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Microsoft, PayPal Invest in Anti-Fraud Startup Arkose Labs

Arkose Labs Raises $22 Million in Series B Funding

San Francisco, Calif-based Arkose Labs has raised $22 million in a Series B funding round led by the Microsoft venture fund, M12. Existing investors PayPal and USVP participated, bringing the total raised so far to $36.5 million. Arkose Labs provides a fraud detection and prevention platform.

The firm was founded in Brisbane, Australia by Kevin Gosschalk (CEO) and Matthew Ford (VP of product and science) in 2015. When it launched commercially in 2017, it moved its headquarters to San Francisco. The system is designed to protect any consumer action from abuse and fraud, such as account takeover, fake account abuse, scraping, spam, gift card abuse and other activities.

Gosschalk has previous expertise in interactive machine vision technology, while Ford has experience in video gaming technology. The two brought their experience together to develop a new and unique approach to authenticating attempted online transactions -- a solution that in their own terminology is designed to bankrupt the fraudsters. 

The Arkose Labs platform comprises two components: Arkose Detect and Arkose Enforce. Arkose Detect learns behavioral patterns across devices and networks. It triages traffic and uses a risk score to determine between genuine users and fraudsters. If confident that the user is valid, the user is authenticated.

However, if there is any doubt, traffic is passed to the Arkose Enforce application. Users are now presented with a visual puzzle that must be solved. If satisfactorily solved, the user will be authenticated. But if not successful, the user (now considered to be a fraudster, either in person or a bot) is not simply blocked. Further visual puzzles are presented to engage the attacker's resources in a useless cycle of effort. The intent, said Arkose in a statement, is "to bankrupt the business of online fraud and abuse... by making cybercriminals expend massive effort to conduct their attacks, which eliminates the ROI and profitability of fraud." The purpose, added Gosschalk, is "to eliminate fraud, rather than contain it."

This process reverses the accepted belief in authentication -- it increases rather than decreases user friction, but only for suspected fraudsters. Using the founders' background in interactive visuals and gaming, the additional authentication possibly required for genuine transactions can be treated as a bit of fun by real people, but is impossible to solve by automated means. The overall result is to decrease user friction for genuine transactions but increase it for fraudsters, while maintaining a very high level of accuracy in its determinations.

The new funding is expected to be used for further product development, new hires and expansion into the EMEA market. Arkose Labs expects to build partner-led market strategies for Latin America and the Asia-Pacific region. It achieved a 400% revenue growth while doubling its customer base in 2019. Those customers include Microsoft itself, GitHub, Electronic Arts, Match.com, Singapore Airlines, Roblox and Twilio among many Fortune 50 companies.

"Microsoft is committed to providing a safe experience to our customers," said Alex Weinert, director of identity security at Microsoft. "Arkose Labs' technology is an important component of our multi-pronged approach to minimize fraud without negatively impacting legitimate customers."

Related: Fraud Prevention Firm Sift Science Raises $53 Million 

Related: Mobile Payment Fraud on the Rise 

Related: eCommerce Fraud Prevention Firm Riskified Raises $165 Million 

Related: Fighting Fraud With Threat Intelligence: Debunking Common Misconceptions

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Kevin Townsend is a Senior Contributor at SecurityWeek. He has been writing about high tech issues since before the birth of Microsoft. For the last 15 years he has specialized in information security; and has had many thousands of articles published in dozens of different magazines – from The Times and the Financial Times to current and long-gone computer magazines.