April 8, 2014, 10:09 AM

A fraud-prevention startup provides a no-loss guarantee to e-retailers

Forter, which recently raised $3 million, takes the loss if a transaction it approves turns out to be fraudulent.

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Online watch retailer Ashford.com relied on Fraud Sciences to say whether a suspicious transaction was fraudulent, knowing that the vendor promised to cover any losses from transactions it approved, says Eli Katz, the former president of Ashford. But then eBay Inc.’s PayPal unit purchased Fraud Sciences in 2008 for $169 million, and took the service off the open market, incorporating it into PayPal’s own fraud-fighting system.

Now, two Fraud Sciences veterans have launched a company, Forter, that offers e-retailers a similar guarantee. And Katz, who has seen a demonstration of Forter’s service, says it goes beyond Fraud Sciences in one respect: The new system does not rely on manual review; instead, the review is automated and the retailer gets a yes or no immediately.

“On Dec 18th or 19th you don’t want a six-hour turnaround for a credit card verification,” Katz says. “You want to know, ‘Should I ship it or not, and tell me immediately.’”

That’s what Forter can do, says CEO Michael Reitblat and chief operating officer Liron Damri, both of whom previously worked at Fraud Sciences. The company, based in Tel Aviv, Israel, launched its service early this year, offering it exclusively to U.S. retailers. Forter will open a U.S. office later this year, probably in New York or Silicon Valley, Reitblat says.

The company has the capital to expand, having raised $3 million last month in a Series A funding round led by Silicon Valley venture capital firm Sequoia Capital. The company has nearly 30 employees and is hiring, Reitblat says.

“A few dozen” e-retailers are already using the Forter system, says Reitblat, who declines to be more specific. They sell a variety of items, including jewelry, shoes, apparel and auto parts, he says.

Forter’s system seeks to detect fraud by examining many aspects of a transaction. That includes the customer’s geographic location, whether he appears to be hiding his identity or location, and how he navigated to the retailer’s site.

It also looks at what the individual did after arriving on a retailer’s site. That’s more important than ever today, Reitblat says, because thieves have repeatedly penetrated corporate networks to steal information about millions of consumers, such as credit card number, the CVV security code on a card, and the cardholder’s home address. “The fraudster knows how to get the CVV correct, or the home address or phone number,” he says, “but he doesn’t know how to act like a person. How he’s supposed to behave is very hard for him to mimic.”

Damri offers this example. “If someone is trying to buy a wedding ring he would be all over the place. He would look at the site a few times, come back to shop, look for promo codes, go back to make sure he made the right choice. A fraudster would find the most expensive item and buy it right away.” He says Forter has only recently introduced the technology “to track whether you are acting like a legitimate user would act, or a fraudster trying to get in and out as soon as possible.”

Because it can accurately spot fraud in most cases, Forter declines fewer transactions than a merchant typically would, Reitblat says. “The first impact clients see is a significant impact in declines,” he says. That rate of turning down orders typically goes down 50-90% when retailers start working with Forter, he adds.

When in doubt, Forter approves the transaction, Damri says. The company has had to cover only a “very, very small” number of chargebacks, he says. In fact, he says, “we want to see some fraud so we keep learning. And we want to drive as much business as possible to our customers.”

Forter charges what Reitblat calls “a small percentage of every transaction we approve.” He would not disclose the percentage, but says it varies by a retailer’s risk profile, volume and other factors.

Clients send all their transactions to Forter, which means they pay a fee on all purchases. But Katz says seeing all the transactions helps Forter better understand the behavior or legitimate customers compared with that of criminals, and thus improve the service. “Economically it comes out the same for the retailer,” Katz says, “and they get a better system because Forter is assessing all that information.”

Katz is one of the founders of Emob, a trade association that enables its members—63 mostly midsized online retailers—exchange information on e-commerce technology and vendors. Katz, who left Ashford.com in 2011, says the average Emob member books $28 million in annual sales and works with 24 service providers or products.

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