Why don't you become a payment provider? A disambiguation.

Every once in a while there comes a question about why doesn't company X become a payment provider, or what would it take for them to become one. Lately, I have seen this come up in Quora regarding Skype. Parts of what I want to say about this matter were brought in this Quora question but there are a few other issues and a couple other basic assumptions to sort out.

I'm a big proponent for competition in payments; rates are too high, systems are archaic and self-imposed limitations by incumbents are just crazy sometimes. Even Paypal can use the competition to shake up some of its ways of doing business as the 8000 pound gorilla. But before you dive right in, you have to sort for yourself where in the food chain are you going to compete. I covered this a little bit in my previous posts about mobile payments, but I see 4 links in the payments chain you need to mind: engagement drivers, networks, methods, and wallets. Of course you can play in all of them, and many companies do so in more than one, but it's important to understand them since they have different implications to your product. Once we understand those, we can really look at why providing value in payments is not as easy as it sounds; we can also understand where most people choose to compete and where other opportunities might be waiting.

"Engagement drivers" is the model for many companies in the gaming market. You're competing in driving engagement when all you do from the payments perspective is resell someone else's ability to provide a method of payments (and therefore, build on top of the second group's systems). Note - not some other company's ability to acquire payments, as the companies whose services you'll use are not banks or V and MC. As I noted in my post, I see the mobile payment providers of the world in this category, and to a large extent offer wall providers as well. Players in this category don't own the customer service liability with the customer but at the same time don't own the relationship either; their product is a promise for improved conversion and hassle free UX, and at times they act as "aggregators", presenting end users with multiple payment methods. Quite a few companies have been pushed to this part of the chain or chose to go here because Methods incumbents are too strong and the barriers to playing there are high, while the gaming industry was and still is very supportive of pricey added services as long as you can drive engagement.

Networks is where most of the big players are playing or intend on playing; this is where Paypal, Facebook credits, Google checkout, mobile operators, the future Apple product etc are in the food chain. Players in this area have a direct relationship with the buyer and the seller, and discover the joy of customer service for payments. They emerge because they either identified a new merchant and customer relation that was needed and not catered for (examples: Paypal rules in online payments and P2P/U2U, Facebook is solving virtual currency fatigue and small WePay is looking at group payments). At this level customers already have stored value accounts that are sensitive to fraud as well as may default on some type of credit you've given them. This is the true battlefield of payments to many people - and many people, in my honest opinion, are missing the point - but when question askers think about payments this is what they have in mind. And for a good reason - owning this type of a relationship, as well as identity details, is important value add that can and should be leveraged by current payment companies.

Payment Methods and Wallet is where I find things to be extremely interesting - try to draw a graph of Visa, Mastercard, Amex and banking through the world and you can realize why - how small and fragmented is the online payments world compared to this opportunity, and what opportunity lurks there. But first I must make a point about differentiating methods and wallets, since some companies might claim to be both. Here's a simple test: when your customers get their paycheck, where do they put their money? If it's in your system you're the wallet. If it's not, you're not.

I am very interested in Methods since they are the rails that enable payments, while getting a piece of the pie in a (relatively) lower risk environment. Methods connect wallets with networks and they do this, ideally, in a seamless integration. Yes, they're in the back unless they have great brand strategy, and that's a challenge for any player to solve, but the reward is huge. It's a high-volume-low-margin market, but a profitable one, and is one that is ready for competition, as long as you can bring more value than just another credit card. I can say I know at least two companies that are working in this area and will provide what I perceive as immense value, and I'm following them closely.

Lastly, Wallets are where you put your money when you get it. For regulatory and other reasons mostly this place is a bank, that then uses various other services to allow you to spend your money. While quite a few companies developed as means for helping you spend or creatively save your money (Mint would be one example), not many are trying to provide an actual wallet. While there are many barriers here as well, this is a unique type of relationship with a customer, one that has much more upside once established but a rough way until it is established.

If you're thinking about payments, you're probably thinking about one of the first two in terms of fighting for market share in a crowded space while disregarding the third. Now that we have them defined, we can look at the perils of trying to establish yourself as any.

In a future post: what are the challenges of becoming an engagement driver and a network 

The Next Big Thing (and what is it takes to be that thing)

When something happens for the first time - it's avantgarde.
If you see it twice - it's original.
On the third time - it's plagiarism.
On the fourth - it's pastiche.
But when it happens for the fifth time - it's a genre...
(Anonymous)

In the never ending discussion on innovation vs. execution (see Sara Lacy's great post here) I tend to be an avid supporter of the execution point of view; I've yet to see a great idea execute on itself, but I have seen pretty dull ideas becoming hits because of laser focused hard work. And, of course, it is my personal tendency for building and running strong organizations rather than engaging only in ideation. The reality of the business, as well, shows us companies that succeeded with strong execution on the ideas of earlier, less successful and agile companies (see the article for some examples). This is why I really like the dynamics of a new genre of products and services - if you follow closely you can track the evangelists, the copiers, the big and small players all mixed together, fighting for their place.

The dynamic is pretty straight forward - after a need is established by the avantgarde, in come the strong execution oriented players; proliferation kicks in, and many companies rise to offer similar services and products, each with its own twist. This stage ends with convergence - first with aggregation services, and then with the big winners emerging from the crowd of competing companies. Finally, when these winners become too big or fail to innovate, new avantgarde kicks in, discovering new niche segments that the giants were overlooking.

Social networks are, generally speaking, beyond the genre stage. Facebook and Linkedin emerged as winners, and though there are aggregation solutions out there I personally don't see any need to mix my personal and professional business networks. In fact, Twitter has signaled a new niche (together with Yammer, its LinkedIn-like twin), taking the Facebook status line to the extreme - but the cambrian explosion of networks has passed. It might be best reflected in the coverage and attention Ning - the DIY social network platform - is getting (or not getting) these days compared to 2008.

Online games are in an earlier stage; although there are a few major players in every part of the ecosystem (hardware, portals, platforms, publishers etc.), the barriers are still low and any garage geek can develop the next game. Until now, major game publishers have overcome this by cloning, executing quickly and gaining more and more traction; but as the market becomes more sophisticated and gamers' expectations rise, we will see changes. Acquisition of smaller studios by larger ones to get hold of new IP, traditional game companies entering the space and introduction of known franchises (I vote for Star Trek!) will all come into play, signaling the the battle for control is far from over. But there's another interesting story here - and that's payments in the virtual space.

New ways to pay and be paid have caught the eye of entrepreneurs and VCs alike. Investment money is running like crazy, funding the next-next innovative, zero-click-super-social payment service. Kwedit gets $3 million for letting people pay if they feel like it, Square is making news by enabling coffee shop sales via iPhone. We have hit the spot where there are just too many payment options, and platforms try to answer the need for convergence. Now, I have the utmost repsect for new inventions, but as I started this post, you also need to know how to execute on them (Square is going to discover that, with Verifone's generous help). Remember the three pointers for a successful payments service? Easy, Enabling, Trustworthy. Getting those nailed doesn't take mere ideation, but good old fashioned execution on boring stuff like compliance, reconciliation and relationship management with card associations. And merchants are not early adopters like most gamers - getting them to expand to yet another payment service, in a highly fragmented market, is hard. Merchants are looking for a broad and established user base. Succeeding in this is much harder, and therefore constitutes a bigger barrier, than in other industries.

I can only give only two general advice: one, is do not underestimate compliance and regulation; they will either limit your market (SMBs don't usually work with non-compliant payment services) and you may be facing huge fines even before you start profiting. And two - make anything possible to establish yourself as reliable - it's a merchant's biggest nightmare to have their payment service vanish one day, or to see their customers' data accessed by fraudsters. Guard you system, adapt your best grown-up face, and think about availability because being cool is great, but will only last that much. For success, you need to understand the basics of executing on a successful payment experience, to complement the big technological and business ideas.

Watching the payments industry over the coming two years is going to be extremely interesting, much more volatile than we were used to. Hopefully, some of these incredible minds will adjust to the demanding type of execution the industry requires, and will make it on the other side of the convergence.

PS
Two quick ones: due to a new role I'll be taking on in Paypal, the content and nature of my posts my shift a little. I apologize in advance to those who expected the deep dive on mobile payments threat analysis. On a similar thread, I will be at the Engage! expo next week - buzz me if you'd like to chat.

Amazon PayPhrase is a nice, risky step (plus some PayPal platform)

Today, TechCrunch posted about Amazon PayPhrase going live. It appears that Amazon customers were notified of this feature, allowing them to set a phrase they can later use on 3rd party sites to check out quickly - just type in your payphrase and PIN and you're out. The TC post mentions a similarity to PayPal's student accounts, I am not sure I agree, but that's not the case. The interesting question (one also raised in the post) is - what new risks does a new feature introduce into the system?

There's a lot to be said about modeling the possible risks in a new payment feature, and I find it to be some science, some art. You have to weigh not only what users and fraudsters are doing now, but also what opportunities will they have once you introduce a feature, and understand how to design controls that mitigate the major issues without hurting functionality. That's why there's some art in it.

The EU is less united than expected

This mystery research, widely advertised today by the EU union's research department, puts cross border shopping declines inside Europe at 60%. I once wrote a post about 3rd world shoppers unable to shop, but this situation is a much graver one. Unfortunately, the pros' call to invest in better, more intelligent risk management to open up to international purchases goes unnoticed, while merchant insist on making lives harder for legitimate buyers.

Hopefully SEPA will help solve at least part of the issues dealt with here, at least giving a head start for merchants and buyers on their mutual trust issue.