share this article!

Fraud is not a new problem. Some historians trace it back to 300 B.C., when a Greek merchant named Hegestratos took out an insurance policy on his boat full of corn with the intent to sink it and collect the insurance money. A couple of millenia later, fraudsters are more likely to be surfing the web than the open seas.

But modern day grifters face a challenge in Forter, which has just closed an oversubscribed $300 million round of venture capital to further expand its business of detecting fraud in online transactions via machine learning. Tiger Global Management, a prolific Silicon Valley firm, led the Series F funding round, which nearly tripled Forter’s valuation to $3 billion in the half-dozen months since its prior round. Third Point Ventures and Adage Capital Management also joined Forter’s latest capital infusion, along with existing investors including Bessemer Venture Partners and Sequoia Capital.

It’s no secret that ecommerce has exploded during the pandemic: In the U.S. alone, digital retail sales totaled $791.7 billion during 2020, up 32.4% from 2019, according to recent Census Bureau data. Naturally, so too has fraud. Forter’s CEO Michael Reitblat is loath to divulge specific tactics popular with fraudsters so as not to inspire any sly Forbes readers, but he notes that fraud related to unattended frequent flyer and hotel points has jumped. Likewise, Forter increased its customer base by about 70% and roughly doubled annualized revenue in 2020 to about $116 million.

“I feel almost bad saying that it’s interesting to see how creative fraudsters are,” muses Reitblat. Since it was founded in 2013, the New York-based company has raised more than $500 million in venture capital and employs 300-plus people.

How does Forter work? The company says its algorithm analyzes thousands of data points to “holistically” evaluate each online transaction, item return or loyalty points redemption that occurs on a customer’s site. The system typically replaces a customer’s in-house fraud detection program that might decline transactions that meet certain broad criteria–for example, if a would-be buyer lives in a country that has a high percentage of fraudulent transactions. Forter claims to process about $250 billion worth of transactions per year, up from $100 billion at the end of 2019. (In 2018, Forter processed a measly $50 billion per year.)

“We don’t want to generalize, we don’t want to say ‘this address is bad,’ because an address is not good or bad,” explains Reitblat. “People can be bad, they can do bad things. Everything else is circumstantial, so we actually want to make sure that we’re letting all the good people through.”

Forter’s customers span the digital economy. Notable names include Nordstrom, Sephora, Instacart and Burger King. Travel booking site Priceline began using Forter in 2018 after it saw a “stubborn” false decline rate, says Eric Lorenz, Priceline’s VP of strategy and operations. Priceline’s problem wasn’t unique; Retailers can lose significant revenue from transactions that are inappropriately declined because they simply appear problematic. A 2019 report projected that false declines could cost merchants and issuers across the globe a combined $443 billion in income by 2021, while actual fraud was projected to reach $6.4 billion. (The findings come from an AITE Group study commissioned by ClearSale, a small fraud-prevention firm founded in Brazil.) On average, Forter claims to mitigate 85% of false declines, while blocking 75% of fraudulent transactions.

“We saw the opportunity in this space as not really focusing so much on reducing the fraud, but on giving retailers peace of mind or a guarantee that they can sell without the fear of fraud,” says Rajesh Ramanand, CEO of Signifyd, a San Jose, Calif.-based fraud detection company that competes with Forter. Ramanand, who previously worked as PayPal’s head of risk, points out that demand for Signifyd’s product along with revenue both roughly doubled in the last year. He says the company now processes “hundreds of billions” in transactions annually.

Launched in 2011, Signifyd is one of Forter’s key rivals. The 450-person company secured a $1.34 billion valuation in mid-April via a $205 million round led by Owl Rock Capital, and its customers include Samsung, Rite Aid and trendy Spanish clothier Mango. Forter’s second major competitor is Riskified. Founded in 2012, the New York- and Tel Aviv-based business earned a unicorn valuation in 2019 after closing a $165 million round led by General Atlantic, and it employs more than 500 people. Riskified’s customers include Canada Goose, Wayfair and Prada. These three category leaders all use machine learning algorithms to detect fraud or an absence thereof, and they offer to reimburse merchants for chargebacks related to wrongly approved fraudulent transactions.

It’s still anyone’s game, but Forter hopes the depth of its data will help it triumph. (Its database covers more than one billion customers globally.) Reitblat employs a vaccination metaphor to describe the value of this: “Let’s say a new fraudster is attacking one of our customers, and then we figure out how to stop them. From that moment, all of our other customers are almost immunized from the same attack.”

This virtuous cycle presents an advantage for Forter, says Elliott Robinson, a partner at Bessemer’s San Francisco office who participated in this round and led its $125 million Series E in November. “Data is the new oil,” he quips. “Forter was the first company tying all of the data together.”

Forter is eight years old, but Reitblat and his two cofounders have been immersed in fraud prevention for decades. Reitblat started his career in Israel’s military intelligence unit before joining Fraud Sciences, an online fraud detection company based in Israel that was acquired by PayPal in 2008 for $169 million. His cofounders Liron Damri and Alon Shemesh also worked at Fraud Sciences–but Reitblat first met Damri back in boarding school.

“We understood that the way ecommerce works, fraud will always be a problem,” reflects Reitblat.

Read More

share this article!