Fraudrepreneurs

When I graduated from college, I spent a summer volunteering to build a schoolhouse in rural Ghana.  I would have laughed then if you had told me that a few years later I would be spending considerable time dealing with Ghana as founder of a tech startup.  Not because we were in any way focused on West Africa, but because of the spammers and fraudsters attacking us from that part of the world.

Ghana and Nigeria seem to lead the way in terms of this type of activity.  Sooner or later, many startup websites have to deal with fraud, and it can come in many forms. At best this activity hurts the experience for legitimate users, and at worst it can drive you out of business, specifically if you aren’t able to handle payment-related fraud.  If you have a site with any form of open communication (member-to-member messaging, commenting, etc.) and you have any semblance of traction, you may be attacked.  Scammers will spam your members manually or use bots for nefarious purposes such as requesting cash or gifts.  They may also convince your users to visit external sites that pay an affiliate commission.

It gets worse when you start to charge for digital goods and services.  Fraudsters use lists of stolen credit cards and test them on your site to see which cards work, so they or business partners can then go purchase physical goods.  The victims are both the people whose cards are stolen as well as merchants who sell over the web.  The result is that people complain to their credit card company when they realize they have a charge from a merchant they’ve never heard of (your site!).  If your chargeback rate (the ratio of complaints to sales) is too high, you can be fined or even prevented from offering credit cards as a payment option at all.  Fraud is a serious business, and for some reason a lot of it stems from West Africa.

Imagine if all the ingenuity, intelligence and hard work that goes into fraud went into creating startups that provided valuable services to humanity.  Maybe some fraudsters could even use their expertise to start companies that fight fraud!  Perhaps if the startup infrastructure was more developed in these countries more people would turn away from fraud and toward more productive pursuits.  Until then, us entrepreneurs must spend some of our valuable energy focusing on being smarter than the fraudsters!

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2 thoughts on “Fraudrepreneurs

  1. Great post- and I a very relevant one at that for any internet entrepreneur with a dominant subscription model. What is most worrying is the impact this will have on internet startups within Africa, as they will be a huge target especially those that become successful and with a proven success model. The rise of mobile banking as a digital payment sceme in many african countries may have barriers as such fraudsters move into this mode of payment.
    Do you think these fraudsters tend to target a certain type of internet startup?
    Are there any 3rd party services or technology that one can use to minimize these problems? Services like Kwedit that circumvent needing a credit card or even paypal come to mind.

    • I think fraudsters will target any site with open communication as well as any sites that are easy to setup a profile and test credit cards on. There are service providers that can help companies deal with this problem, especially on the payment fraud side. Unfortunately these services are quite expensive and out of reach of many startups. Many of the payment gateways offer fraud related services which vary in quality. The downside of many options for preventing fraud is high false positive rates, and thus high numbers of valid transactions prevented. Other payment options are fine, but the most sites earn the majority of revenue from credit cards. On the plus side, fraud protection does not have to be perfect – it just has to be better than other sites. Someone once asked me, ‘How fast do you have to be to outrun a lion?’ The answer: ‘Just faster than the other guy running from the lion!’

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