An Overview of Fraud Management Solution Types: Pros & Cons

The world of fraud management solutions has come a long way in the past decade. The ever-evolving fraudsters are a constant challenge to the e-commerce industry. They are getting more sophisticated and deploying high-end technology like machine learning in committing fraud these days. To counter these fraudulent activities, having a sound fraud management solution is vital for your business.

This article will discuss different types of fraud management systems along with their pros and cons.

Types of Fraud Management Solutions

1. Rule-based solutions

Rule-based solutions were the go-to solutions systems before the advent of machine learning. A lot of businesses still use these systems due to their inherent simplicity. These systems prevent fraudulent activities by creating a set of rules and executing them. These rules need regular tweaking and modification as the nature and pattern of frauds evolve.

Pros:

1. The business owner has full autonomy over the rules.

2. The rules are easily transferable and can be efficiently taught to anyone to operate them.

Cons:

1. It is a reactive approach and not a proactive one. This system can only be changed or updated after the damage is already done.

2. Machine learning solutions

This is a data-centric approach in which data is gathered by the system in real-time and is analysed to train the system to evolve accordingly. Hence, when fraudulent systems try to do something new, this fraud management system is already prepared, having trained itself by studying the small changes in patterns.

Pros:

1. Implements decision trees and neural networks to increase efficiency and precision in execution.

Cons:

1. The system is too complex to operate, and you will need a professional to manage it.

3. Scoring Solutions

This fraud management system does not decide on your behalf. It sends a score attached with the transaction to you and lets you make the final call based on the score. You have the option to approve, decline, or conduct a manual check.

Pros:

1. The merchant has full discretion and control regarding the approval of payments.

Cons:

1. Scoring solutions have an inherent incentive misalignment with the merchant.

4. Chargeback guarantee solution

Rather than providing a recommendation, this fraud management solution system provides decisions. The decision is binary, and you have the option to either approve or decline the transaction. If the system decides to approve the transaction and eventually the transaction turns out to be a fraudulent one, the service provider will compensate you for your loss. Hence, it is called a chargeback guarantee solution.

Pros:

1. The incentives of both vendors and merchants are aligned.

Cons:

1. These fraud management solution systems charge a fixed monthly charge and are only suitable for large businesses. The cost of monthly maintenance may be too much for small businesses.  

Conclusion

All fraud management solution systems have their pros and cons. Choose the system which best suits your requirements and helps you in preventing your business from fraudulent activities.