Now here’s an interesting one for those bootstrapping new payment systems in the online world. Square is searching social networks as a variable in their fraud detection and credit check algorityhms.

This makes a lot of sense when you consider the founders background. Square, which we’ve talked about previously, is a combined magstripe reader and associated software for the iPhone. The goal is to give people who can’t justify a Merchant Account and card reader to be able to take credit card payments – be it in a small indie coffee shop, at a market stall, or anywhere that can get 3G coverage.

Jack Dorsey is open of the founders of Square… he was also the creator of Twitter so his use of social networks and community websites makes perfect sense. Expect the number of company mentions in Yelp, friends on Twitter and Facebook and a bundle of other metrics to be used to gauge the trustworthiness of both the retailer and the customer.

Given that assessing risk and making sure that the company has funds to cover any fraudulent transactions is one of the biggest barriers to entry for a new payments company, it’s great to see some innovation happening in risk assessment.

Perhaps if Square doesn’t take off as a payments system, this checking service can be white labelled to other suppliers?