The land of milk and honey — and startups

With teams made up of veteran intelligence corps, Israeli antifraud startups are providing inspiration and assistance to companies worldwide.

When PayPal Holdings Inc., the US-based digital payment service, wanted to create an elite team to combat fraud, it turned to people whose background made them perfectly suited to the task.

"The company’s battle against fraud is led by a team of 100 Israelis, mostly veterans of the Israel Defense Forces’ intelligence corps who work at the firm’s Tel Aviv development center," according to haaretz.com.

The international giant (when PayPal started trading in July 2015 as an independent company [spun off from eBay] its market cap was US$49.5 billion) took fraud prevention most seriously. And who better to keep up with or outsmart the ever-creative fraudsters who target companies such as PayPal than men and women who had been trained to protect a nation that is constantly under threat?

PayPal, founded in 1998, had taken a major step in its antifraud initiatives when it acquired Israeli risk management startup Fraud Sciences in 2008 for US$169 million. Fraud Sciences focused on the development of breakthrough innovations in online fraud detection. That acquisition led to the establishment of the fraud prevention development centre in Tel Aviv, the company’s second-largest office after its headquarters in San Jose, Calif.

"From a technological point of view, it’s the largest center," Tomer Barel, PayPal’s chief risk officer, who has experience with Israeli military intelligence, told haaretz.com. "In a quiet way, we’re doing the most complicated and complex things at the highest level of expertise in the world," he said, adding that PayPal’s competitors in the 1990s went bankrupt due to fraud.

The need for such an antifraud initiative is essential for a company such as PayPal. "There are countries in which PayPal handles more than 20% of online commerce," Barel said. "As a result, PayPal is a major target for fraud. We have almost 150 million users, so theoretically this involves a huge number of people who could become theft victims. Every day, 10 million transactions are conducted on PayPal, and the company’s loss rate is 0.2% of sales, most of which stems from fraud."

PayPal’s fraud prevention team has to make decisions almost instantaneously about whether a transaction seems legitimate or suspect. "We need to identify attempted fraud in real time, and that’s a matter of a fraction of a second," Barel said. "We need to identify that a stranger is using your account. You’re not going to wait in front of your computer or mobile device for five minutes for the system to approve the transaction."

Some of that work is done through automation, but not always. "The Israeli team also has to analyze sophisticated cases that a computer can’t recognize as fraudulent," reported haaretz.com. "This involves research and intelligence gathering. Graduates of the Israel Defense Forces’ technology units are natural candidates [to do this.]"

PayPal’s team of analysts in Israel "look at huge volumes of data, identify patterns and help the algorithm make a decision," Barel said. "People are still more powerful than machines in trying to foresee and identify human behavior."

Fraud Sciences was by no means the only Israeli antifraud startup. In a February article, "The Land of Milk, Honey and Fraud Prevention" on techcrunch.com, author Barak Rabinowitz declared that Israel had become "a hotbed for startups in the fields of identity verification and fraud prevention."

He explained that Unit 8200, Israel’s famed cyberspace agency, "develops systems for gathering intelligence, automatically sifting through data to flag dangers, and escalating serious threats for manual review."

In July 2015 FT Magazine added, "In few other countries does the military establishment mingle so closely with academia and business, to all three sectors’ profits. Last year Israel’s export of cyber security products — designed to protect companies, banks and governments from the growing ‘dark web’ of hackers, fraudsters and snoopers — topped US$6 billion, exceeding Israel’s exports of military hardware."

In his techcrunch.com article, Rabinowitz said several startups "use the systems [developed by Unit 8200]." An example is Riskified, which he said helped retailers recoup millions in revenue from fraud loss. "The company closed 2015 on a run rate of US$3 billion in approved transaction volume for global retailers including Burberry, Wish and Viagogo, and just announced a new funding round of US$25 million."

Another recent startup is Forter, founded in Tel Aviv in 2012 by the three men who had founded Fraud Sciences. Forter came into the marketplace with a radical concept in the world of fraud prevention: a 100% chargeback protection guarantee. "Forter delivers a simple, real-time ‘approve’ or ‘decline’ recommendation on every transaction," pando.com noted, "and if it’s wrong, the merchant is not responsible for paying the fees associated with the ensuing chargeback."

The bold innovation caught the attention of the American Business Awards. In July 2015, it awarded Forter a Silver Stevie (the name is derived from the Greek for "crowned"), "one of the most prestigious awards in the business world, for taking a lead in the e-commerce and fraud prevention industries," the The Times of Israel reported. The Stevie is given only to companies with "fascinating and inspiring stories of success," Stevie Awards president and founder Michael Gallagher said.

Forter, the paper said, "is the only fraud prevention company that’s willing to put its money where its mouth is — refunding money to customers if they make an incorrect call about a sale that a retail website loses money on."

Forter chief marketing officer Bill Zielke told the paper that his company, which sells a made-in-Israel technology, offers "a real-time automated decision service for web retailers that protects them from fraudsters. Using our behavior detection algorithms, retailers can quickly determine what transactions are legitimate and which ones are fraudulent. We remove the entire decision-making burden from the retailer. They don’t have to analyze metrics and make an educated guess, as our competitors require. If we approve a transaction that is fraudulent, we take the hit, paying the site 100% of the failed transaction." He said Forter’s accuracy rate is about 99%.

Forter’s system draws on a large database of user behaviour on a site to see whether a specific user’s activities fit a legitimate pattern — or if the customer is a likely fraudster, the Times said.

"There are many data points that can indicate this, like the type of products they are looking at as compared to previous purchases, information about their personal life based on registration information or location, and much more," Zielke said. The system also considers the login location, IP address and the billing and shipping information.

Almost as important as catching fraudsters, however, is determining when a legitimate purchase, although perhaps suspicious looking, should be approved. "We recently had a case where a user logged into a site with an African IP address, and a billing and shipping address in Washington, DC," Zielke said. "That is the kind of transaction most other fraud prevention systems would have immediately banned. We approved it, because the customer’s behavior online was in line with acceptable patterns. And it turned out we were right. After checking the shipping address, we realized it was a diplomatic mission of an African country, and the customer was a diplomat who was ordering products he was planning to bring home."

In his article, Rabinowitz lists several other Israeli startups that have taken advantage of the expertise many young tech-savvy investigators acquired during their tenure (usually three years) at Unit 8200. The unit, he said, recruited intelligent, highly motivated, out-of-the-box thinkers.

"Just as Silicon Valley has famously aggregated technical talent in other areas, Israel is the capital of the world for talent who specialize in algorithmic thinking about risk," he wrote. "For Israeli startups in the field, this means a ready pool of specialists in each layer of fraud detection, from detecting proxies at a low level to automation with machine learning at the highest levels, developing algorithms that are border agnostic."

That Israel would emerge as a world leader in the development of highly sophisticated fraud prevention and detection systems may not be well known but it should come as no surprise, considering the level of sophistication it applies to internal security. Daniel Wagner, CEO of Country Risk Solutions, a crossborder advisory firm based in Connecticut, says Israel "has been the gold standard for establishing and maintaining security in all its forms."

It only makes sense that many graduates of Unit 8200 would look to apply what they learned there to the growing problem of national and international fraud attacks on legitimate companies. Considering the success Israel has had at preventing and detecting terrorist threats at its airports, perhaps it will soon be called the land of milk, honey and antifraud startups.

About the Author

David Malamed


David Malamed, CPA, CA•IFA, CPA (Ill.), CCF, CFE, CFI, is a partner in forensic accounting at Grant Thornton LLP in Toronto.

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