#45 - PSP fraud VAS strategy: Build vs buy vs operate

Last week we started discussing how PSPs should approach offering fraud value-added services (VAS) products to their clients.

Specifically, we analyzed the type of clients that would opt to work with their PSP rather than directly with a fraud vendor, and what their needs would be.

If you missed it or if you wish to refresh your memory, you can find it here.

Today, I’d like to look at the other side of the equation–the three different strategies available to PSPs that want to launch a fraud prevention VAS.

Like any other strategic choice, each of these has their pros and cons and there is no right answer that fits all companies.

The real question is what you want to achieve by offering fraud VAS and how much you’re willing to invest in it.

Let’s have a look.

Strategy A - Build it (Stripe)

Choosing this path, we’re committing to building our own fraud technology stack, and more importantly–our own fraud prevention product.

As we explored last week, it is the latter that is actually more important and often ignored. Building a full-blown fraud detection product is more than producing an ML fraud score.

Instead, it’s about empowering your users to analyze their fraud data, make smart decisions, and implement these decisions in a timely and easy way.

If this sounds like a lot, we also need to remember that our clients would tend to be either SMBs or low-fraud-rate businesses. This means that our users are mostly non-experts and would need a very easy and user-friendly UX to manage all of the above.

Advantages

• Strong brand play that would pay off immensely long-term

• Optimized performance–both analytical and technical

• Strong product-market fit (if you build it right)

• Low operational costs

• No vendor lock-in

Disadvantages

• R&D and Product budget likely in the 7-8 digits (yearly)

• Requires a critical mass of internal domain expertise, especially in product

• Long time to market

Who is it for

Straight off the bat I’ll say this path is reserved for players who are big enough to have the long-term budgetary commitment required. It’s no accident that only market leaders manage to pull it off.

Consequently, this can be a meaningful long-term investment that builds your brand reputation in a highly competitive space, as it sends that strong “market leader” signal.

The main risk is that it requires a large budget, resources, and time investment before you start seeing returns. Or even know if it’ll pay off.

Therefore, in order to minimize product complexity and launch faster, you’d want to have a strong business case focusing on your SMB portfolio. They would be easier to serve and you can launch it with fewer features.

Strategy B - Buy it (Worldpay)

If you don’t have the budget or talent, and especially if you want to shorten the time to market, an alternative path would be partnering with a fraud vendor.

There are a few commercial models for that, from simple referral agreements, to integrated services, and up to full white-label partnerships.

I’m going to ignore the first one as it’s not a real VAS offering and focus on the latter two. Whether it’s white-labeled or not, the implication is that the PSP will bridge the technical integration between the vendor and their clients.

Advantages

• Quick time to market

• Little upfront investment required

• Fully matured tech stack (if you choose right)

Disadvantages

• Strong vendor lock-in and dependency

• Low contribution to brand (you are seen as a technical integrator)

• Low profit margins

Who is it for

PSPs usually turn to vendor partnerships when they lack the internal talent to handle the product and tech development themselves. 

Sometimes, even if they have the budget, they simply lack the conviction. Partnering with a vendor represents a low-risk/low-reward choice. 

The integration and partnership launch investments are relatively low (although don’t discount them either). Operating it is a breeze.

But at the same time, the gains are also limited.

Revenue is usually split in favor of the vendor, and the stickiness effect with your clients is also diminished. They can always choose to work with the vendor directly if they want to switch PSPs.

In essence, the main benefit is a better competitive positioning in RFIs. You are not going to win deals because of it, but at least you’re not going to lose any while having nothing to offer.

Strategy C - Operate it (Worldline)

On the surface, this might look very similar to option B. Indeed, in both paths we’re going to partner with and integrate a fraud vendor. 

The difference lies in how we’re bringing the product to market.

Last week we touched briefly on this point:

“More times than not, clients who work with their PSPs on fraud prevention need professional services as much–if not more–as they need the tools and technology.

Instead of building amazing UI and UX features, PSPs are oftentimes asked to support their clients with their specific fraud management needs.

This can be as simple as recommending the right model cutoff score, or as comprehensive as analyzing emerging fraud patterns and recommending remediation steps.”

The idea behind this strategy is to not only offer an integrated fraud product, but to actually offer professional services as part of it.

As I wrote last week, this can take many forms. The point is that you offer paid “hand-holding” services to your clients and not just the product/tool itself.

This is fundamentally different from how PSPs are selling their core product–payment acceptance.

Advantages

• Quick time to market

• Strong product stickiness effect

• Little upfront investment required

• Differentiated market position (not many offer this)

Disadvantages

• FTE-intense

• Linear scaling costs

• Professional services are a foreign concept to most PSPs

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

Who is it for

The cost implications of building a professional services team mean these services mostly make sense when sold to large-enterprise clients.

Specifically, you’d likely want to target clients that are either not digitally native, or ones that have relatively low fraud risk.

Otherwise, you’d find yourself competing directly with fraud vendors instead of other PSPs.

But if done right, you can serve these mega merchants in a way that would make your partnership much more resilient to the competition.

This isn’t only about reducing churn risk. Instead, this can be your way to gain a bigger share of wallet from your merchants, as they are likely working with multiple PSPs.

To conclude…

Offering fraud VAS products as a PSP can be done in several ways. None of them are perfect.

The question then is which one suits your business most. And by business, we really mean your client portfolio. The one you have right now, and the one you see your future with.

Navigating the decision of which path to take and how to go about it can get tricky. Even the “cheapest” paths still represent a significant investment of resources and leadership attention.

And unfortunately there are many pitfalls to look out for.

And this is exactly where we’ll pick things up next week, in the third and final part. Stay tuned.

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

See you next Saturday.

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