On December 8, Facebook said that the number of active business Pages on Facebook has grown to 50 million, a 25 percent increase since 40 million in April. This casual announcement from Facebook is significant for a few reasons, not the least of which is that it confirms what payment facilitators have known for years: Social payment needs are soaring.
Specifically, FB’s stats illustrate the explosive, global growth in the number of small merchants while simultaneously reminding merchants how much they need to embrace social media as both a marketing and communications tool.
This has huge implications for merchant underwriting and boarding. Increasing social activity among merchants means that they cast a wider digital shadow, which can supplement traditional underwriting. A search across multiple social channels can validate location, phone, description, customer base, time in operation, and even ratings, to justify underwriting by a payment facilitator.
Although Facebook is the most dominant social operation, there are many other social channels (Twitter, Pintrest, LinkedIn, Tumblr, etc.) that can add dimensions to merchant verification. The compilation of these social data delivers output consistent with numerous, traditional underwriting queries (verification of IP, address, phone and UR). I am not proposing that ID authentication via social channels should replace traditional underwriting, but they can augment the current data set on which underwriters depend.
Social also provides two less obvious benefits to underwriting:
Efficiency. Dynamics such as mobile adoption and cloud infrastructure are a catalyst for new business models. This drives a proliferation of merchants, many of which are truly micro-merchants (think Airbnb, or multi-layer-marketing). A high-cost (i.e., manual) underwriting process may eliminate payment facilitator profit for these merchants. But a shoddy underwriting absolutely will.
An automated social query helps address this challenge by elevating the confidence of traditional checks, which could reduce the percent of manual follow-up that would otherwise be required were those traditional checks to result in non-fatal flags. The simple result is lower costs through greater automation.
Another happy overlay is that micro-merchants often emulate consumers from an underwriting point of view – further increasing the relevance of social queries.
International. Markets in Asia and Latin America often represent the greatest growth in the number of small merchants. Yet they pose the greatest underwriting risk. Many queries function well regardless of geography (OFAC, IP verification), but many are either not relevant or not possible in certain markets.
For example, in some large Asian markets, only the format of an ID can be validated as there is no central data repository to which an automated API has been exposed. In some other high-potential markets, the penetration of credit/debit vehicles and bank accounts complicates standard credit queries.
Social is a relevant standard across markets. It can fill gaps created by system deficiencies and limited financial engagement of consumers in some markets. Although the U.S. behemoths have global footprints, these sites are often not sufficient to paint a complete underwriting picture in some markets. Some sites with heavy regional use include Ibibo in India, Mixi in Japan, Orkut in Brazil, Vkontakte in Russia and RenRen in China.
Avoiding The Pitfalls Of Social
There is no doubt that social queries can be a powerful tool for underwriting and, in many cases, detection of fraudulent transactions and chargebacks. That said, it should not be used as a single source for underwriting data. Although social has all the likely benefits discussed above, including it in the already muddy process of underwriting risks increasing, not decreasing, overall complexity.
Further, social queries are likely to evolve quickly, as user-generated content remains a fast-moving source of innovation and change. The result is that leveraging social profiles in the underwriting process may add ongoing operational pressure to payment facilitators, who have far bigger fish to fry in building and adding value to a portfolio of merchant relationships.
Bottom line: Do your homework. Balancing benefit to effort will be key, so seek out options that combine social output with traditional, required checks within a single interface. This accomplishes two things: (1) Gathering underwriting information through a single conduit, which drives simplicity and reduces “vendor fatigue”; and (2) Enabling transparent enhancements to these queries, which will enrich output without the payment facilitator having to do it (e.g., as social sites add new features, and as fraudsters inevitably determine how to counterfeit a social profile).
Underwriting may very well be next on the long list of things disrupted by social media. It will be an undeniable asset to payment facilitators; but can also be a growing distraction. Be thoughtful about how you leverage it, and the tools you use to do so.—Dustin Young is a former product VP for Vantiv and InComm, with specific depth in prepaid, mobile and payment facilitation.