Build or Buy?The Hidden Challenges of an In-House Fraud Team

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When it comes to managing fraud, eCommerce merchants have a critical decision to make—utilize a third-party solution or build your own fraud team in-house. There are pros and cons to both, but if your company is considering creating an internal team, it’s essential to understand there are major challenges.

Cost of an In-house Team

A fraud team consists of multiple disciplines that, as a whole, deliver optimum results. Achieving those results comes with staffing costs for fraud investigators, rules analysts, technology professionals, chargeback analysts, and fraud supervisors. Fraud investigators manually review the population of orders that are too ambiguous for your rules engine to process. In fact, order review represents the most expensive part of a merchant’s fraud budget, with 46 percent of the budget allocated to manual review staff.¹ Professional rules analysts optimize the out sort rate and ensure the manual review queue is as fraud-rich as possible. A technology team handles technical aspects including system maintenance, data quality and integrity, security, and solution development. A chargeback team investigates consumer disputes and works systematically to recover as many disputed sales as possible. Overall, the entire fraud team needs supervisors to establish goals, monitor performance, and ensure best-in-class results.

1. CyberSource, 2016 Annual Fraud Benchmark Report: A Balancing Act

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24x7, 365 Days a Year Fraud Screening Coverage

Most consumers do not realize a fraud check occurs as a normal step in order processing unless, of course, they are subjected to order delays because you don’t offer round the clock coverage 365 days a year. Consider the impact on a customer when an order placed after 5 p.m. on a Friday is held for manual review. If your fraud team works Monday through Friday from 9 a.m. to 5 p.m., as many do, you have just held this order for more than 48 additional (and potentially unwarranted) hours. Elite fraud teams offer 24x7 coverage to ensure decisions are made promptly and sales are converted quickly. If your company offers in-store pickup, digital gift cards, or same-day shipping, 24x7 coverage is essential. Even if you don’t offer these options, today’s demanding consumers expect instant gratification, and if you fail to deliver because you are understaffed—or don’t have 24x7, 365 day coverage—they will go elsewhere.

... today’s demanding consumers

expect instant gratification,

and if you fail to deliver

because you are understaffed—or don’t have

24x7, 365 day coverage—

they will go elsewhere.

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Fraud Liability

According to the LexisNexis 2016 True Cost of FraudTM report, the level of fraud as a percentage of revenue is 1.47 percent. For a $50 million merchant, that means a loss of $735,000. If you multiply that by $2.40 (every dollar of fraud actually costs merchants $2.40), the loss is more than $1.7 million—a liability incurred directly by merchants with in-house fraud teams. This is a significant loss that warrants serious consideration when contemplating the build or buy fraud management question.

Fraud loss is best managed by a fraud team that can quickly adapt to fraud trends. An expert team can immediately adjust rule configurations to properly target the attributes of fraudulent orders. As a very basic example, if your team discovers a fraud trend with the same email domain and time zone, a rule change using that combination of data points may be needed to ensure all future fraud attempts are captured. If your team is only making rule changes after chargebacks come in, they aren’t moving fast enough. Criminals will quickly identify the gaps in the system and do everything in their power to exploit them. When fraud teams are in-house, failure to identify and remedy fraud quickly will eat away profit from your bottom line.

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Lack of Big Data

The average manual review rate is 29 percent, meaning that on average, merchants manually review more than one in four orders.² A huge contributing factor to a high manual review rate is the lack of big data. In-house fraud teams generally serve one merchant or possibly multiple brands for that merchant, which means historical transactional data is limited. If an order is received and there is no historical data on the customer, the order is far more likely to be held for manual review.

Third-party solutions often have data from many different clients—in some cases hundreds of them, spanning many years. In addition to helping convert good customer orders quickly, big data can also capture fraudulent orders just as fast. Third-party solutions have the resources to build robust risk profiles comprised of extremely valuable data regarding previous fraudulent orders. This risking model is utilized to ensure the data points on current orders do not link to fraud. Since in-house teams have less data, it is much more difficult to identify new fraudulent orders. Large stores of historical data, both good and bad, ensure the manual review rate is optimized and the queue is as fraud-rich as possible. A high manual review rate also directly impacts the customer experience, causing orders to be held longer before processing. If your fraud investigation team is not able to handle the out sorted volume, time-in-queue will suffer. In order to meet customer demands, merchants must set strict time in queue KPIs and process orders as efficiently as possible. Additionally, when you don’t establish a fraud-rich manual review population, the opportunity for your fraud investigation team to cancel legitimate orders in error greatly increases.

Since in-house teams have less data, it is much

more difficult to identify new

fraudulent orders.

2. CyberSource, 2016 Annual Fraud Benchmark Report: A Balancing Act

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False Positives

Whether orders are incorrectly canceled by the system or a fraud investigator makes the decision in error, there are major consequences to canceling legitimate orders. In addition to eroding profits, these mistakes also create a bad customer experience.

Loss in Profits

Effective fraud strategies minimize fraud loss while maximizing converted sales. Inexperienced fraud teams tend to overly focus on fraud losses, which creates a strategy that captures not only fraudulent orders, but also good orders. Stopping fraud is critical, but consider the loss in profit when good customer orders are canceled in error.

Customer Experience Costs

Say your marketing team develops a great campaign to get traffic to your site and you are effectively able to convert these visitors into customers. Great, right? Not if these orders get canceled. Canceling a good order creates a negative customer experience, and not one that will soon be forgotten. Calculating the customer insult rate (how often a good customer’s order is canceled) is challenging. Once the order is canceled, customers do not always attempt to replace the order. Therefore, there’s the insult rate you know and the one you don’t know. The best case scenario is that these customers contact customer service to replace their order. The worst case scenario is that they abandon the sale all together and you potentially lose a customer for life.

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Order Processing

Case Management System

If you have an in-house fraud team, you will most likely need a third-party case management system to help your fraud investigators manage their workloads and digital information. Costs for these systems vary greatly depending on a merchant’s size and needs, but if you are considering bringing your fraud team in-house, it can be a significant expense.

Fraud Investigation Tools

To effectively authenticate orders, professional fraud investigators will need to use a variety of free and paid tools to aid in their decision-making. Similar to third-party case management systems, the cost of paid tools varies greatly, but with third-party tools making up 29 percent of a merchant’s fraud budget, it’s another expense that shouldn’t be ignored. It’s also important to note that many free and paid tools do not work internationally depending on the country’s privacy laws. With cross-border eCommerce growing rapidly, in-house fraud teams must be able to convert international sales and therefore need to understand that it is very difficult to verify customer information for many countries.

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Scalability

High volume times, including the holiday season, are certainly hectic. When companies choose to manage their fraud in-house, it can be very difficult to scale to meet high volume increases without negatively impacting order processing time and efficiency. The fraud team is under intense pressure to process orders in a timely manner, but merchants often have to go to “Plan B,” which can be costly and ineffective.

• Some companies hire additional fraud investigators to keep pace with peak periods, which adds unplanned overhead to the labor budget. While it’s another body in the seat, these fraud investigators can’t possibly be on par with a professional fraud investigator and therefore will not be able to deliver the same quality and efficiency.

• Even with additional staffing, an in-house fraud team can fall as much as three to four days behind in processing orders. This sometimes leads to drastic measures, including converting all orders that are older than a certain date—a strategy that could prove very costly when it comes to fraud losses.

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Conclusion

Deciding whether to build an in-house fraud team or utilize a third-party solution is the biggest decision an eCommerce merchant will make regarding fraud management. Having an in-house fraud team means complete ownership of fraud losses, human capital, scale, infrastructure, data, and the customer experience, as well as all of the associated challenges and costs. A third-party solution can eliminate these challenges and costs, deliver better than industry average results, assume complete liability for fraud, and drive higher profits and a better customer experience.

So, what’s your answer—build or buy?

About Radial Radial is the leader in omnichannel commerce technology and operations, enabling brands and retailers to profitably exceed retail customer expectations. Radial’s technical, powerful omnichannel solutions connect supply and demand through efficient fulfillment and transportation options, intelligent fraud, payments, and tax systems and personalized customer care services.

Hundreds of retailers and brands confidently partner with Radial to simplify their post-click commerce and improve their customer experiences. Radial brings flexibility and scalability to their supply chains and optimizes how, when and where orders go from desire to delivery. Learn how we work with you at www.radial.com. Or contact us:sales@radial.com1-877-255-2857

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Authors: PJ Rohall Supervisor | Fraud Management

Louisa Rupp Senior Manager | Omnichannel Product Marketing

Darnell Wilkins Senior Product Strategist | Product Management