The Pros and Cons of In-House Vs Outsourcing Fraud Solutions
by Florian Tanant
Online fraud is inevitable. Let’s explore the benefits of outsourcing fraud management and software versus dealing with it in-house.
A 2020 PwC survey of 5,000 businesses found that a whopping 47% of them had experienced fraud.
When it comes to online fraud and Risk Operations (RiskOps), it’s not about preparing for if it happens. It’s about being prepared when it happens.
The problem? There is a multitude of ways you could protect your company today. Today we’ll look at the major pros and cons of building a fraud detection software in-house, staffing your own Risk Ops or Risk operations team, outsourcing the lot, or buying external tools.
Outsourced Fraud Detection Solution
The first method is quite common with midsize companies who need extra trust and safety. Put simply, it’s about sending your data to an external risk management team, who will use their own tools and expertise to their best to reduce risk.
A lot of firms specialize in providing these services, with everything from content moderation to reducing credit card fraud.
Here are the pros and cons of choosing that route.
Pros of outsourced fraud management
- No support or integration needed: everything is taken care of by the risk management team.
- Easy to get started: simply find a way to send your data and see fraud rates decrease
- Scaleable costs: finding a reliable fraud management partner means you can focus on other problems
Cons of outsourced fraud management:
- False positives: if the fraud management team measures success by reducing fraud, they have a strong incentive to be conservative, which may block more valid payments.
Lack of control/intelligence: your fraud rates may decrease, but you will lack visibility into the process, which may make you more vulnerable to other attack vectors.
Staffing an In-House Fraud Department
As you may imagine, not every company will have the budget or luxury to hire its own fraud team. There’s staffing expense, the challenge of hiring the right talent, training, and ensuring you can scale operations.
But staffing your own department can be a worthwhile investment if data privacy and complete control of the fraud management system are primordial requirements. Below is the breakdown of the pros and cons of the method.
Pros of Staffing In-House Departments
- Answer to specific fraud challenges: your team will quickly learn exactly the specific fraud challenges that plague your business, and will know how to defeat them.
- Better control/intelligence: you get to tweak your detection methods, get full reporting and generally better business intelligence.
- Security/data protection: all the business data stays on-site, which increases safety and compliance
Cons of In-House Departments
- Expensive: adding new employees to your payroll is always pricey.
- HR challenges: finding the right talent is time-consuming and requires full-time attention.
Scaleability: do you keep a whole department on the payroll if fraud is only seasonal? What about when your fraud rates decrease over time?
Building In-House Tools
Build or buy is one of the most common dilemmas business owners face with any kind of tools. In the context of an anti-fraud system,
- A tailored system: that is to say, one that meets your very specific needs. If, for instance, your main concern is account abuse, you will have a very good idea of how often and when it happens. A third-party provider might not be able to target it as quickly with an out-of-the-box fix.
- Complete control: adding to the point above, all your anti fraud resources can be directed towards a specific goal, which means a more efficient result. You decide when and how the system kicks in, and get clear KPIs and figures for your ROI.
- No external support: the staff dedicated to your fraud management tool will get to know your products in and out. They will also remain fully available for fixes, updates and enhancements, something a support team might be able to provide with less agility.
- Full data privacy: none of the data leaves your premises as it is directly processed in-house. For companies where data-processing is highly sensitive, there is no better safety net than ensuring it is contained within your own silo.
- No integration nightmares: since the solution is purpose-built from scratch within your system, getting up and going should be a seamless, fast process. This is not always the case with complex external fraud tools.
Cons of In-House Fraud Solutions
- Resource heavy: Aside from the huge upfront costs, there are other points to consider. How long will it take before the tool can get off the ground? And how much time will be lost to integration tests before you get good results?
- Staffing difficulties: chances that you already have cybersecurity experts in your IT department are slim to none. This means you’ll have to go through a long, expensive and tedious hiring process to find the right professionals: risk manager, fraud analyst, developers, data scientists…. And let’s not forget that if they leave the company, you will need a thorough contract to ensure none of your technology is leaked.
- Data-enrichment: for increasing the precision of your fraud tool, you’ll need to aggregate data from various sources. This often means integrating middleware platforms, which defeats the purpose of insourcing in terms of data security.
- Ongoing maintenance: implementing a solution is one thing, keeping it ticking along as your company scales is another. Sadly, the burden of ensuring nothing breaks will be on you and your team, which can be taxing in the long term, both in terms of resources and budget.
Outsourcing a Fraud Detection Solution
Last but not least, it can help to strike a balance between all of the above by hiring a reduced team of fraud experts, and buying anti-fraud software through a third-party vendor.
Pros of Outsourced Fraud Tools
- No support or integration needed: everything is taken care of by the fraud detection solution vendor.
- Scaleable costs: this is especially true of the pay-per-API call solutions, where the fraud detection API only costs as much as you use it.
- Access the most powerful technology: how hard would it be to implement a machine learning system yourself? Probably very hard. When you buy outsourced fraud tools, however, you can leverage the most advanced anti-risk tech in seconds.
- Light on resources: the workforce comes with the fraud management package. That is to say, you won’t need to hire anyone, except perhaps a risk manager. This, of course, means fewer upfront expenses, and generally seems to be more cost-effective.
- Reduced oversight: since all the updates, bug fixes and feature implementations are handled by the provider, there is little to do for your company except monitor the results. This can relieve a lot of concerns of CFOs, who can concentrate on protecting their bottom line through other strategies.
Cons of Outsourced Fraud Solutions
- Integration can be complex: your external fraud detection solution needs to integrate within your system. This could be less seamless than you think if their documentation is lacking, or if their technology does not play nice with yours.
- Customisation is harder: Need to tailor the third-party solution to target your specific needs? You will either have to wait for them to release a new feature or ensure the system is flexible enough – which isn’t always the case.
- Still requires manual efforts: Going over the fraud tools’ analytics panel is still a job for your own team. If you want to tweak the fraud detection solution rules, for instance, it’s important to understand how the system works, which requires a bit of legwork on your part.
- Decision-making can lack transparency: Certain fraud tools give results without reasoning. This lack of transparency is frustrating, particularly when it comes to analysis and classification processes. Fraud managers must ensure they understand the scores or classifications to fine-tune their results with the best user experience.
Is It Worth Outsourcing Fraud Detection?
In spite of all its potential challenges, it would seem that the pros outweigh the cons of outsourced fraud solutions. Today, 43% of CFOs say they are likely to outsource part of their fraud detection solution, and the figure jumps to 69% when it comes to eCommerce merchants.
At SEON, we are well aware of the difficulties in choosing the best tool for your needs. Our solution was designed from the ground up to meet all your challenges, by offering a tool that is easy to integrate, flexible, easily scalable, and offers outstanding results, regardless of your vertical. For more information, do not hesitate to contact us for a demo today.
See a live demo of our product
Communication Specialist | Florian helps tech startups and global leaders organise their thoughts, find their voices, and connect with customers worldwide.
Sign up for our newsletter
The top stories of the month delivered straight to your inbox