Wednesday, September 1, 2010

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 


Rick said...

Thanks, Ohad - this is very informative. Would you mind giving an example of each of the four service offerings to help better understand where to draw the lines?

As I understand it, you see the "engagement drivers" as being something akin to a BOKU or Zong or SuperSonic Ads in that they aren't as focused as providing the online merchant a payment platform (with all the analytics and customer service that might come with it) but instead simply intent to increase transaction volume by offering alternative methods of payment and thus increasing the addressable market?

So would the "method" bucket represent the PlaySpans and the SocialGolds with their full service payment platforms?

If I am following correctly so far, it seems like these two groups tend to compete with each other, but also partner up. Are you seeing that as well?

I'm not sure I following the "network" distinction as much. Would you mind expanding further on that point?

Thanks again for the post - most information overview I have come across so far in my research on the industry.

Ohad Samet said...


Yes, I agree with your observations wrt engagement drivers and methods. It's interesting to see what the playspans of the world will do as the gaming industry matures and stops funding various business models and a fragmented payments market with its huge current margins.

As for networks - consider Visa. They are not driving engagement (not directly, anyway). Once upon a time they started as a payment method (= a way to take money out of your wallet) but have since evolved to an all-encompassing infrastructure that other companies build services on. Instead of creating a unique value their business is a high volume, low margin one, and it's mostly interesting because everyone has a credit card. The same approach can be taken with checks and mobile payments - if new companies aim to create an easy to integrate, global solution that will allow other companies to build services on top of it. A consortium of operators might create something of the sort for mobile payments, for example.

Thanks for the comment!

Anonymous said...

What are the two companies in the network space that you are following?

Ohad Samet said...

I have high hopes for Payfone and Noca. I'm not sure the founders will agree that they are in the network space, but that's how I perceive them.

Vladimir said...

This is incredibly helpful. I appreciate your blogging on this topic.

I don't quite understand the definition of a network, however. If there are only two players of note, it seems it's a special definition that's not widely accepted. What do these guys do? What's the value they provide?

In part two, you mention NFC as an example of a network... isn't that just a payment method? I am just struggling with understanding the difference between method and network. In separating these two are you essentially unbundling a couple of value-additive activities that are more commonly found under a single roof?

More examples would be super helpful.

Thanks a ton -- I'm reading your blog to learn and I've got a lot to learn so forgive me if I've mangled some concepts.

Ohad Samet said...

After talking to a few people I realized that I created some confusion. Will correct that soon. However, the unbundling stands - networks and methods are not necessarily bundled and can have fundamentally different business models. I hope the upcoming clarification will help.

Rohit Mishra said...

If I build a wallet, am not I am also building a candidate for method. I understood network as wallet+method. It will be great if you can do a descriptive post on this topic. Thanks again for your help in understanding the payment components.