculator. It will apply our proprietary algorithms to your current fraud prevention expense and show you how much lower those costs might be with Kount. As well as providing projections for reduced fraud and chargeback rates, plus expected sales increases.

60-Second Fraud Calculator