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.


Assaf Lavie said...

Very interesting points. I think, though, that the excitement isn't really about "innovation". I remember interviewing for a job at an Israeli start-up 10 years ago. I don't remember their name. Anyway the product was "paying with your cellphone" and they had it working with vending machines. :) My point is that nobody really thinks of paying with a smartphone as true technological innovation, just like video chat inside Facebook isn't real technological innovation. But just like with video chat, people are perennially excited by the prospect of some big vendor(s) finally having enough impact to get the ball rolling. If everyone who has an Apple/Google phone can pay with it, then it's exciting because it means the era of the mobile e-wallet is finally arriving. Maybe when that happens smart people will actually start to examine more closely the hidden value of payment itself, as you say.

@tkanet said...

At least you have my vote against all the "new wallets", "pay with a mobile", "banking the unbanked" excitement. The ability to pay via a mobile is one thing. But does just paying with a mobile add any value, per se (regardless of the technology)?
At some point, in a new payment channel, someone has to be gaining significant added value to be ready to pay for it and take the risk of switching.
Carrying less cards or wallets ? reducing queues at stores ? None of these reasons are really convincing for the mass market.

When the credit cards appeared in the 50's, the ability to have an instant credit (without going into a lengthy bank loan) was not only magic for the new US working class but also for the merchants. Credit Cards holders walking into a shop could suddenly spend more than they actually had. It felt like artificial money...and for both merchants and users, it had an amazing added value.

For some reason, many of the new (mobile) payment technology coming from standard bodies or alliance between major players seems to be missing this.

Agree with the key benefits for a new payment method...just it is very hard to argue that coupons are not driving commerce to merchants.

I would also add other benefits/added value, but for emerging markets, where the models are very different.
It is not about "banking the poor" but about "controlling your funds' journey".
I described this "new" mobile payment model and added value here :

Ohad Samet said...

@Assaf agreed, but I think that adoption is just not there and talking about connectivity technology is a moot point.

Colin Treseler said...

Ohad, you bring up very valid points. However, considering that nfc will make it vastly more easy for developers to create new rails, don't you think the technology plays a vital part in new innovation?

Ohad Samet said...

How will NFC allow developers to create new rails? NFC is a way to provide your payment details, it's merely a connectivity option - it replaces the action of handing the credit card to the retailer but not the credit card itself. The only way to create a new rail is to create a new standard of trust between sellers and buyers which will facilitate cheap moves of funds - exactly what we're aiming to do at Klarna.

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