eBay’s PayPal Scoops Up Fraud Sciences

On Monday, eBay announced that its PayPal payment-services unit would acquire Fraud Services, a privately held Israeli company, for $169 million.

Based in Tel Aviv, Fraud Sciences is a venture-capital-backed startup formed in April 2006, specializing in online risk assessment. Fraud Sciences’ technology is designed to ferret out fraudulent credit card purchases by verifying that the person making the transaction is in fact the cardholder.

The company’s technique, known as “identity proofing,” builds on existing behavioral and pattern-matching tactics that many online retailers and payments processors already use to detect fraud.

“At PayPal we use the same type of tools, and we feel that Fraud Sciences technology is going to be very complementary,” PayPal spokeswoman Sarah Gorman told InternetNews.com.

Gorman said that Fraud Sciences’ technology will build on what PayPal calls its neural detection technique, which approaches identity verification from the buyer and seller side. “It literally gets smarter with every transaction,” Gorman said.

Fraud Sciences has claimed that its system is 99.9 percent accurate, significantly reducing acceptance rates of fraudulent transactions, as well as the false negatives that reject legitimate purchases.

The technology works by evaluating a composite of the purchaser’s digital history to ensure that he is both a real person and the authorized cardholder. Beyond that, Gorman won’t say what’s in the secret sauce.

The acquisition makes good on the promise that President and CEO-in-waiting John Donahoe made on last week’s earnings call. Donahoe said that he would move aggressively to improve the safety and reliability of the shopping experience at the e-commerce giant.

Risk tools relating to identity verification will improve the security of online transactions executed through PayPal, but eBay’s payment-services division has run into other types of fraud over the years, particularly phishing.

Gorman said that the acquisition of Fraud Sciences is just the first of many security-related enhancements that eBay will make this year. Tuesday morning, eBay is expected to make a series of announcements at the annual e-Commerce Forum in Washington, D.C.

Some could involve other security aspects, such as phishing and counterfeit protection, Gorman said. eBay is also expected to announce pricing changes to its listing fees, fulfilling another promise made by executives last week.

eBay said that it expects the acquisition of Fraud Sciences to close within the next 30 days, and that it should not significantly alter its 2008 financial guidance.

Fraud Sciences will continue to operate out of Tel Aviv, and most of the company’s employees will be offered jobs with PayPal, Gorman said. Fraud Sciences’ executive team will work closely with PayPal during the transition.

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