Inside Mastercard's $2.65 billion bet on digital security

Lionel Ng/Bloomberg

Financial services fraudsters are stealing more money from consumers while fraud risk remains above pre-pandemic levels, creating a backdrop for Mastercard's large investment in advanced threat detection technology.

The card network on Thursday agreed to a $2.65 billion acquisition of Recorded Future from private equity firm Insight Partners. Somerville, Massachusetts-based Recorded Future sells generative artificial intelligence-powered technology that analyzes different data sources to identify potential security threats.

Mastercard's Recorded Future deal, which is expected to close in early 2025 pending regulatory approval, is the latest in a series of Mastercard investments in artificial intelligence and other emerging technology that attempt to thwart payment and other financial services fraud by accessing more data from a growing number of sources. Its goal is to manage security risk as digital payments and processing speeds increase.

"For most interactions in a digitally connected world, payments are interjected into the process. So you have to go beyond the transaction to combat fraud," said Johan Gerber, executive vice president of security solutions at Mastercard. "Cybersecurity is one of the biggest threats."

Recorded Future has more than 1,900 clients in 75 countries, including governments in 45 countries and more than half of the Fortune 500 companies. It uses AI to analyze billions of data points to identify potential threats and has partnered with Mastercard on an AI-driven system that alerts financial institutions of a likely card compromise.

Since Recorded Future started work with Mastercard in January on a project that uses AI to spot compromised cards, the partnership has doubled the rate in identifying stolen cards compared to the first eight months in 2023, according to Mastercard.

"They already do business with banks, businesses and governments, so we're building on those relationships," Gerber said.

Mastercard has for years offered its AI and payments security technology to banks as part of a broader strategy to sell security, consulting, technology and product development services to card issuers and merchants to diversify the card network's revenue sources beyond payment processing.

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In January, Mastercard introduced new biometric authentication for banks and merchants. And in late May the card network updated its technology to identify stolen cards, using generative AI to analyze a trove of existing payments data to produce missing card numbers that can identify an entire stolen card on the dark web. This is designed to thwart crooks who leave only a partial trail on the dark web to cover their tracks. 

Mastercard rival Visa has also recently added similar technology to use gen AI to build profiles of stolen cards based on incomplete data.

"The Recorded Future deal will help us inject security intelligence into the entire transaction lifecycle," Gerber said. 

Fraud is always evolving with new payment technology innovations, said Ben Danner, a senior analyst at Javelin Strategy & Research.

"Fraudsters can use new technologies such as gen AI to develop sophisticated attacks on financial service providers by way of the creation of synthetic identities," Danner said. "Financial service providers and fintechs always need to stay one step ahead of the fraudsters to keep their customers protected, so leveraging advanced AI and analytic tools from Recorded Future is a way of doing just that."

The payments and financial services industries face an elevated security threat that could create headwinds for other innovation. 

Consumers reported $5.4 billion in losses due to financial services fraud in the first half of 2024, compared to the $4.9 billion in the first half of 2023, according to the Financial Crimes Enforcement Network and the Federal Trade Commission. 

For the first half of 2024, Fincen received 890,000 fraud reports from financial institutions, down from 940,000 in the first half of 2023 but above 810,000 in the same period in 2022, which was well above reports from prior years. 

There is also a market opportunity to market technology that uses AI to combat digital payments fraud. By 2026, 80% of financial institutions plan to use gen AI, with the top areas of focus being fraud prevention and customer services, according to research from Arizent, American Banker's publisher.

This comes as more financial institutions embrace real-time payments and mobile wallets, which heighten the risk of fraud given the shorter detection time, Arizent reports, adding concerns over security could slow development of new payment tools. 

"The traditional rules-based fraud detection tools are struggling to keep up with increasingly sophisticated threats, and artificial intelligence and machine learning tools are are essential in keeping fraudsters at bay," said Zil Bareisis, a director at Celent, adding the most effective fraud tools look beyond payment transaction patterns and leverage a range of signals that might indicate a threat.

"The offerings of both Mastercard and Recorded Future should benefit from combined capabilities and expertise," Bareisis said.