#06 - My Zero-Cost Fraud Protection Guide for Fintech Startups

Over the years, I got to speak to many early-stage founders in the Fintech space.

One thing I noticed was that their approach to fraud prevention was always the same: invest as little as you can, for as long as you can.

No wonder that the context of our conversation was also always the same: they just found out that “as long as you can” ended yesterday.

The thing is, I get it.

Launching a startup is always a balancing act that is rigged against you. Fraud is not the only important thing that is sacrificed on the “Find Your Product-Market-Fit Fast” altar.

But unlike other elements of your business, when it hits you, it can have a crippling effect on your business.

Your financial partners suddenly impose conversion-killing risk controls (*cough* 3DS…). Even if you’re not liable for the direct losses, your operational costs will start to skyrocket.

Worst-case, you get on the regulator’s radar. And no one wants that.

But here’s the thing:

You can do A LOT to protect your business already on day-one, and with very minimal cost and effort.

You don’t need an expensive vendor, and you definitely don’t need to build your fraud prevention stack by yourself. At least not now.

In fact, what will carry much more impact is how you prepare for the likely eventuality of fraud hitting you some day. Setting up your policy, processes, and team will cost you pennies, but will make all the difference when that day comes.

Below you’ll find 7 things to consider if you’re just starting out.

1. Define Your Risk Appetite

Every business can (and probably should) function with some minimal level of fraud. The question is, what is the minimal fraud level in your business? This can be influenced by many internal and external factors.

Internal factors mostly depend on whether you’re liable for the direct fraud losses. Coupled with your profit model, you’ll get a sense of how much fraud is okay for you to take in while still maintaining the level of profitability you aim for.

Remember: Even if no one expects your business to be profitable anytime soon, your unit economics still need to make sense.

External factors mostly depend on the regulatory landscape in which you operate. This really depends on your business model, licenses, and regions of operations. Consult legal experts and make sure you’re not unknowingly crossing any thresholds that might put you into monitoring programs.

2. Map Out Your User Journeys

Fraud attacks are never generic. They are always tailored to bypass the defenses of a specific target, in a specific way.

This means that fraudsters will test your system to map out and identify any vulnerability points.

You must do the same. The good news is that your product team has already mapped your user journeys!

Now, instead of looking at them from the user’s perspective, try and think how would a bad actor exploit them to commit fraud.

Remember: You don’t need to fix all vulnerabilities right now. The crucial thing is to be aware of them, so you can monitor them more closely.

3. Set-Up Basic Monitoring

You're already tracking product metrics anyway, right? RIGHT?...

Hopefully, the answer is yes. And if so, it’ll cost you very little to add some fraud-related ones like chargeback rate, approval rates, etc. You don’t need a fancy dashboard, at least not to start with. A simple weekly Excel report is perfectly fine.

Pro tip: Track key daily volume figures (e.g., transaction count, signups, withdrawal amounts). These can quickly indicate issues without sophisticated analysis.

(and if you missed it, ​here's my quick guide​ on which basic KPIs you should be monitoring).

4. Create a Fraud Response Playbook

Imagine the day fraud finally hits you. Are you clear on who’ll take charge of the situation? Does every stakeholder know exactly what role they are expected to play?

The question is not whether fraud will hit you one day, but how long it’ll take your team to overcome the initial shock and fight back.

Every lost day can mean tens of thousands of dollars being shaved from your runway.

It’s also a good idea to have some level of familiarity with relevant vendors in case things get really out of hand.

Ask your financial and technology partners if they can provide integrations to fraud prevention vendors.

Knowing which levers you can pull fast can make a big difference.

5. Hire Smart

No, you don’t need to hire your first fraud leader within the first 20 employees. Sometimes not even for the first 50.

If fraud isn't a problem yet, it’s very hard to justify the costs.

However, that doesn’t mean you should completely give up on this skill-set.

When hiring leaders in technology, product, or operations - look for ones with experience fighting fraud. They don’t need to be professional fraud fighters themselves, but having some experience dealing with fraud issues can go a long way.

At the same time, spend a few hours researching who can be potential hands-on contractors you can bring in quickly if needs be.

Having a “Rolodex” with a few names can really help you sleep better at night, knowing you have a go-to person if the situation calls for one.

6. Bake in Security From the Start

Two-Factor Authentication (2FA) is pretty much a standard these days. Which is good, as users are used to it, and so it has less of an impact on conversion rates.

But have you implemented it correctly? Does it cover all relevant user journeys? In all flows? Did you make sure all the vulnerabilities you mapped out are protected by 2FA?

Remember: Users are not only expecting 2FA today, but they also appreciate the sense of security it provides to their experience. Especially when considering sensitive or high-value actions.

Pro tip: Make sure you map out all the possible ways for users to introduce new assets to their account (e.g., email, phone, device, etc.). Oftentimes these flows are forgotten and are left for fraudsters to easily bypass 2FA checks.

7. Limit Your Exposure

All customers go through KYC? Is every login protected by 2FA? That’s great, but fraud will still find a way.

Make sure to introduce account limitations as part of your core product.

This is a key functionality you’ll need to build at a certain point, and it will provide you with flexibility when segmenting populations by risk.

New SMB merchant onboarded automatically? Limit the amount of funds they can withdraw from the system in the first week.

New user got a borderline KYC score? You can still onboard them, but make sure they don’t spend more than $50 before a human vets them.

Your 30-Day Challenge

With these 7 guidelines, your startup will be prepared to deal with fraud without burning through your budget.

You don’t need to tick them all.

How many can you cross off the list now? If the answer is 5 and above, you’re already separating yourself from the pack.

Which is good - wolves always pick on the stragglers.

But if you scored below 5, here’s a challenge I recommend you take:

Within the next 30 days, work on getting to at least 5 of these guidelines crossed out from your list.

It might look daunting at first, but remember - this doesn’t need to be perfect. In fact, it can’t be perfect!

But having an initial version of what will be your full-blown fraud strategy four years down the line will make all the difference in the world.

So, are you ready for this challenge?

And if you have questions or feedback - reply to this email, I read all messages.

That’s all for this week.

See you next Saturday.

P.S. Feel like you're stuck with the same fraud challenges for months and need expert advice quickly? Book a consultation call with me to get clear, actionable recommendations that fit your budget. Guaranteed.
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