Wednesday, December 21, 2011

A quick point about buyer psychology

There are multiple things I need to worry about beyond just fire fighting, but the thing I keep getting back to is users' mindset and how we are impacted by it. It fascinates me to what extent and how much deeper we need to go in understanding customer psychology. I wrote in the past about how much easier it is for people to steal online because of anonymity and distance from actual face to face human contact; one of the folks here at Klarna equates this to an open cookie jar in an empty room. Would you take one?

Most people would. That's the amazing, oh-so-human day to day situation we need to work with. The difference from your usual eCommerce payments risk situation stems from the fact that instead of trading tokens of trust issued by other financial institutions (issuing banks in the case of credit cards, for example) we basically establish and sell trust between buyers and sellers on our own, based on our data and inference (more on how this impacts the multiple facets in a payments business - maybe in a future post). That's a very different ball game when not only is the customer's identity not a given, but their mere ability or willingness to pay could be in doubt.

So instead of focusing on identity verification given a credit card (with a sprinkle of repeat offenders and hackers on top) we must look at a broader spectrum of credit and abuse issues. And the question about the customer's current and future mental state (future being upon receiving the request to pay) determines our ability to approve a purchase no less than the question whether this is a real person or not. The levers we need to pull, then, expand beyond identifying bad guys. Can I instill financial responsibility in a first time buyer  through a well designed buying experience? Will the busy businesswoman forget about our payment request in her busy schedule?

The other interesting thing is that since Klarna owns the stack (we issue credit, acquire merchants, manage reminders to pay) I have many more touch points with the customer. That calls for more negotiation and, actually, relationship building that both sides are interested in (buyers keep coming back to Klarna-powered checkouts). That's a plus in many ways since I can control the buyer's experience and correct earlier mistakes, be them false positives or false negatives. But the question remains - and it's a complicated one - how do you impact the buyer's mental state within a very short sequence of clicks and without hurting conversion?

Have I mentioned that I love my job?

(BTW, we're hiring)

Tuesday, November 8, 2011

What I Hoped Would Be Announced At Innovate2011

Late post, I know. Hyper-growth life (yes, that was a #humblebrag).

I went to x.commerce (ex-PayPalX-Innovate) to check on industry trends, meet friends and exchange ideas. I didn't have huge expectations but I did hope to see a couple of things emerge from the whole x.commerce effort that will extend both the Marketplaces and PayPal divisions beyond where they are today. This has yet to come in full, but some early signs are still visible and look promising.

eBay has made some very interesting acquisitions which have an obvious synergistic quality to them, and it seems that it's managing these integrations well - as in, not forcing them to immediately assimilate but rather trying to make their products available within the greater eBay portfolio context. Now the question is whether all of these acquisitions can be actually leveraged together into a coherent, complete set of products and services. This leads me to what I was hoping to see.

The two things I had hoped to see coming from eBay were (1) An integrated social commerce suite that allows commerce to go anywhere - basically showing that if sellers don't come to marketplaces, marketplaces will come to them. Preferably, this would be integrated with FB's open graph and allow real personalization based on social data. (2) A real transactional identity strategy and toolbox that allows PayPal's data and identity assessment to be extended by commerce sites to tie past purchasing behavior and enhance user experience. I was hoping for these two things since in my POV, both would have shown that the Marketplaces and PayPal divisions understand the limitation of their business model (mainly, the need to own the experience on and the consumer relationship for PayPal) and they are willing to partner and really provide access to some of their assets for others to expand on them. x.commerce, in general, was the right evolutionary move from PayPalX, since payments alone are not enough to build a really big and vibrant developer community - the problems a more flexible payments API is solving are not big enough (vs a new payment rail, but that's not what PayPal was offering).

While both were sort-of touched upon and generally speaking the direction is impressive, both the general x.commerce vision in general and the PayPal Access product specifically seem, still, a bit limited. In the x.commerce case, demanding that all capabilities communicate through the "fabric", as well as the way APIs expose information about the buyer (categorical answers such as "engaged", "casual" etc) demonstrate how eBay is trying to maintain as much business logic behind the APIs rather than provide raw data based on varying permission levels (at the consumer's discretion). PayPal Access is very similar in that sense - as one participant noted, currently looking a bit like a re-branded Express Checkout with a nifty sign-in module. I (hope to) see both of those concepts evolving more in the coming year as eBay incorporates more feedback from users, and becoming more open with its data and services. There's really a lot to be done in social commerce if eBay wants to continue being relevant, and I think it recognizes that. Time to take the big, platform agnostic, open-web-style leap.

Monday, November 7, 2011

Identity Theft - Whose Problem is it?

With Fraud Awareness Week happening this week, one of the main things I hear about (apart for, obviously ZEUSZEUSHACKEDMACHINESFRAUDZEUS) is identity theft and ways to deal with it. I wrote in the past about issuing additional secrets, basically, I don't believe in it - and the more I hear about two factor auth, the more worried I become. The problem is that because traditional methods fail, identity theft stops being the individual's problem and become society's problems.


When large entities (read: governments) realize that issuing secrets doesn't work (even digital passports and IDs get stolen and forged), they start thinking about solving that in the most obvious way (if you're a gov official): storing something-you-are type authentication factors. This is how biometric repositories are created (and then hacked. But that's a different story). If only everybody would be more laid back about behavioral profiling based on available online identities... but then again, this isn't a product nicely packaged with a nice RFP that gov and banks can understand.

Oh well. Don't come asking for my finger prints.

Sunday, September 11, 2011

Klarna is looking for a Manager of Risk Forecasting and Analytics

Trying to purchase something online is still far from a perfect experience. Not only are you taken through a tedious sign-up process, you’re also expected to trust the merchant and pay them before you even get to look at the merchandise. No wonder that only 9% of total commerce is done online: it’s just not easy enough. Klarna is looking to solve all that. 

Klarna was founded 6 years ago by three Swedish entrepreneurs and has been growing rapidly ever since, thanks to its offering. It lets customers pay only after getting their product, while guarding merchants from risk – making purchases simpler and safer for everyone while growing sales for merchants. This also drew one of the best VCs in the world – Sequoia – to invest in the company. 

We are Klarna’s Risk Management and Decision team; we deploy state of the art methodologies and tools (forensics, pattern recognition, network analysis, advanced statistics and even Theory of Constraints) to deliver the decisions that make Klarna’s business model possible. We’re looking for an experienced Risk Analytics and Forecasting Manager to join the team. 

This is where you come in.

The Manager of Analytics and Forecasting will oversee Risk’s activities in loss forecasting and provisioning, loss trend analysis and reporting, and risk controls and compliance. They will be required to maintain and further develop our risk reporting system including originations, portfolio quality, fraud etc. You should be well versed in and able to understand loss line development, its relation to the company’s P&L and how to best present and explain it to internal stakeholders as well as external partners, banks and regulators. 

The ideal candidate will be an impressive domain expert in the development and improvement of our provisioning and forecasting methodologies and tools as well as deep dives into trends and their drivers; all this while guiding and directing the teams that report to you in day to day tasks. While reporting and analyzing our performance and serving as a source of knowledge for loss reporting, they should also recognize that Klarna is a growing and accelerating company, and know how – even prefer – to successfully deal with the challenges of life in a company at the hyper-growth stage. 

Some formal requirements:
  • This is a full time position in Stockholm, Sweden. You should be local or ready to relocate.
  • Excellent communication skills in English (written and spoken); Swedish is a plus.
  • 5+ years of experience in a similar role, preferably in an eCommerce/Payments company, is a strong plus. Candidates with less than 5 years also encouraged to apply.
  • Good knowledge of the IFRS standard; knowledge of USGAAP is a plus.
  • 2+ years of experience managing more than 4 people.
  • Advanced degree in a relevant area (accounting, statistics) is a plus.
  • A combination of startup and corporate experience is a plus.
  • Previous experience working with regulators is a big plus.
For more information, email me directly:

Thursday, September 8, 2011

Why is the blog unattended?

It's because I'm head down with the team at Klarna, working to build a really awesome user experience and payments product. I have a few posts cooking, but this one's going to be a rather slow roast...

Wednesday, July 20, 2011

Beyond NFC and coupons: is there real value in payments?

If there's anything I can honestly say about the latest talks about payments, offers and connectivity technology (read: NFC) is that I am underwhelmed. I have voiced my opinion about NFC before, but the extent to which payments related discussions are focusing on what I find to be irrelevant is just mind boggling.

The issue most participants are missing is the intrinsic value in the payments business itself. When discussing NFC and offers, payments are often treated as a necessary evil - an almost commoditized way to move money between two accounts, based on existing rails (mostly credit card), where you optimize on cost (fees and losses). All that, to get to the real prize - users' personal data, to be leveraged for alternative revenue streams. This is the embodiment of the factory approach, and it is self perpetuating since inefficient user behavior management creates bad cost structures, and drives payments into becoming a loss leader. Is that what payments are about?

No. Consider PayPal: the company hit profitability, among other reasons, by offering instant bank payments even though the existing infrastructure (to this day) only clears after 3-5 days. Data was not used to further segment the population for better delivery of advertising content; it was data used to deliver quality decisions and decision supporting tools, and enabling capabilities that users would not have otherwise.

What are the added benefits of a payment option? The ability to move money quickly and for a reasonable price; the ability to drive commerce; responsible access to debt. Any solution that doesn't create more or cheaper commerce activity is not a change in payments - it's a new advertising platform. Extracting that value, however, requires more deep technology and data science/decision design capability than are usually invested in payments, which is probably (together with lack of domain knowledge) why only a handful of companies ever succeeded in bringing real benefits - and they grew into gorillas. Effective risk management and automated decisions can make the difference between making a payment and earning a paying customer and rejecting it; they also make the difference between approving a good customer and a fraudster or a kid using their parents' account. They also constitute the  difference between your struggling gateway business and a PayPal or a Visa. Companies that invest the time and research get rewarded by a substantial revenue stream just from moving money around; companies who don't are forced to treat payments as customer acquisition cost.

The above is the reason why NFC-enabled, offers-driven "wallets" don't strike me as innovation in payments: they are not. Improved underwriting, new payment rails or enabling commerce in a new setting are, but those aren't included in the debate. This is how a huge chunk of business opportunity is being missed.

Wednesday, June 22, 2011

My Favorite Two Tips for New Risk Teams

Every now and then I get to talk to companies either going into payments or having to deal with the effects of risk and fraud in payments. Usually that's a good sign - you need to be big enough to care, and that mostly means that you have good trajectory - but having to deal with risk and user behavior in payments without a manual (none exists) is difficult. To make matters worse, there aren't a lot of folks with this specific experience who are ready to hop on to a company looking to start a team from scratch.

Naturally every company is slightly different in the way its product utilizes payments. A marketplace for tangible items having to manage both merchant and consumer risk is different than a gaming platform with immediate delivery and high refund rates; business models also impact loss tolerance and use of various payment options. And so, providing one general advice constantly fails - well, other than "take it slow and iterate quickly", but you already knew that. There is, however, some advice I keep repeating at these very early stages.

  1. Hire the right person. As I describe in The Factory Approach, your first hires are crucial for the way your risk and decision team will grow. I've written multiple times in the past about the importance of hiring people who can articulate complex patterns. Find someone who combines a knack for patterns and data, can understand technology, but is able to deliver results in an operational environment. You may be looking for two different people (although my experience shows that these people exist - only outside of standard engineering practices)... hire the right person, and a huge number of the childhood illnesses of your department (over-reacting to losses, solving problems with low quality man power) will be spared. oh, and if you read this and feel like you're the right person for the job, I'm hiring!

  2. Instrument, instrument, instrument. No one has ever looked back at the first two years of his company running and said "I shouldn't have kept all that data". From the payments and risk perspective, this means a few things: decide on an entity-focused data structure and stick to it. When you add functionality, properly abstract rather than add flags and columns that are called "is_transaction_refunded_yes_no". Never delete rejected, refunded or cancelled orders. Properly document state changes. Instrument internal decisions and manual decision clicks. Finally, never build a complex ETL process to provide Risk folks with data; risk isn't business analytics - it is engineering with a sprinkle of manual review. Trust me, this will be one of your most precious assets even a few months down the road.
Are these enough for building a successful risk management team? No. But they are a good start and two things to keep in mind while you think about this complex task.

As always, I'm available for questions at @ohadsamet

Tuesday, June 7, 2011

Come Reinvent Payments with Us – Klarna is looking for Decision Analysts

Trying to purchase something is still far from a perfect experience, especially online. Not only are you taken through a tedious sign-up process, you’re also expected to trust the merchant and pay them before you even get to look at the merchandise. No wonder that only 9% of total commerce is done online: it’s just not easy enough. Klarna is looking to solve all that.

Klarna was founded 6 years ago by three Swedish entrepreneurs and has been growing rapidly ever since, thanks to its offering. It lets customers pay only after getting their product, while guarding merchants from risk – making purchases simpler and safer for everyone while growing sales for merchants. This also drew one of the best (maybe THE best) VCs in the world – Sequoia – to invest in the company.

We are Klarna’s Risk Management and Decision team; we deploy state of the art methodologies and tools (forensics, pattern recognition, network analysis, advanced statistics and even Theory of Constraints) to deliver the decisions that make Klarna’s business model possible. We’re looking for analysts to join the team.

This is where you come in.

Decision analysts in Klarna are motivated, strong achievers who specialize in using our methodology and tools to prevent payments fraud, predict credit worthiness and stop abusive customers. They work individually and in a group to identify patterns in user behavior data and turn these patterns into accept and reject decisions, delivered both manually and automatically. This is an entry level position with excellent prospects for getting into data analysis, risk management and automated decisions. If these areas sound interesting, you need to apply.

If you are our dream candidate, you probably:
·        Play to win. You know what we mean.
·        Can absorb vast quantities of information in short periods of time.
·        Have some proven ability to make quality decisions based on partial data and under time pressure.
·        Know or at least have a tendency to look at masses of data and identify patterns in it.
·        Are constantly encouraged by your friends to go on game shows because you always know the answers.
·        Lead an active life with multiple activities – because you can always rest later.

Some formalities:
  • This is a full time position in either Sweden (Stockholm) or Israel (Tel Aviv), with preference for Stockholm. Be local, or dazzle us completely and be ready to relocate ASAP. That said, if you feel like this is your dream job and you’re in the US, do drop me a line.
  • Fluent English is a must. Additional languages are a plus (in Israel, Hebrew is highly desired).
  • No relevant experience required. We prefer diverse backgrounds (I hold a B.Sc. in Biology and Philosophy). That said, if you’re experienced and looking for cool new challenges – we have multiple advanced challenges.
  • Bachelors’ graduates preferable, but all (= high school students to PhDs) may apply.
  • Some proof of excellence and analytic skills is highly desired (GMAT or Psychometric exam over 700, SAT > 1400, top programs, top schools)
  • Some technical skills or background (again, doesn't have to be formal) will push you to the front of the line. Please don’t refer to proficiency with Office as “technical skills”.

Interested? Contact me @ / @ohadsamet

Thursday, May 26, 2011

The Google-PayPal showdown

In late January of this year Osama Bedier, PayPal’s VP of New Ventures has moved to Google, where he now serves as VP of Payments. Today Google announced the Google Wallet, an initiative to bind credit cards and offers to an NFC-enabled mobile phone. Soon after we’ve learned that PayPal filed a lawsuit against Google, Bedier and Stephanie Tilenius blaming them for misappropriating of trade secrets, breach of obligations and interference of contractual relations . Just as we thought that the week was going to wind down, we get some prime time PayPal and Google action.

First, let’s look at the Google announcement. Apart for repeating “innovation” a bit too much, what did we see? Google is partnering with a bank and a card company (MC is definitely going the partnership route, as opposed to Visa) to provide users with an account they can attach a credit card to, and pay with using a tap. For phones without NFC capabilities Google will offer an NFC sticker that you can connect a credit card to and put on your phone to create a wallet-like experience.

Sounds familiar? If it doesn’t, it’s probably because you don’t live in Palo Alto and this BlingNation experiment – powered by PayPal – failed before it reached you.

So what’s really new in the Google Wallet? The way I see it, nothing. Apart for a strong statement from Google that it is betting on NFC, there is not much new here. Google is going the PayPal route of sign-up-and-attach-a-card which I find challenging and to some extent futile and tying in offers to enable the online-offline connection that is expected to give eCommerce a boost. Are these real problems, unsolved by others, that grant a major investment in this market? I don’t think so: attaching a credit card to an app is basic functionality, and NFC is admittedly far from prevalent. Still, if you’re Google, creating an offers and payment scheme to drive adoption and use of Android phones while gaining some access to end-customer payments is not necessarily a bad idea; but it’s not “innovation in payments”. If you’re looking for signs either way, check out the pricing scheme that the wallet will offer merchants and conversion metrics: a really innovative solution will either solve the onboarding or payment economics issues, which will be reflected in one of the above. Based on the partnerships Google has come up with, I’m guessing none of these issues has been solved (side note: one of the reasons Square is innovative is because it has a unique signup incentive: catering to a previously underserved industry segment and solving a real pain).

Should PayPal feel threatened? Absolutely. Although it has a tremendously strong brand and network, PayPal has its own issues. Losing a products executive like Osama Bedier to a competitor, at such a sensitive time, and when this executive allegedly takes with him actual trade secrets – that’s a potentially big blow. The company is investing a lot of efforts in becoming a serious, bank-like financial services company while eyeing retail; since it doesn’t own any hardware platform or direct relationships with a large community of developers, its product roadmap and strategic partnerships are its main assets. Those are the two matters that Bedier has been heavily involved with. The lawsuit acknowledges that and provides a peak into how PayPal approached the mobile payments market (and to what extent it is aware of what’s happening in its employees’ laptops).

What does the future hold for mobile payments? Obviously some more vicious fights inside and outside the courtroom. However the lawsuit exposes how the big players are thinking about payments: a simple product driven by strategic partnerships and very basic economics. I beg to differ, and with me quite a few interesting small to medium startups (Klarna, where I serve as chief risk officer, is only one of them). I’ll take a look at a few of those in the next few months.


Dear clearXchange: really? Three banks partnering to allow the use of an email address or phone number is “an innovative game-changer in electronic payments”? The year 2000 NEVER occurred to your while writing this press release? I wonder.

Wednesday, May 18, 2011

Risk Management for Risky Times - a Deck

I'm embedding the slides from a presentation I gave at Amazon lately. A great group of professional risk folks!

Wednesday, May 4, 2011

Klarna acquires Analyzd

Today we've announced that Klarna has acquired Analyzd, our payment risk consulting firm. This is an exciting step for me, as I will be assuming the chief risk officer position for a company whom I view as a contender for a substantial piece of the international payments market.

Short term credit is, from my perspective, one of the two most interesting approaches to disrupt payments in the next few years and I look forward to developing new ways to grant credit responsibly and accurately and create an unprecedented payment experience for customers, and a super effective checkout for merchants.

Find the TC post here.

Tuesday, April 12, 2011

PayPal's Weaknesses, and Who Can Exploit Them

I'm reposting my TC post. I'd rather have a less controversial title as I think the post itself is pretty balanced.

2011 is going to be a big year for payments, with more startups and mature companies getting funded in the space than almost ever before. It’s important to make the distinction between the headline chasers, the slow moving giants struggling for a piece of the pie and the companies that have a chance at real disruption. For my money Facebook and Square are both very interesting companies to follow in this space.
In my last post on TechCrunch I discussed Google and Apple and their efforts around payments, and explained why I don’t yet think they are serious players for the whole payments pie. The post ended with some ideas around what serious contenders could look like, and who are other potential large companies that could step into user-to-user payments. I’d like to expand on that, looking at how the companies above might take advantage of chinks in Paypal’s armor (disclosure: my consulting company, Analyzd, has done a project with Square in the past).
Paypal’s Weaknesses
Paypal (eBay’s growth engine) is demonstrating strong growth and evidently still enjoys network effects—in many territories its service sells itself to small and medium merchants. Moreover, much like with banks and other financial services companies, people like to complain (about fees, user experience and customer service) but will not easily migrate to another company just by virtue of marginal improvements. But Paypal is far from untouchable; it has a few flaws that make room for some fierce competition. What are they?
First and foremost, Paypal’s service has matured over the last ten years. Product and policy decisions that made a lot of sense in the era of “The Paypal Wars” became structural issues, accompanied by limitations gathered in an attempt to improve profitability and revenue. Concepts such as a full redirection to Paypal’s website to make a payment which is still widely required in its most popular small merchant products and the limitations it places on businesses it deems risky (such as rolling reserves, 10-20% of your volume being held for up to 120 days) create whole segments that are underserved and can be tempted by a new service.
Second, the company is heavily reliant on the existing card association and banking infrastructure. Despite having acquired Bill Me Later (offering credit on the spot to approved buyers), its payment volume is still noticeably a mix of card and direct bank payments (here’s an old yet still relevant explanation). This creates a boundary both on the level of fraud and credit losses it can sustain and (more importantly) on its pricing. Paypal is left struggling with getting more people to pay with a bank account (and, given Bill Me Later, more and more using credit products) or it’s forced to skim a few basis points on top of card fees. This is one main reason why small merchants start with Paypal, but then graduate out of the system and move to a full merchant account where they can work directly with card products and other, lower fee payment options.
Third, Paypal is very much U.S.-centered in both infrastructure and process. It has definitely gone global, with good presence in Europe and Asia, but its hold of the market is much less obvious in these territories. Other countries have significantly different regulatory challenges and sometimes completely different payment processes and preferences (Germany is a good example); a few ongoing issues (most recently in India) have demonstrated that being based in the U.S. is not always an advantage. Becoming a truly international organization, with a distributed work force adapting or (in some cases) rebuilding the product creatively to match the local market is a daunting challenge for many companies.
Finally, with size comes the innovator’s dilemma which hinders Paypal’s ability to bet on small and evolving markets, resulting in the company being late to the game. We need to take this one with a grain of salt, though—Paypal is investing in user experience and technology, and through sheer size can reclaim market share even when it is a late entry. However, a wide consumer base is not as large an advantage as it once was when new consumer (web or mobile) products gain immense amounts of traction within weeks and months and other innovative consumer companies with a shorter history are eyeing the space.
And so, competition for Paypal’s lead position can come from two types of players: the first and obvious one is a consumer brand that has a trusted relationship with a massive user base; the second is a company rooted in an underserved segment of the market, preferably out of the U.S., and does not build on the usual card-and-bank infrastructure (or worse, on carrier billing or some other secondary derivative).
Facebook’s Social Advantage
Facebook is a good example of the first type of player. Why them and not Google or Apple, which I’ve discussed in my previous post? All three have a wide user base, have experience with some sort of payments, and are faced by the same challenges. Why is Facebook different? First, Facebook signaled it wants to play, at least to some extent, with its new Facebook payments subsidiary.
Second, of all the large companies it not only has the largest, most diverse and global user base, it also has a rather clear identity strategy that extends beyond their website and is based on real information. This is a critical element in payments today. The ability to control identity isn’t the be-all and end-all of payments (spam, abuse and fake accounts on Facebook prove that) but if enforced properly it will provide a good enough basis for seller and consumer risk management.
Third, while Google and Apple have built their ecosystems and added payments to them to facilitate the type of commerce they required, nothing is a more natural extension of social interaction than adding payments to the mix. Payments and commerce are by their very nature social transactions.  From the user perspective, Facebook moving into payments is an easy to comprehend progression, and the social graph can easily add relevant reputation to boost the feeling of trust.
Where is Facebook aiming to be and where can it fit? While currently it is clear that the company is aiming at social games—a high margin industry it understands and could use as a classroom to learn about payments—it can go way beyond that. As I noted above, Paypal has a merchant graduation issue that is clear from its fee structure; when you grow beyond a certain point, a merchant account is better than a Paypal account if only for the costs, even given the need to manage risk management yourself.
While Facebook may not be able to solve the cost problem that’s limiting Paypal, it can provide large merchants with a different incentive—a huge, diverse, captured audience—which translates into conversion heaven. With its growing experience in ad targeting and more users moving to Facebook messages, Facebook can create unique marketing opportunities for merchants that integrate Connect.  Payments are the next logical step—all through one simple integration. Getting those merchants on board and using Facebook Credits as a universal form of payment will drive enough users to attach cards and bank accounts to their Facebook account.  That could pose a huge threat to Paypal, and strongly limit its opportunity.
Square: Going For The Mobile Wallet
Square comes to mind as a good example of the second type of player, however its case requires some explaining. Square seems to be a consumer-mobile-focused payment system for offline payments using cards, kind of a well-designed poor man’s POS (point of sale system). But look deeper: what I find super interesting is not the payments small sellers and retailers are receiving through credit cards. This is a necessary evil. What’s interesting to me is what these users then do with this money they have in Square’s system—currently deposited to their bank accounts, but which can potentially stay with Square and be used as a low cost funding source.
It’s a little farfetched, but Square may be onto a very creative way to tap into payrolls—effectively becoming the one real mobile wallet—by meeting the money spent by consumers at the point of sale and providing better ways to spend it directly from your Square account. The result will be an ecosystem which you enter with a credit card payment, but then never use that card again.
If everyone has a mobile phone with a Square app, wide payment acceptance is just one tap (or bump) away, and with fees more befitting cash than cards. This direction can also explain why removing the fixed portion from their card fees makes sense—a loss leader used to pump huge amounts of cash from small retailers into their Square balances. This is the power of going after payroll. From the financial perspective, if Square keeps its current fee structure, it remains competitive with merchant accounts for anything under $15-20 (see Feefighters’ handy calculator here) and with Paypal on even larger average transaction sizes (anything under $35, even for Paypal’s most competitive fees).
While Square needs to drive down costs further to become more interesting for the larger retailers, it’s definitely compelling for exactly the population that might then spend money directly from its Square balance and build its wide user base, namely the small retailers and occasional sellers. To those people, Square is also offering a quick way to accept credit payments that may not have been paid otherwise and a superior user experience, both strong drivers for adoption that can be more important than fees in the short term.

Thursday, April 7, 2011

Why PayPal should buy WePay

Last week a big discussion broke out on HN about WePay's last prank. This isn't their first - they pulled one on PayPal in the latter's X conference last year, winning them TechCrunch fame and some resumes of disgruntled PayPal workers. This last prank, however, started a discussion about who WePay was, what their credibility is, and should we trust "these guys" with "our money". I don't think that's the question at all, since most of the participants in the discussion haven't and will not use WePay; WePay is not targeting them. What I think is the question is - when will PayPal step up and acquire WePay in a talent acquisition.

It's not a secret that PayPal is having a hard time to hold on to middle-level technical talent. Over the years, there have been multiple exoduses - most notable (in my time) to LinkedIn in 2008 and to FaceBook's Risk and Payments teams in 2009 (not to mention Google this year). I'm not talking about poaching - simply people changing companies since senior managers they believed in moved. Looking at open positions at PayPal it seems like some of them take many months to fill up, and some of them never meet the original requirements; and since hiring out of college to key positions is out of the question, PayPal is left in a growing problem.

WePay has taken on itself to build an ACH-based payment product that can compete with PayPal, but building a network of dedicated payers is a hard business. It's growing, but not exploding, and without a viral product or a strong distribution channel it's hard to see it growing exponentially to a point where it can really compete. You can say it's a product market fit thing but from my point of view, it just seems like WePay has entered a field where I think others (like Apple and Google) will have a hard time competing in, and without the heavy guns. But they have built a payment product from the ground up and created an experience that is at least at par with some of the better payment experiences that are out there. This is something they need to be recognized for. In addition, the acquirer gets a closely knit team that is connected with the younger crowd in the valley, has been around in hackathons and meetups, and can help invigorate a product organization. Plus, if that's PayPal, they get Aleksey Sanin (ex Lead Architect) back in the team.

So on one side we have a team that delivered on a complex product within a decent number of years and could be a player in the market if it wasn't so heavily dominated by stronger consumer brands. On the other hand we have a juggernaut that's struggling to get young talent in its hallways to rethink some of the more innovative parts of its product. A match made in heaven!

(Although I have briefly worked with Aleksey and met Bill in a meetup or two, I am not affiliated with either company in any way. This is my free advice and two cents ;) )

Monday, March 28, 2011

The payment market is in replay mode

I sometimes stand dumbfounded at how history tends to repeat itself. Seems like no-one in the leading banks and card companies and their peers has had the time to read and process archives about the emergence of Paypal, and what happened to its competitors.

I am not a blind Paypal fan - the service has flaws and the payments market is ripe for disruption - but the recent announcement from AmEx just goes against reason (for some more material about other companies going after payments, see here).

Let's look at the case in hand: there's a gorilla in online payments, called Paypal. It has 90 million active users it acquired with hard work, hundreds of millions of dollars and riding eBay's success in the days when "viral marketing" was still called "email campaigns". To get its initial traction Paypal had to offer $10 per user referral,  a brilliant and costly move, and to get users to add their low cost bank accounts to their Paypal accounts it needed, and still needs, to force all kinds of limitations and verification schemes on its users. Still, Paypal struggles with high card payments volume and, to this day, has not had a single mass-traction product which encouraged users to actually keep money in their accounts.

In come the above. They look at the online payments market, look at Paypal, see what it takes to grow a customer base and get them to attach a financial instrument to an account, and what do they do? They create an online account, which takes 3 pages to sign up to, and which then asks you to attach a card or bank account - and without any built in virality. I am completely at awe with the reasoning that has gotten up and running other than "let's copy Paypal and wish for the best". If someone sees something here that I am missing then please, enlighten me.

Monday, March 14, 2011

Knowing where you're going: roles in payments and how your company fits in

Several months back I wrote about archetypes of players in the payments ecosystem. The post got some replies that objected to its proposed division of the ecosystem for various reasons; the most common one of all were those that cited regulatory and legal definitions as ones that determine who you are and what role you play. However diving into these details takes attention away from the most important parts, in my opinion - my post was aimed at categorizing business model and market approaches. Those, and not your PCI/DSS or money transmitter status, define your product needs, the brand you build and ultimately your market.

The confusion is apparent when talking to payments-related startups. As I like to say, moving money out of one's hands is a commodity and building a bi-directional network of sellers and buyers is a huge undertaking. And still, many startups that develop incremental improvements for the current process insist that they are going to compete with PayPal. If that's your way of showing commitment to a goal, maybe it's a reasonable tactic; but trying to "compete with PayPal" as a default in payments creates a distraction that may prevent you from realizing the real benefits of your business.

For example, do you think you can create the ultimate payment experience for a type of product (most popular are mobile and micro payments)? Realize that by virtue of simplifying the flow and integration you are not creating the foundations of a network - you are creating an engagement driver. Trying to sign sellers and buyers on to demonstrate superior conversion and ease of use, then being sold to a larger company (think Jambool) is a viable strategy - and a completely different one than creating you own payment network. Bling Nation is demostrating how hard, frustrating and capital-intensive is such an attempt, and I am not sure they are winning it.

Another one: do you have a new technology that allows an easy addition of NFC capabilities to existing POS systems? That's a neat solution to an adoption issue that many companies will be interested in; however, again, building a payment experience to try and capture a piece of the pie would be the wrong way for packaging your solution. You do not have to turn into a technology vendor, but deciding to build your own network is a diversion that will cost you your focus and a lot of money.

All of the above does not mean to say that starting a payment network is not something to be done, nor does it imply that you cannot use some other company's infrastructure if you want to be successful in payments. What you need to do is understand what role you can, want and should play in payments and use it to direct your product strategy. Diving head on into the business of building networks is an unnecessarily automated decision that can turn a potential money making machine into a very effective capital incineration one.

Wednesday, March 9, 2011

While trying to go after Square, VeriFone shows its lack of mojo


Public blows to competitors' brands are acceptable, especially if you're a long time contender who sees its lunch being taken away by a 2-year-old hyped newcomer. But the only thing VeriFone managed to do today is hurt its own brand; its focus on obscure security issues exemplifies how unversed it is in building a proper payments brand, the application it built raises ethical issues that their shareholders should be worried about and - last but not least - it managed to do it all without style. 

And style, anyone at Square will tell you, is key for building a brand in payments.

The only thing VeriFone might be able to do is raise some concerns with card associations. However, since Visa has openly endorsed the Square model, this too seems like a dead end. It's not that Square cannot face trust issues, and I have covered that in the past - but nothing is really incremental to existing setups. 

I suggest VeriFone focuses its efforts on building a truly compelling payment solution and compete for the attention of customers. That, and getting some tigerblood won't hurt either.

Monday, March 7, 2011

Apple, Google and the future of the payments market

A post I wrote about domination of the payments market and the largest players in it is live on TechCrunch (here).

Happy reading!

Monday, February 7, 2011

Fraud prevention for small merchants - an interview

Last week I gave an interview at, a blog dedicated to small merchants. I really like this market and I also think Mike is doing an amazing job maintaining this blog and creating quality content (and since his readership is growing fast, I believe this potential is not overlooked by merchants!).

Will be happy to hear your opinions about my answers to Mike's questions, here.