The War on Fraud

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Fraud Sciences uses these standard behavioral and pattern-recognition techniques but also adds another element that the company calls "identity proofing." Maier refuses to discuss how the top-secret technology works so as not to tip off fraudsters, but says it involves establishing whether the buyer is a real person—and whether he is the person he claims to be—by analyzing digital footprints scattered around the Internet. The company also has effective technology for detecting whether communication originates from a compromised computer, a common technique used by fraudsters to disguise their location or identity.

"All legitimate people these days leave traces in cyberspace that we can analyze using legitimate and public information," Maier says. Fraudsters, by comparison, "by their nature do not really exist and do not leave genuine evidence." Fraud Sciences scans hundreds of data sources to establish an accurate picture of nearly every buyer in the world. While this could raise some privacy concerns, Maier insists the profiles are drawn entirely from public information and that Fraud Sciences doesn't invade buyers' computers or share its data with any other companies.

Israel's Intelligence Entrepreneurs

The technology was developed over a three-year period by the startup's two founders, Saar Wilf and Shvat Shaked. The two friends met while serving in the Israel Defense Force's intelligence unit, which is responsible for gathering and deciphering enemy intelligence. The unit has been the breeding ground for dozens of Israeli entrepreneurs who later founded Internet security companies, including Gil Shwed of Check Point Software Technologies (CHKP).

Fraud Sciences began offering its service in April, 2006, and says it has already landed hundreds of clients. "In the first nine months of operation we approved $45 million in legitimate revenues that in the past would have been thrown out," says Maier, who splits his time between Tel Aviv and Palo Alto, Calif. The company claims its technology is 99.9% accurate—and to back that up, guarantees full payment to the merchant if it's wrong. That's especially helpful for online merchants, who typically reject about 4% of orders, even though three-quarters of them turn out to be legitimate.

Among Fraud Sciences customers are jewelry seller Mondera.com, computer equipment distributor MacSales.com, and cell-phone vendor Cellhut.com. Many are small to midsize online merchants who faced increasing difficulties dealing with fraud. "We've been able to double revenue to $1 million a month in the past year by accepting business from abroad and a large percentage of transactions that we rejected in the past," says Joseph Levy, founder and CEO of Watchery.com, a site that sells high-end watches. Before using the service, the New York-based e-tailer had a full-time person checking for fraud. Levy adds that since working with Fraud Sciences the site has had only one case of fraud that the Israeli firm did not catch.

Eye on Financial Services

Staying ahead of criminals is a full-time job for Fraud Sciences. "This is war," Maier says. The company maintains a high-security facility in Tel Aviv, staffed round the clock by four or five trained analysts, many of whom are straight out of IDF intelligence units. Hundreds of thousands of dollars in questionable transactions pass daily through the operation, most of them approved or rejected automatically so that the speed of sales isn't slowed. Only a small percentage of cases are manually reviewed. Just across the hall is another high-security room where computer experts spend their time keeping one step ahead of the fraudsters by analyzing suspect traffic patterns and looking for the evolution of new fraud techniques.

For Maier, a former rocket scientist, running a startup is familiar turf. He was the CEO of Memco Software, which was acquired by Computer Associates (CA) in 1997; one of the founders of GetThere, an online corporate travel site sold to Sabre in 2000; and the founder of Currenex, an electronic foreign currency trading network bought by State Street (STT) in January, 2007. But Fraud Sciences could be the biggest one yet. Maier aims eventually to move beyond e-tailing into fraud prevention for the potentially even larger markets of online banking and financial services. Cybercriminals, watch out!

Sandler is a correspondent for BusinessWeek in Jerusalem .