PayPal Acquires Israeli Anti-Fraud Company

January 29, 2008 0

The deal marks the first time eBay and PayPal have acquired a security technology company…

“PayPal’s acquisition of the software firm Fraud Sciences for US$169 million, could help boost confidence in the online payment industry and in the parent company’s online auctions…”

San Francisco — PayPal, eBay’s online payments division, will pay $169 million for an Israeli security company specializing in detecting online fraud, the companies said Monday. The deal should close within 30 days.

Analyst Charles King said PayPal’s acquisition of Fraud Sciences “reflects the fact that sophisticated online fraud is an increasingly dangerous issue.” PayPal said Fraud Sciences offers a “unique transaction-verification service to manage online fraud” and is part of parent eBay’s plans to improve trust.

With the Fraud Sciences purchase, eBay can both address auction platform fraud and beef up PayPal as a tool for non-auction sales — a true growth business given the interest among consumers and merchants alike to find secure alternatives to credit card payments, Sterling Market Intelligence Principal Analyst Greg Sterling, said in a statement.

PayPal, eBay’s online payment service, has preferred to build its own security technology until now. It has been battling online fraud, which has cost it millions of dollars, and the acquisition is part of recently announced efforts to improve safety and boost trust across eBay’s sites in 2008.

“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.”

Based in Tel Aviv, Israel, and founded in April 2006 by former members of Israel’s intelligence agency, Fraud Sciences is specializing in online risk assessment. Fraud Sciences gives merchants online tools to help them verify the identity of buyers, a key issue in both online auctions and in other parts of e-commerce — particularly when more and more purchases come from overseas buyers.

“Integrating Fraud Sciences’ risk tools with PayPal’s sophisticated fraud management system should allow us to be even more effective in protecting eBay and PayPal’s hundreds of millions of customers around the world,” said Scott Thompson, president of PayPal.

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, said in a statement.

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.

While PayPal claims that less than one percent of all transactions are fraudulent, that is little comfort to those who have been defrauded. PayPal lets users exchange money online via e-mail addresses, a system which has also made it one of the most highly targeted brands for phishing scams.

“Fraudulent Web sites mimicking real sites are set up in order to steal people’s log-in details, who are lured there by fake e-mails.”

Last October, Yahoo, PayPal and eBay have teamed up to fight against fraudulent e-mails. Thanks to DomainKeys e-mail authentication technology, Yahoo said that Yahoo Mail will offer to its customers a safer e-mail experience.

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.

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.

Fraud Sciences cofounders Shvat Shaked and Saar Wilf — former members of the Israeli Defense Force’s intelligence unit — as well as COO Yossi Barak will join PayPal’s technology and fraud-management teams after the deal closes, while President and CEO Gadi Maier will leave after a transitional period.

Reducing the risk of fraud on eBay and its assorted sites, as well as for the many e-commerce sites that rely on PayPal, is of strategic importance to eBay, said Andrews Storms, director of security operations, in an e-mail.

“Outside of the credit-card companies themselves, eBay has been the clear leader in investing in and developing online fraud-mitigation tools,” Storms wrote. The purchase of PayPal gave eBay not only a popular method for users to exchange funds but also a “significant number of tools to allow users to do so in a secure manner,” he added.

PayPal has taken other steps to shore up its defenses. Early last year, it began offering a keychain with a one-time numeric passcode that users enter in addition to their login and password. The passcode expires after 30 seconds, which greatly reduces a hacker’s window of opportunity to get access to someone’s account.

PayPal has also pushed for free e-mail providers to block e-mail sent without digital signatures. That would potentially mean fewer scam e-mails would land in people’s inboxes, reducing the chance of fraud, although providers have yet to make a unified commitment.

PayPal continues to hold its own against a challenge from Google Checkout, which launched in June 2006. During that same time, Fraud Sciences won fans among merchants who are eager to cut down on the fraud they have to absorb, especially as their exposure to international sales grows.

“PayPal saw Google Checkout come in to the market just as it was eyeing more growth outside eBay,” Sterling commented.

That PayPal has continued to hold its own despite a strong push from Google to foster Checkout growth may give eBay confidence that it can now grow that part of the business and helps justify the investment in Fraud Sciences, he added.

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 is backed by BRM Capital, Redpoint Ventures and other U.S. and Israeli investors. The acquisition is an all-cash deal.

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