Pin-pointing Perpetrators

The billing data for the customer's credit card indicates he lives in New Jersey, but the $1,600 online order he just placed requests that the TV be shipped to an address in London. On top of that, the IP address the customer logged in from is located in Nigeria.

The customer could be making a totally legitimate purchase, but these disparities raise significant red flags. Therefore, before the e-retailer finalizes this "card not present" transaction, it does some deeper checking, striving to detect whether this is an attempted fraud.

In instances when e-retailers spot a red flag linked to the location of an IP address, they are using a risk assessment research tool called IP geolocation; with increasing frequency, they are connecting to GeoPoint, the world's largest IP geolocation database, operated by Mountain View, Calif.-based Quova.

Use of IP geolocation has been growing rapidly and is now "fairly well established among anyone serious about fraud detection, including large retailers," says Avivah Litan, research vice president for IT research and advisory firm Gartner. "It's become a 'must have' in fraud detection."

Tom Donlea, executive director of the Seattle-based Merchant Risk Council, a trade association focused on global payments issues, says the vast majority of MRC's largest members "are using IP geolocation as one of the core tools in making decisions about whether or not to accept an online transaction." Bob O'Neill, the council's payments program manager, says a growing number of smaller online retailers are now using IP geolocation, as well.

"It depends on the sophistication of an e-retailer's systems," he says. "Some retailers choose simply to block transactions from countries with high Internet fraud rates, while others want to be more nuanced and to review a number of data points before declining transactions. But any retailer selling online can really use IP geolocation, and our research shows the numbers are growing."

After integrating Quova's GeoPoint database, which contains location information on more than two billion IP addresses, into their web applications, e-tailers and law enforcement agents can narrow, in real time, the geographic location of a visitor to their websites to a radius of 15 to 20 miles. IP addresses typically "change" at rates averaging 5 to 7 percent every month, and independent research conducted by PriceWaterhouseCoopers shows that Quova's data is 99.9 percent accurate at the country level and 98.2 percent accurate at the state level.