Fraud

With data breaches and stories of identity theft in the news almost daily, it’s not hard to make an argument that the financial services industry could use better fraud-detection technology.

It’s a particularly dire situation in the US, thanks to a confluence of factors. First, this is the world’s largest economy. But despite that giant bullseye, the banking sector here is shockingly behind the times technologically, eschewing global standards like the credit card chip and pin infrastructure. The country’s banking sector is also a victim of its distributed and fragmented nature, unlike the centralized banking systems in parts of Europe and elsewhere around the world.

Feedzai is a Portugal-, London-, and San Mateo-based data science and machine-learning company that claims potentially game-changing effectiveness in preventing payment fraud. The company has deployed its omnichannel solution across Europe, and in select locations within South America and Africa. Today Feedzai announces its first ever commercial availability in the US.

“Consumers are buying across physical and digital channels and it is important for fraud prevention systems to work across all technologies, from legacy systems to new mobile card readers,” says Feedzai CEO Nuno Sebastiao. “Online sales are still hovering around six percent of all retail sales, and recent events have shown that fraud is not just an online problem. Our software has the ability to analyze data from any platform to detect breaches by as much as ten days earlier than other solutions and expose more fraud cases, all with lower false alarms.”

Feedzai integrates with payment networks, banks, merchant processing companies, and retailers to prevent fraud across physical and digital transactions. The key to the technology, according to Sebastiao, is the fact that Feedzai eschews the current rules-based approach to fraud detection and instead combines machine learning with behavioral analysis.

The company feeds massive troves of global payments data into this system, including both consumer and merchant behavior data. The more data, and the more diverse the sources of that data, the more effective the system can be. Thus global expansion is more than just a business development decision for the company. The result of this data analysis is what Feedzai calls “deep learning profiles” for each customer, merchant, location or POS device. Each profile can include as much as three years worth of historical of data behind it and enables the system to identify atypical behavior at any point in the transaction chain. By the same token, Feedzai helps service providers perform continuous merchant underwriting and better predict merchant insolvency or unfunded chargebacks.

“The current industry standard solution typically detects less than 50 percent of fraud with a high rate of false positives, or what I like to call annoyed people,” Sebastiao says. “Feedzai detects more than 80 percent and sometimes as high as 90 percent of fraud with very rates of low false positives.” The company regularly detects fraud as much as 10 days earlier than the competition, he adds, and in the process avoids thousands of acts of victimization. The ROI on a single fraud prevention can amount to tens of millions of dollars.

Bold claims and bravado aside, it’s almost unheard of for a small startup to get access to the payment data of the world’s largest financial institutions. “We literally have the power to stop commerce,” Sebastiao says.

It wasn’t always so easy for the company. Upon starting out, the company lacked credibility. It was only after a Series A investment from SAP Ventures, who Sebastiao routinely refers to as one of world’s largest tech companies, that financial heavyweights started taking the company seriously. Additional investors in the company’s $4.7 million Seed and Series A rounds include Data Collective, EDP, Espí­rito Santo Ventures, and Novabase Capital. Now, the company’s global track record speaks for itself.

Feedzai’s current customers include Coca-Cola, Logica, Vodafone, Ericsson, SIBs Payment Solutions, Horizon Wind Energy, Servebase Credit Card Solutions, and Nigeria’s national processing network. The company is currently overseeing $229 billion in global transactions annually, which for perspective is 59 percent more than PayPal’s $114 billion total. Sebastio claims that Feedzai already has undisclosed contracts in place with US customers in each of the banking, payment network, merchant processing, and retailer verticals.

The company sells its solution under a SaaS license model, charging customers on a transaction volume basis. “It’s not cheap, but the price tied to the value we deliver – we deliver very measurable results,” Sebastiao says. “It’s not just the reduction in fraud losses, but also reduction in fraud-mitigation expense that we deliver.”

A typical sales cycle involves Feedzai delivering an ROI analysis to each prospective client. The companies then agree on a benchmark goal, and conduct a test. Only when Feedzai exceeds the goal does the conversation around price begin, according Sebastio.

The reality is, money is not the issue in this case. If Feedzai can deliver demonstrably better results that the alternatives and can continue to convince financial institutions that it’s trustworthy and reliable, then the industry is its oyster. It would only take one major case of fraud missed, however, for that halo to tarnish. But in the absence of a competitive solution, the company’s opportunity will be less likely to disappear.

“The incumbents won’t be able to catch up,” Sebastio says. “The talent capable of creating big data and machine learning systems like ours doesn’t want to work for them. Plus we have a huge head start.”

Rather than facing competition from the likes of legacy vendors like FICO, Feedzai is bound to face competition from other startups. Xoogler founded and Y Combinator Sift Science, for example, is taking a similar approach to combating fraud and is backed by Union Square Ventures, First Round Capital*, Founder Collective, and Max Levchin, among other Silicon Valley luminaries. Other companies in the category include Andreessen Horowitz*-backed Signifyd, and August Capital-backed ThreatMetrix.

Fraud is a multi-hundred billion dollar problem globally. As a result, it’s the focus of numerous brilliant minds and millions in venture backing. On the other side of the equation are the equally well incentivized attackers and cyber-criminals seeking to exploit these networks.

Feedzai appears to have crept ahead in this never-ending game of full-contact leapfrog. It’s a tenuous position, and one that the company will need to continue innovating to maintain.

(Disclosure: First Round Capital and Andreessen Horowitz partners Marc Andreessen, Jeff Jordan, and Chris Dixon are investors in PandoDaily.)

[Image via BBB]