Fraud is an unavoidable part of the online business, and it has become one of the biggest challenges merchants face. Choosing a fraud management solution that is able to effectively reduce fraud while maximizing business revenue is not only vital for growth, it has also become crucial to survival. However, merchants often face a dilemma choosing between in-house vs outsourced fraud management.

In-house vs outsourced: What to consider

For different merchants, their needs and priorities vary and there is no right answer to what each merchant should choose. However, merchants may consider these factors as a guide on whether to outsource fraud management or to manage them in-house:

  1. Total costs involved
    Aside from service fees (setup and transaction fees of outsourced systems), merchants should also consider other fraud-related costs, including the time invested by the review staff, expenses of developing systems and training staff, reputation damage from unhappy customers or lengthy verification opportunity costs.
  1. Resources available
    Considering how complex fraud could be, building an in-house fraud solution from scratch could be an extremely daunting task. Greater exposure to fraud and higher fraud risks could also create a time urgency.
  1. Business priorities
    Merchants may instead choose to dedicate time and resources to other business aspects, such as the user base and revenue. Fraud may not be of top priority, and merchants may delegate it elsewhere or manage it with a simple solution.

Merchants must take note of the implications involved in building a verification team or outsourcing to a provider. The following chart gives a quick look at the pros and cons of both in-house solutions and services provided by professionals:

Feature In-house Systems Outsourced Systems

Pros

System Flexibility Tools are adapted to business‘ needs as merchants choose their own risk thresholds Most tools can be customized to meet merchants’ needs
General Costs Initial costs are low Extensive offer available in different price ranges
Resources Merchants have total control of the resources allocated to combat fraud and rely entirely on their own staff to perform fraud checks Experienced, well-trained personnel means rapid reaction to sudden changes in the fraud scene and system updates; therefore, better position to gain agreements with industry players
Information available More flexibility: merchants choose which information must be gathered and how it must be stored and used Information on industry findings accessible

Cons

System Flexibility Merchants tend to focus on only one way to combat fraud and lose part of the whole picture Customization varies on the provider and it is usually restricted by the provider’s own parameters
General Costs Maintenance and update costs are high (e.g. time spent in manual verification and training periods for staff) Initial costs tend to be higher than in-house systems and some solutions might entail hidden costs, unplanned by merchants
Resources Poorly experienced staff means limited capabilities to react to new fraud schemes and update tools Services available vary on provider
Information available Merchants compile and store their own information Information on customers’ behavior is not always available, depending on provider

Is your fraud protection effective?

Additionally, merchants may assess the effectiveness of their current in-house or outsourced fraud system by answering the following questions:

  • Does the system guarantee the maximum number of genuine orders processed?
  • Is the cost of updating and maintaining the system/team within the initial budget?
  • Has the system adapted to the business needs?
  • Is the information about fraudulent orders and other key findings easily accessible?

Is the answer to one or more of the above questions a no? If so, merchants might need to reevaluate the effectiveness of their current fraud protection system, and consider making a change.