#47 - 3 fraud vendor pitfalls that kill PSP profits

In the previous issues of this 3-part special series, we looked at how PSPs should go about offering fraud prevention Value Added Services (VAS):

We started with what your clients are really after, and the possible business models you have available for servicing them.

In this last issue, I wanted to take a closer look at the common pitfalls I tend to see with PSPs building out fraud VAS offerings.

Specifically, the pitfalls of partnering with a fraud vendor and either reselling their services or offering professional services on top of them.

Because let’s face it, it’s a select few who actually go about building it themselves, and we already touched the most important pitfall in part 1.

So without further introduction, here are the top three pitfalls you want to be aware of when partnering with a fraud vendor:

Eating your cake and having it too

PSPs offering fraud VAS need to think about servicing the risk needs of their clients, namely merchants.

But that does not mean PSPs don’t have their own fraud prevention risks and needs. The problem is that they are completely different.

While merchants care mostly about payment fraud and 1st-party fraud, PSPs care about merchant fraud and AML.

So while PSPs need one tool to manage their own risk needs, they need a different tool to manage their clients’ needs.

Investing in two parallel tools as a margin-thin business with no direct fraud losses is a decision any PSP will be hesitant to make. And I understand why.

The problem is, what happens in reality is that the compromise solution is to work with one tool for both risk needs. And let’s be honest, there are not many vendors out there that are good–not to mention great–at both.

In other scenarios, this problem is even worse: 

PSPs that offer both POS and CNP payments often find their POS merchant risk is focused on the SMB segment, while their intended VAS buyers are CNP large merchants.

Covering that with a single vendor is a tall order.

The solution? There’s no other choice than making a decision–what’s more important for the business right now? 

Unless you’re convinced you picked a vendor that can help with both needs, choose only one and focus on that.

Misaligned product-market fit (PMF)

As a PSP you’re looking for a vendor that is used to working with Fintechs (especially as resellers), but one that primarily knows how to service merchants.

This type of dual PMF is quite tricky to understand and find, especially considering that in today’s fraud vendor space everyone is known to be doing everything.

Although no one is really doing everything.

Too often I see PSPs engaging with Banking/Fintech-focused vendors who would do a terrible job at servicing their merchants, simply because all of their peers are using them (for their own internal controls).

What makes this even trickier is the type of merchants you want to serve.

SMBs have different needs than large-enterprise merchants.

Different merchant verticals have different needs: gift card marketplaces have different fraud issues than, say, furniture stores.

Different regions (and payment methods) also require specialization.

So it’s not enough to make sure the vendor can serve merchants, but also that they have a strong PMF for your specific portfolio.

At the same time, you want to make sure they know how to work with resellers. Pricing, onboarding, and servicing all need to have proven frameworks.

Working with a vendor that does this sort of partnership for the first time would heavily impact your expected GTM plan and revenue forecast.

Unfortunately, I’ve seen it more than a few times.

Neglecting technical SLAs

I’ve written in the past about how Fintechs are often testing the wrong thing during fraud vendor POCs. Specifically, testing the AI score performance when they intend to mainly use it for rule writing.

When it comes to reseller partnerships, I see the same bias although in a different form. PSPs are still focused on testing out the AI score, but they usually ignore completely the technical SLAs.

For context, let’s revisit one disadvantage of working with vendors we’ve mentioned in the previous issue:

“Brand exposure to vendor hiccups (when they fail, you’re in the frontline)”

This is definitely true when you operate the tool yourself as a professional service offering, but to a degree it is always the case when working with 3rd-parties, regardless of the model.

In reselling models, you still own the client relationship. You’re still the first line of support for any issues that might arise.

Your vendor is down? You get flak.

Your vendor times out? You get flak.

Your vendor introduced a bug that affected decline rates: You get flak.

Your vendor is unable to fulfill a change request in under 6 months? You get flak.

You get the picture.

Now to be fair, these are all also quite hard to test before choosing a partner and going live. Unless they are really bad.

But knowing in advance that much of the reputation risk lies in this domain, we can do all sorts of things.

This ranges from inquiring about the reputation of the vendor in these areas to insisting on strict SLAs and fines in the contract.

To Conclude

As I wrote in the first part of this series–offering fraud VAS as a PSP makes a lot of strategic sense.

But just as much, it is also hard to pull it off commercially.

It’s way too easy to make fundamental mistakes that either end up costing too much, or prevent you from ramping up the revenue according to plan.

Can it be done? Absolutely yes! 

It’s all about making the right choices before you get going. 

Like everything else in life.

In the meantime, that’s all for this week.

See you next Saturday.

P.S. If you feel like you're running out of time and need some expert advice with getting your fraud strategy on track, here's how I can help you:

Free Discovery Call - Unsure where to start or have a specific need? Schedule a 15-min call with me to assess if and how I can be of value.
​Schedule a Discovery Call Now »​

Consultation Call - Need expert advice on fraud? Meet with me for a 1-hour consultation call to gain the clarity you need. Guaranteed.
​Book a Consultation Call Now »​

Fraud Strategy Action Plan - Is your Fintech struggling with balancing fraud prevention and growth? Are you thinking about adding new fraud vendors or even offering your own fraud product? Sign up for this 2-week program to get your tailored, high-ROI fraud strategy action plan so that you know exactly what to do next. ​
Sign-up Now »

Enjoyed this and want to read more? Sign up to my newsletter to get fresh, practical insights weekly!

<