WePay Discovers Its Hidden Talent: Social Risk Evaluation

8/1/12Follow @wroush

WePay has come a long way from its humble beginnings at Boston College in 2008, where co-founders Bill Clerico and Rich Aberman created it as a way for groups like fraternities or ski-weekend buddies to collect and spend money. The company moved to the Bay Area in 2009, went through the Y Combinator startup program, decided to take on PayPal in the area of online payments for small businesses, and has been growing like a weed ever since.

The startup has raised just over $19 million in venture funding, is signing up 1,000 new merchants each week, and is processing hundreds of millions of dollars in payments per year. In the last 12 months its revenue has increased by a factor of 10, and it has doubled its head count to about 50. The company recently moved into a huge space—Box’s former headquarters on Portage Avenue in Palo Alto—that gives it room to keep growing.

But the most interesting change at WePay is something that wouldn’t be obvious to most customers or other outsiders. It’s in the way the startup is attracting new business. As Clerico and Aberman explained to me in a recent interview, the company has realized that its secret weapon—the thing that sets its apart from PayPal and other other online payment providers—is its ability to sign up new merchants quickly, without lots of paperwork or time-consuming background checks.

In fact, its onboarding process is so fast that other Web businesses that need to help their users process money—such as Fundable, a Kickstarter-like crowdfunding site for startups—are signing up by the dozens to use WePay as their payment infrastructure.

WePay's staff poses for a July 2012 group portrait (click for larger version).

According to Clerico and Aberman, the startup is able to offer these quick sign-ups because it has figured out a fast and reliable way to evaluate whether new customers pose a fraud risk. Rather than running slow and expensive credit checks and other inquiries, it simply looks at applicants’ social networking profiles on Facebook, Twitter, LinkedIn, and other sites. Says Aberman: “The benefit of digging into Facebook and Twitter is that when a new user signs up, they don’t have any transaction history on WePay. But they do have a history on other networks. We can see goodness or guilt by association.”

That means WePay can make a quick decision about whether a new applicant might be a fraudster. Assuming they’re not, it can enable them to receive money as soon as the day after they sign up.

“Simplicity is absolutely paramount for small businesses” who want to accept payments online, Clerico says. “Their current solutions are either to apply for a merchant account with a credit card company, which is a crazy 15-page application process, or they can use PayPal, which also has a pretty drawn-out sign-up process that has given a lot of small business owners negative experiences. But we have this great asset, which is our easy sign-up process. It’s absolutely the easiest way for any small business to accept payments online, whether it’s a maid, a handyman, a gardener, a dog walker, or a Web designer.”

The whole phenomenon of social risk evaluation is very new, and is part of a gradual shift in the role that social networks are playing in our everyday lives. You may have thought that your Facebook and Twitter posts were purely social, allowing you to share updates and keep up with your friends and family. But increasingly, the ripples you leave as you pass through your social networks are signals that other companies can use, whether to target you with advertisements or to evaluate your business credentials.

There’s no privacy-invading going on here—WePay only looks at publicly available data, unless applicants authorize it to go deeper by connecting the startup to their Facebook or Twitter accounts. “It’s a fact of life that there’s so much publicly available data about who we are,” says Clerico. “It’s a tremendous customer service if we can get merchants up and running so quickly and if we can understand them better based on the number of friends, their age, and other parts of their profile.”

The advantage of using this kind of information is that it’s very difficult stuff for fraudsters to fake, Clerico and Aberman explain. And by handling these automated risk evaluations on a massive scale, WePay is able to sign up new customers at a rapid clip while still minimizing the risk of chargebacks from fraud.

“Instead of signing up one customer at a time, we have whole platforms joining who have a tremendous number of users,” Aberman says. “That has been the largest driver of growth we have had.”

Clerico and Aberman didn’t realize how important social risk evaluation would become for WePay, but in a way, it’s been baked into the startup’s model from the beginning.

“When Rich and I initially conceived WePay, it was based on our needs in college to collect money from friends,” Clerico says. “That was our world—we were going on ski trips and doing things together. Over time, we found that our best customers were larger organizations like frats and non-profits and small businesses.”

Because of this group-payments legacy, he says, “we were really closely tied into Facebook and Twitter, to enable people to collect money from friends really simply, and we found that the data we were able to collect form being tied into these services was really valuable from a risk perspective. We could understand a customer really well from their Facebook and Twitter profile, and we found that that information was more valuable for fighting fraud than the traditional data about finances and ownership and DBAs and the last three addresses—the things you get from the credit agencies.”

Today, WePay’s sign-up form includes only a couple of fields, Clerico says. “We are able to pull information from the Web, which allows a 60-second signup process.”

Risk evaluation is critical because online payment companies are, in effect, underwriting their merchants, meaning that they are usually on the hook for fraudulent transactions.

What does fraud look like in the online world? “Say I sign up for WePay and I’m not who I say I am,” Clerico explains. “I pretend to be Rich the dog walker and I send an invoice to Pam, who is also fake, for $1,000. Pam pays that invoice with a stolen credit card and takes $1,000 out of our system. But the real cardholder, whose credit card I stole, sees a $1,000 charge and calls their credit card company and initiates a chargeback. The credit card company claws that back from WePay, and they get their money back, but meanwhile Rich the fraudster is long gone.”

Exactly how WePay screens out fake Rich and fake Pam involves patent-pending technology that Clerico says he’s hesitant to describe in detail, “because then the fraudsters will use it against us.” But at a minimum, he says, WePay has an applicant’s e-mail address. “That can be used to find out data about a person in an automated way. There is probably also information about them on Facebook and LinkedIn and the Web using the e-mail address. That gives us valuable information right out of the gate.”

Such as: Does the person exist? Does their online profile match the other information the person is providing? Are they connected with an adequate number of people who also seem to be legitimate? If they are a service provider, do LinkedIn and Yelp and the Better Business Bureau have reviews about them?

WePay doesn’t use such information to stop merchants at the door, but rather to judge whether to move forward with the transactions they initiate. “We let everyone sign up,” Clerico says. “It’s more about, do we allow them to process, and do we allow them to receive the money the next day, the next week, or the next month? Ninety-nine percent of the time, we underwrite the merchant, they are legitimate, and the payments sail through with no problem.”

In the last year, WePay has put a lot of effort into building application programming interfaces, or APIs, that other Web-based companies can use to tap into its payment infrastructure. (For a fee, of course: WePay earns money by keeping a flat 3.5 percent of each transaction.) Already, the company has 100 API partners doing business on the platform, including Fundable and another fundraising site called GoFundMe.

“Allowing third parties to leverage our API and our onboarding process removes a barrier for them, and allows them to choose us over another payment provider,” Aberman says. When GoFundMe tested WePay’s payment infrastructure against PayPal’s, Clerico says, the startup saw a double-digit lift both in the number of new organizations signing up to accept donations and in the number of donors submitting payments.

Aberman and Clerico say there’s a lot of room for the company to grow, both by adding more API partners and by signing up merchants who don’t yet have an online presence. Over the long term, of course, the startup also hopes to take more and more business away from PayPal. And its social risk evaluation technology will continue to be the foundation for all of its services.

So if you’re a small business owner and you’d like to give your customers the option to pay you through WePay, you’d better start thinking harder about curating your social media profiles. “It’s not like we are making judgments as to your character or your worthiness,” Aberman says. But increasingly, he says, “people are going to use your online identity to verify your offline identity, which is the opposite of how it was 10 years ago.”

In fact, he says, if an applicant doesn’t have a Facebook profile, that’s “a pretty big fraud signal.” So don’t feel bad about all that time you spend on social networks—just be careful about the friends you pick.

Wade Roush is a contributing editor at Xconomy. Follow @wroush

By posting a comment, you agree to our terms and conditions.