Anti-fraud company sees exponential growth in Boise

27-Jun-2012

In the ceaseless war between fraudsters and the retail community, a handful of companies are emerging as the mercenary victors. Chief among them is Kount, a Boise-based company combating transactional fraud that has seen more than 350 percent growth in the last year — with indications showing they will continue that pace through 2012.

Fraud, especially credit card fraud, is nothing new in the marketplace, but it has only been a recent development that third-party companies focused specifically on Internet transactions have shown the potential to become behemoths in the industry.

“There are a few key companies, less than ten, that have a full service fraud (platform) like Kount and all of them appear to be growing exponentially,” said Tom Donlea, managing director of the Americas region for the Merchant Risk Council, a nonprofit trade association that includes members like Microsoft, Walmart and Kount.

"While the technology has gotten far more complex, the dynamic is still simple," said Don Bush, marketing director for Kount. "What fraudsters try and do is mask who they are, they don’t want anybody to know who they are,” he said. “Our technology basically takes that mask off.”

The company has patented several technologies, such as a way to “fingerprint” which devices — smartphones, laptops or other electronic devices — a customer is using and track them for fraud use, to create several layers of fraud detection tools that can finger the bad guys, Bush said.

The software checks myriad factors in a very short time frame, about 300 milliseconds, and assigns a score that represents the risk of a fraudulent transaction. The retail company uses that score to decide whether or not to go forward with the sale.

“You take all these different tools and techniques and you put them together and it makes an extremely powerful fraud barrier for the customers who use us,” Bush said.

The company arose from Kount’s sister company, ClickBank, experienced problems with online fraud until it designed its own transactional security to tell the difference between real customers and crooks.

The company liked the system enough, Bush said, that ClickBank founders Tim and Eileen Barber decided to spin it off into its own company. It debuted in 2009. Both companies are subsidiaries of Keynetics. Tim Barber, who has a doctorate in mathematics from Princeton, designed the company’s patented fraud prevention tools.

Kount’s rapid growth can be attributed to several factors.

The first is need. Companies like Kount are serving more mid-sized companies with business models based on online sales.

The problem with online sales is that a fraudulent transaction leaves companies in the lurch. The consumer whose credit card number was stolen may get his money back from the bank, which in turn gets its money back from the merchant. The merchant is left in the cold, losing its merchandise and getting a “charge-back” from its own bank — the equivalent of paying an overdraft fee in a checking account.

In 2011, there were $3.4 billion in losses in the United States and Canada resulting from online fraud perpetrated on merchants, according to statistics kept by the Merchant’s Risk Council. That’s double what the losses were a decade ago, mostly due to a huge increase of in electronic commerce.

Those losses represent about 1 percent revenues for companies doing business in North America, according to the Merchant’s Risk Council.

That 1 percent seems small, Bush said, but with associated losses of merchandise and chargebacks, it can take several hundred other transactions to make up for the losses.

The largest online retailers, like Amazon or Best Buy, build their own systems to combat fraud. The mid-tier companies, which don’t have the resources to create their own internal fraud detection systems, are the growing sweet spot that have increased a need for companies like Kount, Donlea said.

The second factor is being ready with a respected strategy.

For years, companies would often deploy one or two pieces of technology to combat fraud and stay away from places where fraud is considered more prevalent, such as Europe, Donlea said. But the technology would often only cause fraudsters to create end-around solutions to beat the software.

“Fraud is like squeezing a balloon,” he said. “When you start to squeeze it it just sticks out somewhere else.”

The Merchant’s Risk Council and others recommend having a series of tools that are difficult enough to bypass, when taken as a whole, that fraudsters focus their attention elsewhere – where they have the path of least resistance.

Kount does not discuss the details of its research into fighting fraudulent activities, but Bush said the company is always upgrading its defenses in response to new techniques by fraudsters.

The costs for such systems are going down, which makes them more available to companies that have shied away from high security price tags. One reason for this is the software allows companies to acquire and use the technology over the Internet.

The programs are still expensive. Kount has platforms that cost $10,000 per month for full service on all transactions — although it can also charge per transaction.

Donlea said one reason Kount has been successful is the company’s sales pitch that fraud software doesn’t just stop companies from losing money to fraud, it opens up new sales.

Busted Tees, a popular t-shirt company started by the people behind the CollegeHumor website, and Bodybuilding.com, a Boise company selling workout supplements all over the world, are both customers Bush said have managed to open up new geographical regions to sales once thought too risky because of fraud concerns. The companies have confirmed that they branched out after using the company’s services in testimonials provided to Kount.

Kount estimates there are about 50,000 companies worldwide that fit the company’s targeted customer class.

by Sean Olson
Published: June 26,2012
Idaho Business Review

This story was also picked up by NPR.org.