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A few weeks ago, a high-profile breach at Epsilon exposed tens of thousands of consumers’ information to cyber-criminals. To make matters worse, this information was tied to the individual habits of consumers at Citigroup, JP Morgan, Best Buy, and may other large businesses. Experts believe criminals will use this information to “fish” for more information from customers by posing as a trusted legitimate company through emails asking for sensitive information. This type of scam, known as “phishing”, is one example of many increasingly sophisticated and common methods criminals are using to siphon money from consumers.

In another instance, a credit card thief even sent a victim a bouquet of flowers, with a note attached stating “thnx for ur money”. What is more bizarre, the flowers were purchased online using the victim’s own stolen credit card information.

But customers are not the only ones suffering. The financial industry bleeds billions each year from fraudulent transactions.

The rise in fraud highlights the fact that current tools used to combat the problem are sorely inadequate. The financial industry is slow and often reactive in nature to these events. In many cases, charges continue to be processed even after several fraudulent purchases have already been made.

But ValidSoft, a subsidiary Elephant Talk Communications (NYSEMKT:ETAK), offers a real-time fraud prevention solution that stops fraud before the first purchase is even processed. The breakthrough technology correlates the location of a financial transaction (at an ATM or merchant terminal for example) to a user’s mobile device. In simple terms, if the terminal location and mobile device are in proximity to each other, the transaction is authenticated. But if criminals attempt to use someone’s credit card information in an area where the legitimate user’s phone is not, the transaction will be declined.

ValidSoft has already conducted trials with some of the world’s largest banks in almost every region in the world. The results of these have been very positive and indicate that by utilizing the technology, financial institutions could save billions, by both preventing fraudulent transactions as well as reducing the number of erroneously declined transactions.

Up until now, Europe has unabashedly been the top priority market for ValidSoft. Visa (NYSE:V) Europe recently validated ValidSoft’s VALid-POS and VALid fraud solutions when it chose to integrate the technology into its payment processing platform.

The company has indicated that it is “very pleased” with the relationship with Visa Europe and “very excited” about its progression. Visa Europe intends to offer ValidSoft’s fraud solution to its 4,000 member banks and payment service providers across the continent as part of the company's value added services, which should begin to roll out soon.

This significant development has been completely overlooked by the investment world. Visa Europe alone processed 24 billion transactions in 2010. If ValidSoft were fully integrated during this time, even at a one cent per transaction, the company would be looking at hundreds of millions of dollars in revenue. The company has noted though, that it would expect “a hell of a lot more” than a penny per transaction. The market for fraud prevention is massive and ValidSoft is well positioned to take advantage of it.

Now that ValidSoft is established in Europe, the company will aggressively push into new markets. It is already in commercial discussions with major banks and credit card processors. ValidSoft is even collaborating with a European governmental agency to verify payments to citizens and improve the unemployment system for that country. Live trials should begin soon. Also, success with Visa Europe could be a foot-in-the-door to the bigger fish, Visa International.

It is also important to note that ValidSoft recently presented to Janney Capital Markets in New York. The presentation is part of a larger strategy to garner more institutional investors, boost liquidity, and inevitably move the company to the AMEX, which now appears imminent. This process should begin in the near term.

This event also symbolizes ValidSoft’s emergence in the U.S., leveraging the progress made in Europe. The company’s commercial discussions with banks in Europe have garnered the interest of a very large financial institution in the U.S. The company is aggressively pushing to expand and aims to operate in 5 geographies by the end of 2011.

Other authentication models are based on GPS or latitude and longitude coordinates. Unfortunately, these methods are not very viable because they “track” users. They are also too slow operate within the timeframe required to authenticate a transaction in real-time.

But ValidSoft’s self-learning technology anonymously correlates transactions and mobile devices, all while maintaining user privacy. ValidSoft is the only security software company to be awarded the European Privacy Seal, certifying that its solutions adhere to European privacy standards and data protection laws. This is attractive to banks, as they that can roll out the solutions to all of their customers on an opt-out only basis.

ValidSoft is also the only company in the world providing a real-time solution to fraud, validating transactions in an impressive 400 milliseconds. The company currently possesses the infrastructure to process an astounding 400,000 transactions a second, enough to cover the entire global market.

What’s more, ValidSoft’s technology is not limited to card based transactions. The technology is flexible to work with a range of transaction types, including purchases over the internet and even Near Field Communication mobile wallets. Near Field Communication, or NFC, will be the future of payment where consumers can use their mobile phone as a debit or credit card, simply by waving their mobile device near a receptor. NFC is expected to see rapid adoption compared to the popularity of credit cards due to the fact that most people already have mobile devices. ValidSoft is well positioned to secure the emerging NFC payment method.

Worldwide fraud is a $250 billion problem. Recent high-profile cases of fraud show that the financial industry’s current defenses are clearly inadequate and consumers are left quite vulnerable. ValidSoft can significantly reduce fraudulent transactions with the only solution to verify transactions and stop crime in real-time. ValidSoft will soon emerge as a global leader in credit and debit card fraud prevention.

ValidSoft competes against companies such as Authentify and Verisign (NASDAQ:VRSN). These companies boast two-factor and three-factor authentication. But ValidSoft now offers the first commercially available four-factor authentication through VALid-4F. This technology authenticates identity through the three traditionally factors of "something you know", "something you have", "something you are", and now adds the dimension of "somewhere you are".



Disclosure: I am long ETAK.

Source: ValidSoft Is Positioned to Lead Global Fraud Prevention