2 months ago, we proudly announced our investment in Ravelin, a UK-based fintech company, focused on fraud and risk prediction solutions for e-commerce and on-demand economy. In total, the startup raised £8M during this round led by BlackFin Capital Partners, alongside Ravelin’s existing investors (Amadeus, Passion and Playfair (more details here).
For BlackFin Tech, Ravelin is the second startup in our portfolio operating in fraud detection, following our investment in Friss (Dutch insurtech providing fraud detection software for insurance carriers). But don’t look for a pattern here: we are not solely interested in fraud detection solutions! Our focus remains the whole Insurtech, Fintech and Regtech ecosystem. However, fraud is one of the hottest topics in the financial industry at large, with huge progress brought by the latest AI innovations and we couldn’t miss that trend.
Why fraud is the hottest topic in the industry
The phenomenon is even reinforced by the development of cross-border e-commerce. Customers’ behaviors are very different from country to country, which causes trouble for many tech companies that need to launch in new countries, sometimes on a weekly basis. For e-merchants, the frustration and the costs associated with fraud are enormous: they spend a lot of money to attract people to theirs apps or websites, but have to downgrade the user experience to introduce fraud-detection tools or 3D secure (see below) in the payment process.
At BlackFin Tech, we capitalized on our knowledge of this topic — reinforced by our work with Friss — to identify Ravelin’s potential. Thanks to our network of experts and the feedbacks we got from banks and payment services providers, our path came across Ravelin and the amazing team behind it.
How Ravelin uses AI to tackle fraud
Ravelin works with some of the fastest growing tech companies like Curb, Deliveroo, eShopWorld, Just Eat, Kinguin, and MyTaxi, leveraging Machine Learning techniques to create always faster feedback loops, in order to adapt quickly to new fraud patterns. Their tools have proven to be both highly effective and extremely cost efficient for their clients.
But why is Ravelin so special in the fraud detection landscape, where everyone claims to do AI and Machine Learning? We met many entrepreneurs and startups aiming at fighting fraud, but Ravelin appeared to rely on a very specific approach: its tools are able to analyze the behavior and the navigation of the clients, before the payment process, to increase the accuracy of the data and limit the number of “false positive” cases.
The team also focused on developing a unique knowledge of some verticals, like ride-hailing apps (the Founding team comes from Hailo), food delivery platforms, on-demand economy services and retail. To us, it appears to be a very relevant strategy, since fraud patterns are very specific to each vertical.
Traditional statistic and “if … then” rules are outdated, because they create way too much “false positive” by design… It’s clear they are not a sustainable solution on the long run, and Ravelin is bringing to the market a highly efficient alternative. This approach has already convinced numerous online merchants. They now plan to also address PSPs (payment service providers) and banks.
What’s next for Ravelin? Helping PSPs fight fraud
In the payment process, merchants are bearing the cost of fraud, unless customers are re-routed through 3D secure (strong customer authentication) before paying. In that specific case, the cost of fraud is supported by the issuing bank, and the PSP as a result. However, merchants are rather reluctant to activate 3D secure technologies, because it significantly reduces conversion rates and negatively impacts user experience. Therefore, e-commerce websites frequently ask their PSPs to deactivate 3D secure.
PSD2 (for “Payment Services Directive 2”) is changing the game, by forcing PSPs to systematically activate 3D Secure, unless they can report minimum fraud rate. A detailed table, giving the acceptable fraud rate for different transaction levels has been released.
As a consequence, PSPs will become pickier, by choosing merchants with the lowest fraud rates in order to avoid impacting negatively their stats. PSPs will be clearly incentivized to stay below the legal fraud rate, to keep using dynamic 3D secure instead of systematic 3D secure.
They will actually promote the latest solutions in terms of fraud detection at merchant levels (like Ravelin’s) and might also equip themselves with the same kind of solution to monitor their whole merchants’ portfolio. Tools like Ravelin’s are a great service that PSPs can bring to their clients, as a new value-added service, and as a way to differentiate from other competitors in a consolidating market.
Of course, some PSPs will be able to develop their own fraud detection solutions, but most of the time, this is not their core business. Above all, tackling this issue requires an entire staff of data scientists and IT resources to succeed. Only a few PSPs (the tech-savvy ones like Stripe or Adyen) will be able to allocate enough time and resources. Others will partner or acquire those new pure-players.
Even in that scenario, external solutions will keep a competitive advantage above PSPs’ internal solutions, by adapting to each vertical which face specific fraud patterns (on-demand, retail, travel, gaming), this vertical approach giving far better results. Last but not least, most international merchants use several PSPs and need an external solution coming on top of all those siloed and heterogeneous PSPs internal fraud solutions…
Beyond this amazing solution and market opportunity I must add that the whole team at BlackFin has been seduced by the great vision and ambition of the Founders. Supporting Ravelin in its additional distribution strategy to target PSP and banks BlackFin is now mobilizing its network. Welcome Ravelin and bye bye fraudsters!