Fraud and Compliance – The Double Edged and Necessary Pain in The Ass

When we think about the value of performance-based companies, as we did in our other piece this week, we think about why the outside world doesn’t value us in the same light. I suspect, though, that the vast majority of network owners really don’t care what the outside world thinks. They didn’t start their businesses to have someone else buy them. The notion of what they might be worth just doesn’t factor into the business plan. For many, the only time that they might sell is if they had to, e.g., they couldn’t cover the float. There is however a different type of external problem that faces every network; one comes from the advertiser side, the other from the publisher side. These two external pressures are much more important than any valuation metric as they can make or break the business, but usually just break it.

The problem is that both of these issues are not revenue producing, and they tend to go against the natural inclination of making money. They are nothing but a cost center. In the world of lead generation, it wasn’t that dissimilar from the introduction of validation and ultimately scoring. Today, almost anyone collecting lead data and sending on to an advertiser has some money-eating yet necessary validation. If they don’t, the person that they sell it to most certainly does, e.g., an edu offer where the leads go to an aggregator and not the school.

Fraud
It’s both a testament to performance marketing and a sad state of affairs when we can find job postings for people to create approved accounts on cpa networks. The old stereotype was the lone individual living in a third world country, one where 40 dollars per day makes a big difference. That may equate to roughly $15,000 per year, but in a location where $2,000 could provide for a good lifestyle, filling out two leads per day is not much work for a huge increase in lifestyle. The only downside to that model of fraud is that it doesn’t scale well; so, if you are an enterprising scammer who doesn’t want to make $15k but $150k, you need to find a way to scale. That means recruiting a network of people to help, i.e., doing two leads per day across ten networks instead of one. And, that is a mild example; yet, this is what the industry is up against. The only bit of quasi-good news is that those in the space have started to realize the scammer’s game.

Initially, many companies didn’t care, because those few extra leads, while bad, still meant money in the bank for them as well. As those generating bad leads figured out how to generate even more bad leads, the once innocuous few leads became a not insignificant number of leads… so much so that it started to impact their ability to keep advertisers. Trying to combat this fraud on one’s own is super tough. It is very hard to determine which behavior is legitimate and which isn’t. If, however, a company could see across multiple sites, those individual occurrences start to take on actual meaning. That is why it takes a cross company solution to effectively combat fraud. The good news is that companies are now starting to appear that can start to detect and make sense of the one offs, which again, taken together aren’t so one off. Again, the only downside, is that combating fraud feels like having to pay a fee just to do business the right way. That it can make the difference between staying in business and not, starts to make it seem acceptable.

Compliance
Similar to fraud, compliance can be a moving target. There is a reason of course that the FTC will only, on occasion, provide strict guidelines, and it was a major education advertiser who summed it up best. When asked why, when they know what they want do they not tell us, the answer is that sharing the guidelines only makes them easier to get around. Therein lies the issue with compliance. It is as though those spending the money do not trust those they rely on to make the money. Unfortunately, there is some merit in that attitude. Many marketers have willingly encouraged bad behavior on the part of their affiliates and/or engaged in less than honest practices internally. It’s almost a hazard of doing business in the performance marketing space.

Speaking of our space, compliance currently focuses on three main sectors – mobile, education, and continuity. Despite our dire predictions, the mobile space has manged to thrive in certain unexpected ways be it via co-reg paths and the virtual currency / broader incent space. As was the case with ringtones, it made money the new fashioned way – by getting people to pay for something they didn’t quite want and doing it again and again. It took longer than might be expected, but the whip was cracked on certain practices. Compliance here didn’t mean spending money so much as it did not mean making money. The same is true with the education space. Traffic not directly pertaining to education drives the majority of education leads; and, even though some of the regulations are less threatening than before, schools are becoming (rightfully so) more concerned about the messages that those sending leads use. Similarly, we’ve spent probably too much time talking about the continuity space. In aggregate, what we see is a request by those paying the bills not to maintain traffic quality but brand integrity.

All of this makes compliance a beast that is much less attractive but no less important to monitor. A challenge with compliance is that it often means providing greater transparency; that is not inherently bad, but this lack of trust runs both ways. Networks and aggregators don’t necessarily want to obfuscate their traffic, but seeing as these sources took a while to figure out, they don’t want to give them up either. Until compliance can feel more mutual and include more trust, compliance will continue to be an unintentional sticking point, one advertisers will request and services for which they would pay to help improve. For publishers / sellers, though, it will be seen as a negative. If companies like PerformLine get their way, the solution might come in the form of finally being able to reward those who do well versus making all want to do their own thing.