Preventing fraud is already challenging without adding the confusion of what to build in-house and what to purchase from vendors. There is no standard answer – it depends on your industry, business and risk profile. That being said, there are guidelines all merchants can follow to navigate the murky waters of build vs. buy in fraud prevention.
In the spirit of March Madness, here is my Final Four!
Know Your Team:
If you sell furniture online, don’t look at how an electronics retailer successfully built their fraud solution. If you are a small or mid-size business, don’t try and keep up with enterprise level merchants.
This may seem obvious, but with technology innovation and buzzwords galore, there are plenty of shiny ‘next best things’ to chase. The pressure of tight margins and rising fraud losses make it even more difficult to stay disciplined. The proper path is not always clear.
Your fraud strategy should reflect your business. You need to factor in size, revenue, resources, industry, vertical, products, risk profile, customer base and other attributes that speak to your unique risking strategy. Stay educated on other success stories and informed on innovative technology, but start with understanding your own business.
Know Your Playing Field:
Knowledge of your business-specific fraud problems is a great start. The next step is to turn to the industry and educate yourself on the trends, technology and solution providers at play.
In fraud prevention, this can be quite challenging. Trends and technology evolve rapidly and the number of fraud solution providers has skyrocketed over the last five years. It’s very difficult to identify the best way to plug the fraud holes in your sales funnel.
Never-the-less, it is a critical step. Study the different fraud and abuse types. Move past buzzwords and understand the value of emerging technology. Make sense of the large group of providers and drill down on the fraud problems they are solving.
If you align the research with your business needs and capacity, you’ll discover a much more manageable workload. You can short-list your options and slowly dissolve the anxiety of “keeping up” with the industry.
Keep Score with ROI:
Ok, you understand your business specific fraud needs. You understand the industry, trends, technology and solution providers. Start shelling out money to product teams and providers and see what sticks right?!
At its core, the build vs. buy decision revolves around which option provides the most value. Businesses define value differently, but all have metrics that help quantify this. Before you decide on a vendor or begin sprinting to an internal build, it is important to use these metrics to assess and compare the value of all options.
Return on investment (ROI) is a good indicator of value. This analysis should be applied to all options, internal and external. The calculation varies based on the product functionality (ie: platform and decision engine vs. data provider). What’s consistent is moving past isolated and/or high level metrics.
For example, if you are procuring a platform and decision engine, you will consider things like approval rate, chargeback rate and time in queue (time to action). However, that doesn’t tell the whole story. It’s important to dive into customer lifetime value, customer acquisition cost, cost of staffing, cost of technology, and other revenue drivers that are also impacted by the decision. These are challenging calculations and projections, but are well worth the time.
Some other advantages of this analysis:
- It’s fueled by data, not opinions. Opinions and emotions can cloud the decision making process because they are biased. Good metrics solve this.
- It opens all doors. Build. Buy. Even Partner. It is open to whatever option delivers the most value.
- It reveals opportunity cost. Could internal fraud resources be better utilized in another department? Evaluating your options may reveal a compelling vendor ROI that provides this flexibility.
- It makes the right decision the first time around. This prevents the “build AND buy”, to replace sub-par products that did not deliver the necessary value.
Star Player or Role Player – There is Value:
Whether you decide to build your fraud solution primarily in-house or turn to external providers to shoulder the burden, fraud solution providers will play a role. The previous three guidelines help you determine the size of that role and where they best fit.
Whatever balance you achieve, consider the following advantages of using external solution providers:
- Specialized knowledge and expertise in a field that is a dynamic and challenging to manage
- Data at scale, leveraged across a high volume of customers and transactions
- Specialized functionality that targets fraud by industry, vertical, and fraud/abuse type
- The capacity to scale with business growth
- Networks of shared intelligence across multiple businesses and industries
Similar to filling out an NCAA bracket, not everyone has the same final four. But just like the teams you pencil in, they should be high quality options. These four principles are designed to guide any merchant involved in build vs. buy decisions and lead to value based, revenue driving actions.