The Next Startup Frontier: Credit Card Fraud

Credit card providers and retailers need help fighting card fraud. Here's how startups come in.

Credit card fraud is expensive. The latest figures peg total losses due to identity theft at $24.7 billion—$10 billion more than all other property crimes combined. But for companies marketing new ideas to thwart or even prevent credit card fraud, the market can be very lucrative.

For years, credit card providers have relied on specialized algorithms to detect anomalous behavior. These algorithms take into account not only the cardholder's location and purchasing tendencies, but also make inferences based on behavior, so that if an airplane ticket has been purchased or a transaction in an airport has been made with a card, a $500 purchase in a mall halfway across the country is far less likely to trigger warnings than a $20 charge at a gas station across town.

The trouble is that these models can only detect fraud after it's happened, which is very bad news for credit card companies: In the U.S. at least, card issuers usually assume most of the financial responsibility for credit card fraud. When merchants and legitimate cardholders are reimbursed for transactions on stolen cards, that money comes straight from the company's pocket. Creating predictive models, databases, and protective systems for retailers therefore offers amazing opportunities for startups.

One of the newer companies working in the field is CardKill, which markets a software package that automatically cancels suspicious credit cards before fraudulent transactions occur.

“We look for suspicious transactions designed to fly below the radar, like a $1.03 charge at a hairdresser which is reversed two minutes later,” explains CardKill CEO G. Mark Hardy. “This doesn't show up in a statement, but it shows up at the bank." Charges like these often indicate an identity thief trying to test a cloned credit card.

Another company, slightly better established than CardKill but operating in the same space, is Forter, based in Israel. Founded by fraud protection veterans Michael Reitblat and Liron Damri and incubated by a Citigroup-sponsored accelerator program in Tel Aviv, the company has raised substantial funding, including $3 million from Silicon Valley mega-VC Sequoia Capital in late March.

Reitblat and Damri told Fast Company by email that “we provide the retailer with a clear decision to approve or decline a transaction […] While other solutions are solely focusing on verifying customer-given information, which is easy to obtain or fake, Forter focuses on combining that with the analysis of real-time customer behavior on the site.” Since Forter's product is API-based, it slides straight into online retailers' existing code base. The company also guarantees to reimburse providers 100% for any fraudulent transactions it fails to detect.

Interestingly, both companies come from military and intelligence backgrounds. CardKill's Hardy developed information security plans for several U.S. military commands, while Reitblat served in Israel's cryptography-oriented Unit 8200.

[Pickpocket: Africa Studio via Shutterstock]

Add New Comment

0 Comments