Processors Look To Share Data To Combat Fraud

Merchants have warmed up to the idea of banding together to fight fraud in recent years, and First Data Corp.’s improved fraud-detection system that anonymously shares information about the online purchases of client retailers’ customers could help to accomplish their fraud-detection needs.

The Atlanta-based payments processor on April 4 announced the launch of Fraud FlexDetect, which it built in partnership with Accertify, a unit of American Express Co. (see story).

“Data-sharing is a lot harder to develop tactics to get around” for fraudsters, says Julie Conroy McNelley, a senior risk and fraud analyst at Aite Group LLC in Boston. “The more that you push that capability to the merchant base, the more fraud that merchants will be able to collectively stop.”

As an example, First Data says its system allows an online clothing outlet to ask a big-box retailer what card numbers have duped it in the past and from what computers criminals have made fraudulent purchases.

Businesses selling their wares on the Internet typically evaluate risky transactions by meshing together characteristics of each purchase against their fraud system’s data. If the risk is too high, the order is sent to an employee for a manual review.

First Data, a unit of private equity firm Kohlberg, Kravis and Roberts, would not say how many merchants have signed up to share their data but says about 100 have opted into an early release of the program. However, that does not mean they have agreed to share their information, says Phil Levy, First Data vice president of ecommerce solutions.

“Most are quite hesitant,” he says. “You are giving someone outside your business access to your data, and that’s sacrosanct.”

First Data is not the only company pushing for collaboration to fight fraud. At least one other vender, ThreatMetrix Inc., offers a similar service that fingerprints devices used to perpetrate illegal transactions (see story).

“We think the analysis of the transaction in real-time is much, much more valuable” than other methods, says Reed Taussig, ThreatMetrix chief executive. “What we are trying to do is to determine if this particular customer has a gun in their coat. That’s what it comes down to.”

Different flavors of data-sharing exist, he says. ThreatMetrix links data from merchants in similar industries.

“If there is dust on the banking customer’s keyboard, that bank is going to turn down that transaction,” Taussig says. “They are incredibly sensitive to fraud. On the other hand, if you are clearing Facebook credits that are worth microcents, your sensitivity to risk is pretty low.”

First Data’s Fraud FlexDetect offers additional backroom functions for transactions that fall within a grey area: those just on the cusp of legitimacy.

“We are very focused on the challenges that our merchants are facing with managing fraud,” Levy says. “It’s a complex and global kind of challenge, and this is a major step forward for us.”

CyberSource Corp. announced last month that it was enhancing its own fraud scoring system, Decision Manager (see story). The subsidiary of Visa Inc. says it was marrying its fraud-scoring system with Visa’s system to cast a wider net to catch fraud before it occurs.

Neither Visa nor CyberSource would give an estimate of the amount of fraud the enhanced scoring system would address. They say the degree of the improvement would vary by industry.

Litle and Co., a Lowell, Mass.-based e-commerce payment provider, in March began offering Decision Manager to its merchant clients (see story).

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