My best advice for starting a payments company: don’t. Just… Don’t. #payfac
— Ohad Samet (@ohadsamet) January 31, 2013
You think I’m kidding? I’m not. The days of payment providers and payments companies set-up and grown the way they have, trying to replicate a PayPal model, are gone. Consumers don’t care enough and cannot effectively differentiate your service from others to really choose to sign up. I looked at that several times in the past.
Still I get pitched on ideas I find far fetched and, frankly, a waste of time for smart entrepreneurs. There are many possible smart, ground breaking and really difficult directions to take in payments; the following ones are not, and anyone who understands payments will advise you to stay away from them.
- The mobile wallet: Square (PayWithSquare) isn’t gaining traction. gWallet is failing. Serve isn’t taking off and ISIS is… well, you get the picture. Mobile wallets aren’t working: merchants are slow to adopt additional hardware that will allow them to accept these. NFC is years behind in adoption and many large and small players, including me, just don’t believe in it. Consumers are slow to adopt a solution that gives them no advantage over credit cards, and even giants with big pockets can’t get them hooked.
Signing people up and getting to add their credit cards is impossible without high, unsustainable customer acquisition spend. No startup can grow this way.
- Micro-payments: I understand the rationale. Payments should be as easy as Liking something. People don’t pay for content because it costs too much. We can start from digital goods and charge a large percentage that will cover costs.
It all sounds good until you realize that it doesn’t work. Consumers don’t pay for content by the pound since they are used to free content. Paywalls have limited success and even that success is always with big brands that spend millions on advertising, reducing market size to a minimum. More importantly, zero cost of goods sold – a blessing and a curse – allowed large take rates and supported many interesting business models, ones that cannot expand to any other vertical. Once you’re hooked on these sweet 30% (or 10%), you can’t really go to tangible goods with their lower margin and fraud and other issues. No payments company really grows out of that niche.
- Split bills: oh, the ever eluding perfect offline shopping experience. Entrepreneurs mean well – the experience does need a revamp. Is it really about not having to split a bill at a restaurant or the downtime of waiting for your check to arrive? As it turns out, these are very weak drivers to action when they are required to (again) sign up and add a credit card. It’s not that consumers don’t respond to call to action at those points; apps like OwnerListens prove that they do. They just don’t respond to THIS call to action. They want to do something, just not split the bill.
The reason is simple: the actual shopping experience, while indeed a big issue, is just the tip of the iceberg when you approach it as a payment application. What you’re trying to build is the network of merchants and consumers, and you’re again faced with the two sided chicken and egg problem, with a weak call to action to consumers and not so easy integration for merchants. Adoption never crosses the usual suspects on Emerson street in Palo Alto, and even they are growing tired.
- Facebook Connect checkout: an alternative to the previous idea, here we have an attempt to streamline online checkout. This one fails not only because consumers are not too enthusiastic about giving their Facebook details in financial settings – they are not – but also since much like with the mobile wallet idea, they have a current option they like just as much. Credit cards work, and no incremental solution is going to displace them anytime soon.
The payments landscape is fragmented, commoditized and highly competitive. It is ripe for disruption, but that disruption will not come from new card-based services but from innovations in payroll, cross border trade, emerging markets, new identity trust authorities and other interesting ideas. Research those, and stay away from ideas that will take you nowhere. We need your energy focused on the right things if we are to really see a change in the coming years.