The War on Fraud

Founded and run by Israeli intelligence specialists, Fraud Sciences is helping online retailers distinguish legitimate charges from fraudulent ones

by Neal Sandler

Cybercriminals are working overtime getting ready for the busy Christmas season, when online shopping is at its peak. But this year, Internet merchants stand a better chance of weeding out fraudulent buyers thanks to technology developed by a startup called Fraud Sciences. Even better, hundreds of online retailers in the U.S. and elsewhere already using the startup's screening system will be able to accept with confidence orders they might previously have rejected as suspicious—a boon to their top line.

For Tel Aviv-based Fraud Sciences, the opportunity looks limitless. Last year, online purchases charged to stolen or illegitimate credit cards cost merchants an estimated $3 billion in the U.S. alone. Many believe the actual cost is much higher. Fraud Sciences' proprietary technology tackles the problem by helping merchants verify the identity of buyers. That, in turn, makes merchants more willing to accept orders, especially from overseas.

Security for Smaller E-Tailers

Addressing fraud is a problem of growing urgency. A recent survey by CyberSource (CYBS), a provider of payment processing and security services for online retailers, estimated that 1.4% of all sales last year were conducted by buyers with fake identities or credit cards that turned out to be fraudulent. The most common scam is buying products using credit-card numbers stolen offline or through e-mail scams.

"Attacks are definitely on the increase, with particular focus on electronics, jewelry, and any product that can easily be turned into money," says Avivah Litan, a security analyst at research house Gartner (IT). Litan says that until now, major e-tailers such as Amazon.com (AMZN) have had to build in-house solutions because, "there is no one-stop shop to meet all their needs to counter fraud."

Fraud Sciences could help fill the gap, especially for smaller vendors who can't afford to develop their own technology. Founded four years ago by two former members of the Israel Defense Force intelligence unit, the company has raised $15 million in funding from Israel's BRM Capital Advisors and Redpoint Ventures in Menlo Park, Calif. Last year, California-born serial entrepreneur Gadi Maier joined as president and chief executive officer to bring Fraud Sciences' technology to market. Though Maier won't elaborate, he says the privately held company is growing at 30% per month, and that revenues this year should be "several million" dollars.

Scanning the Internet for Tracks

What sets Fraud Sciences apart? Today, credit-card companies, eBay's (EBAY) PayPal subsidiary, and others detect fraudulent transactions using a combination of techniques. To establish that the cardholder is legitimate, they may ask for the mailing address where bills are sent, the three-digit security code on the back of the card, passwords, or some combination of these. They also employ sophisticated pattern matching to spot suspicious behavior: If there's a charge, say, at a Home Depot (HD) in New York in the morning and several hours later at a fancy jewelry store in Beverly Hills, that's likely to raise alerts. If a modest spender suddenly shells out thousands in a single purchase, that too is likely to get flagged.