PSPs: Is Portfolio-Level Fraud Prevention a Viable Option for You?
A growing number of Payment Service Providers – including BlueSnap, Braintree, Chase Paymentech, GoECart, Magento, and X-Cart -- are offering portfolio-level fraud prevention as a baseline service to their merchant accounts.
As a result, they’ve seen some impressive results:
- “Our business has doubled while the chargeback rate for our merchants has declined 500%,” says John Johansen, Fraud Manager at BlueSnap.
- Portfolio-level fraud prevention helps Braintree deliver next-generation online and mobile purchasing experiences to innovators like Airbnb, Angry Birds, Fab, Hotel Tonight, TaskRabbit and Uber. "Braintree’s payment platform will help us manage fraud without dedicating resources or integrating with a third party,” reports Vlad Gurgov, CTO and co-founder of Virool. “We’re confident we have the right partner to help us recognize fraudulent activity and take action immediately, so we can focus on our business."
- Manish Chowdhary, CEO of GoECart, points out another benefit: “GoECart clients will enjoy a seamless and rapid onboarding process as well as great pricing for the solution.”
- Of course, merchants see big benefits too. Chase Paymentech merchants saw their chargebacks drop 30% to 50%. Other merchants saw increases in their top-line revenues. One top Internet retailer handling more than 25,000 orders per day was able to consolidate its fraud review program to a single full-time employee.
If you’re an issuer, acquirer, payment processor, payment gateway, or ecommerce platform, and you’d like to experience these types of success stories, you may be wondering just how difficult – or easy – it is to develop and sustain portfolio-level fraud prevention.
Like most things in life, the answer is: it depends. Let’s take a quick look at three common approaches to offering portfolio-level fraud prevention, and the key factors impacting performance and profits:
- IN-HOUSE SOLUTION
- Time: In-house systems require long lead times, even if you’re building on existing capabilities. Depending on the IT resources you have available, your in-house risk management bandwidth and capital budget, 9-12 months is not uncommon for lead times.
- Cost: Upfront investments in equipment, technology, and headcount front-load the spending curve with a six-figure (or higher) expense. In addition, there is considerable ongoing cost to maintain the technology and in-house headcount and expertise. However, the direct, “per-transaction” costs are lower and can eventually provide a reasonable ROI.
- Headcount: If you are starting from scratch, expect a heavy investment in risk management expertise: data scientists, fraud analysts, statisticians, program managers, etc. If you’re building upon existing capabilities, the hiring curve may not be as steep. Costs for manual review staff and manual reviews will vary widely, depending on the level of automation your in-house solution can provide.
- Security/Compliance: Part of the need for hiring sophisticated risk management expertise is to ensure continuing compliance with regulations for PCI, AML, OFAC, KYC, etc. Another factor to consider is the substantial risks and penalties associated with data breaches and the attendant levels of IT security measures necessary to prevent them.
- THIRD PARTY PROVIDER
- Time: Third party solutions can typically get up and running much more quickly than in-house systems. Some, like Kount Central, can be integrated into your systems in as little as 45 days. Even non-SaaS solutions can be integrated in less than half the time of in-house, do-it-yourself deployments.
- Cost: No upfront investments or capital expenses are required for SaaS solutions, easing start-up costs. And since IT infrastructure and expertise are resident with the provider, those are not budget line items you’ll need to worry about. Per-transaction fees will be higher than with in-house systems, but ROI is often much better during the first 5 years compared to the in-house approach.
- Headcount: Look to your third party providers to provide the risk management expertise, especially for higher-level functions like strategy and design, analysis, and development. Program managers will be necessary. One interesting note: a number of third party solutions, like Kount Central, deliver automation that eliminates a significant percentage of manual reviews, minimizing the headcount needed for reviewing transactions.
- Security/Compliance: Typically, third party providers assume the responsibility and risk for complying with regulations. Further, their core business revolves around security. While this can make them a more lucrative target for fraudsters, they are typically able to fund best-in-class security and compliance systems by amortizing those substantial costs over customers.
- HYBRID APPROACH
- Time: The third party tools and data sources essential to enterprise-class fraud prevention on a platform-side scale can be implemented fairly rapidly – 60 – 90 days. However, you’ll need IT infrastructure – servers, storage, networking, etc. – in place beforehand. This could mean the same 9-12 months lead time as an in-house system.
- Cost: Third party tools and data sources are not cheap and there may be the temptation to “get by” with as few as possible. Resist the temptation. IT infrastructure costs will be lower than with a full, in-house solution, but monthly subscription, licensing and per-transaction fees will burden cost-of-sales.
- Headcount: Third party tools and data sources can greatly enhance automation capabilities, enabling fewer manual reviewers and reviews. However, a strong team of higher-level data scientists, fraud analysts, and statisticians will still be necessary to provide strategic design, analysis and development direction.
- Security/Compliance: Like comprehensive third party providers, third party tools and data providers assume responsibility for complying with regulations. Nonetheless, at integration points and/or when data moves from their platforms to yours, you will likely incur obligations to comply with regulations (PCI, AML, OFAC, KYC, etc.).
The fact that a growing number of successful payment service providers are offering their merchants portfolio-wide fraud prevention as a baseline service – and none are abandoning it – indicates that it is delivering a strong benefit for issuers, acquirers, payment processors, payment gateways, and ecommerce platforms.
To find out more and discover if Kount Central can help make platform-level fraud prevention feasible for your payment service provider operation, check out the eBook: "Protect Your Merchants. Protect Your Profits."