Why Authenticating Users Is a Good Thing For Your Business

September 15, 2022 Stan

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I still get nostalgic thinking about the early years of sneaker collecting. In those days, people would congregate in lines to secure a limited-release shoe or meet a fellow collector at the mall to make a fair trade for their coveted collection.

Sure, it wasn’t as convenient as clicking “send to cart,” but the experience was rooted in real human connection — an element that’s become as rare as it is sought after in today’s era of online commerce.

And while there’s no turning back from ecommerce, there is a way to make the digital experience of buying and exchanging goods online more human: authenticate all users.

Know your customer technology, or KYC technology, is already commonplace in the finance industry. Investment firms standardly require customers to verify their identities and submit detailed anti-money laundering information before using their online services. The purpose is clear: prevent fraud and increase trust and accountability amongst users.

The same technology is now being used to authenticate users on online marketplaces where we buy and exchange expensive assets. While this creates a layer of friction in onboarding new users, it ultimately serves both businesses and users to take the extra step. Here’s why.

Trust in marketplaces keeps users coming back

Peer-to-peer marketplaces have grown into a hundred-billion dollar industry with the lending segment alone valued at over $115.61 billion last year. While the latter has widely adopted KYC, the majority of peer-to-peer marketplaces have been slower to adopt it because it creates a barrier to entry that results in a lower number of net users.

While user growth is important, it shouldn’t come at the expense of exposing your true customers to fraud or harassment from bad actors. When the identity of the person you’re buying from or trading with isn’t verified, not only does it pose a greater level of risk, it diminishes trust amongst users preventing them from developing authentic relationships amongst themselves. Research shows a lack of trust is the top reason why shoppers don’t purchase products or services online.

Businesses that embrace a community-first approach to e-commerce, centered in building trust and curating relationships between users, will remain competitive, particularly as Gen Z and younger generations grow in purchasing power and demand more personalized e-comm experiences rooted in transparency.

Digital verification ultimately improves the integrity of online marketplaces and helps promote trust and community.

Early adopters won’t be blindsided by regulation

Aside from creating trust and user accountability, there’s another reason digital IDs are good for businesses that operate online marketplaces — they keep them compliant. The government is now cracking down on businesses that don’t authenticate users for tax purposes.

In my industry of sneakers, the resale market boomed during the pandemic, with side hustlers earning two to 10 times the retail price of sneakers on secondary marketplaces like StockX. The sneaker resale market alone was estimated to be worth $6 billion in 2019, with predictions of it rising to $30 billion by 2030. Without user verification, the government isn’t able to tax the profit made by bulk resellers. Think about it. If sites like StockX did a billion in gross merchandise value — that’s hundreds of millions in personal income tax that the government doesn’t get — and that’s just one industry.

In December of 2021, eBay announced it would require all sellers who earn more than $600 a year on their site to provide a Social Security or individual tax identification number starting in 2022 to accommodate new regulations set out in the American Rescue Plan Act of 2021. Businesses who don’t start planning for digital authentication now may be caught off guard and off-budget when the new regulations are enforced. Verifying sellers for tax purposes also deters bad actors from committing fraudulent acts on their sites.

Online communities promote greater returns

Online marketplaces have been driven by gross merchandise value over the past decade. While businesses have realized profit from this model, it’s quickly becoming outdated. We’re entering into a new era of commerce — one that is community-led. As such, customers want to shop where they socialize and feel a sense of community, which is moving increasingly online.

We now spend more time on our phones than on TV and we’re no longer just searching for entertainment — we’re seeking to build meaningful connections with people who inadvertently influence our purchasing decisions. It’s why social commerce is projected to bring in $1.2 trillion by 2025. But we cannot connect if we don’t trust the person on the other side of the avatar.

That’s why online marketplaces that offer protection through user authentication will thrive in this next era of ecommerce. As the connection between community and commerce strengthens, it’s imperative online marketplaces find the right balance between user experience and protection.

Digital authenticators create a safer environment for online communities to thrive, and this ultimately leads to quality user growth and transactions. It comes down to this: What is good for communities is what is good for business — a principle that rings true in any sustainable market.