These days, there is literally an online marketplace for every need. Whether it be workers, office space, rides, vacation homes, food delivery, graphic designers or temp workers, the list extends to almost any and all imaginable services that can be collected digitally. And while these marketplaces are all different from each other, they mainly share a common ground in that they didn’t go into business in the hopes of becoming a payments or financial services company.
As marketplaces take off with millions of transactions between hundreds and thousands of buyers and sellers, they may become a magnet for fraudsters, industry auditors and government oversight. Tom Villante, CEO and cofounder of YapStone, knows this story all too well, which is why his company specializes in handling the burden of financial services, allowing the marketplaces to focus on buyer/seller engagement.
Some of the go-to names in the sharing economy may be known for giving rides or renting properties even though they could also be fairly described as financial service firms.
“Airbnb has a separate company that is a payment company — as in it is a fully licensed payments company that only handles payments. Uber could also be considered a payments company; a lot of what they do is payments-related,” Villante said.
Villante said that the Airbnbs and Ubers are the exceptions to the rule, though — the vast majority of marketplaces either can’t (or won’t) take on the challenge of going deep into financial services. That’s why he founded YapStone, which offers its partners access to its full-stack payments platform that does the risk underwriting, onboarding and payments processing for big-ticket payments — including recurring ones.
Villante said that it’s been an interesting journey for YapStone — one that started out in apartment rentals and helping making digital payments possible for tenants who found themselves tethered to their checkbooks to write (big) monthly rent payments. From there, the journey moved on to marketplaces — with an unsurprising specialty in real estate — where he also found himself on the front lines fighting fraud.
“Before we got into marketplaces, we had three people in risk — now we have 70, in addition to material ongoing financial investments in building and integrating next generation fraud solutions,” he said. “We have also developed a global view of the customers who transact in our verticals. This helps us separate those customers that are known, safe and operating within pattern from customers that require closer evaluation.”
YapStone also has an increasingly well-known client list, processes billions of dollars a year in transactions and is averaging annual growth in the 40 percent range. This is a trend their founder said he expects to continue given YapStone’s remit as a marketplace that offers their partners freedom from being a payments company.
The Incredibly Complex World of Marketplace Payments
In the world of regular payments, a single consumer goes into a merchant or service provider, receives their goods and goes on their merry way — and the payments process is straightforward and fairly simple, noted Villante: “Auth, capture, settle.”
“When you have a marketplace and you’re bringing together essentially thousands and thousands of sellers of goods or services, with potentially millions of consumers, the payout is much more complex.” That complexity abounds and traverses in some unexpected directions. There are the chargebacks and fraudulent transactions to worry about — and those, Villante noted, are considerable and ever-changing.
But then there are things that are less attention-grabbing — like paying out various applicable taxes or making sure various insurance fees are covered. This means that payments going in and out need to be split and distributed in a wide variety of configurations — and Villante noted that in these cases, the money is going through the marketplace, which means the marketplace is responsible for managing all those split payments on its own and dealing with vast sums.
“They are running into money transmitter license territory at some point — which may mean, many years and many millions of dollars for a money transmitter to effectively comply,” Villante said. Or, he noted, YapStone can take over payments, take over chargeback responsibility and make sure that all those split payments are automated and off the marketplace’s plate.
“There are a lot of marketplaces that got big very fast that have no desire to be payments companies but want to monetize payments.”
YapStone lets their clients do that, he noted, which means the payments process goes from being a net loss to a get-profit center. That is good news, he said. Better news, though, is opting out of the unending battle with fraudsters.
Fraud’s Ever-Evolving Presence
“Nothing wrecks a marketplace like fraud. If it becomes rampant, that is a really, really bad thing,” Villante noted.
But attempted fraud is more or less everywhere.
“We have seen so many different schemes,” Villante said of YapStone’s longtime fight against fraudsters on the marketplace’s services.
Some were expected. Collusion schemes where fake merchant accounts are created on marketplaces as mules through which to drain stolen card accounts are an ever popular favorite. On vacation rental sites, posting a photo of a fake property at a too-good-to-be-true price is also a classic. Then, he noted, there are the somewhat more brazen and less expected fraud cases. People who use stolen credit cards to rent houses — and then actually go and stay in them — has been somewhat eye-opening.
Looking at the various types of fraud has also been educational. Once it became clear that even people who steal credit cards like to sit by the beach, it was yet another factor that went into the underwriting and fraud rules engine — since people don’t tend to book vacations with stolen credit cards much more than a day or two in advance.
Traditionally, the war on fraud was fought by identifying abnormalities and patterns of data in motion (authorizations and settlements) and were required to act quickly to block the fraud before the criminal monetized the vulnerability. Winners in today’s war have evolved to using machine learning and artificial intelligence tools driving complex models focused on looking at millions of data elements for both data in motion and data at rest (past processing behaviors, chargebacks, device fingerprinting, geolocation, identity verification) to predict where the next fraud is likely to happen, before it happens.
That decision engine, noted Villante, is an important part of YapStone’s offering since it allows them to essentially take on the risk of the marketplace transactions — and when chargebacks occur, YapStone is the one on the hook for them. But this doesn’t happen often, said Villante, because YapStone has seen a lot of schemes and is really good at spotting fraud. Particularly, he said, because the company is selective about its client base, isn’t recruiting any merchant willing to pay the fee and works in the verticals it knows and where it is confident it can provide the best services. “We go very deep with the fraud tools for our customer. We’ll tailor to very specific needs because we’re taking the risk, and thus we’re highly incented to really know it inside out.”
“The more you know a vertical, the more you understand the risk profile. By any measure, our losses on a basis-point standpoint are incredibly low by industry standards,” Villante said.
YapStone has been around for a long time, so it’s had a very long time to understand that risk profile — at least in the verticals it works with — which means it really knows its fraudsters. YapStone also knows its marketplaces — and that it has rides to connect, houses to rent and crocheted hats to get to people who want them. And given YapStone’s growth rate for the past several years, it seems the company also knows that given a choice, the vast majority of firms will opt out of having to become payments companies if someone else can offer them a better option.