The fraud prevention state of play: too many vendors, too little transparency

Furthermore, we see tools being bundled to address the growing list of requirements of customers. RFP documents became long Excel sheets. Every aspect of fraud detection has to be addressed, from real-time decisions in milliseconds to sophisticated machine learning models, ideally performing well without good training data (labels), completely unsupervised. All of this as a service per transaction without any setup costs.

Sales pressure made venture-backed vendors starting to tick all the boxes. And they would offer deals too good to be true. I have seen vendors offering 18 months of free testing. And I have seen vendors paying the client to be able to test and to promote the client as a newly won customer.

I understand the fast-pace metrics of this venture startup market since I am part of it. I have spent 6 years building a fraud prevention startup within Germany. And a year ago I started my second startup within risk assessment, covering credit scoring and fraud detection for financial products, including consumer loans and payment transactions.

I know that pure software solutions can generate the highest gross margins. And I know the sales pressure arising when you are used to grow your business by more than 50% year to year.

Not enough transparency on the vendor side?

But to be honest, it is time to get back to reasonable expectations on both sides of the negotiation table. I have seen many vendors being quite open about what they can achieve and where they still face real challenges for detecting and preventing fraud. Unfortunately, there is no ‘fraud-free world’, and there are no machine learning models that will identify new fraud patterns within millions of transactions in 20 milliseconds. We all know that but we still accept marketing messages that are far off from any reality.

Having spent quite some time with the Merchant Risk Council, as part of the European Advisory Board as well, I realised how disparate marketing communication became from real business. I like real business. My team and I were always proud when we managed to reduce fraud at a customers business significantly. I am realistic enough to believe that maybe quite a few companies within our space could have done the same. But in the end, there are more aspects to a successful client-vendor relationship than just the numbers. 

Understanding the client’s needs  

You want to make sure you understand the challenges your customer is facing. We have seen business models where it does not make sense to completely automate fraud prevention, even if it optimises the gross margin of the fraud prevention vendor. We have seen cases where a certain level of fraud was vital for the overall business model, since the false-positive rate would have been higher and good customers would have been lost, while fraud-related cost savings were neglectable.