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Innovation in Financial Services

Innovation in Financial Services

A discussion of trends in innovation management within financial institutions, and the key processes, technology and cultural shifts driving innovation.

Why don't you become a payments provider? Part 2

22 September 2010  |  2776 views  |  0

Previously on “Why don’t you become” (here): people put their money in wallets (be those banks, or just stashes). Networks then pierce a hole in these wallets and create a widespread network that allows money to be transferred easily (cash in the stash case but we also have credit, electronic checks, credit cards and mobile phones. I don’t mean carrier billing – but rather those that replace the card using a chip and NFC or similar technology). Methods then put buyers and sellers together and manage the relationship with and between them; engagement drivers build on top of methods and add an improved interface for better conversion.

 

Of course there’s mobility between types and it’s also clear that people who are doing X are sometimes actually trying to get to Y; Zong is my usual favorite example with their attempt at moving from being an engagement driver (mobile payments for games at a very high rate due to carrier fees) to Zong+, a direct relationship with the customer and their funding instrument of choice. But why haven’t more companies gone that route? Some companies might be waiting for a certain stage (Boku might be waiting for wider acceptance, as I learned from P.), but most don’t because it’s really that hard to create an actual, viable payments business.

 

Risk management is a huge issue that can make or break a company, but for the benefit of this post I won’t delve into it – there’s enough about Risk in other posts. The two other things I stated in this post are simplicity and new volume. You identify an unmet need and you answer it with an innovative, easy to use solution – you find a sustainable niche that is your core strength while you expand your business. It’s clear why payments for games, offers and carrier-billing-based payments are having troubles becoming more than engagement drivers (I like offers, but do not see these companies evolving into the next PayPal): their existence is a function of a niche that’s shrinking as the industry that defined it matures, and their business models, unless changed, are only sustainable within that niche. When limited like that, your ability to actually own a relationship with a user base is greatly diminished because your business model is only relevant in that niche. As an example, a 30% take rate in exchange for full fraud protection will only fly when your customers have a 95% margin; and as user acquisition and retention costs rise and people in games learn how to do analytics, the math stops working. So you can end up being bought in Google’s shopping spree, which is NOT a mere feat but will not make you the next PayPal; and performing the way customers in other segments expect you to is difficult. This is, obviously, why I’m so excited about Square now that I’ve learned more about it: a new underserved market segment that adopts an easy way to conduct business is a great user base to build on further.

 

But there are two other issues that PayPal had to deal with when it grew, that could fail other companies: compliance – the reason that PayPal (and not only PayPal) has to be a bank in Europe and something I won’t discuss in this post – is one; the other is the lack of networks to expand on.

 

A sustainable niche to start with and a business mode l that can expand are important, but having the infrastructure for expanding payment services is crucial. Early in its time PayPal realized that in order to maintain growing margins it needs to get people to add and use their bank accounts. The struggle to get that to happen is described in the otherwise difficult to read “The PayPal Wars” and doesn’t even cover 10% of it. So PayPal ends up with a highly useful way of using the stone-aged batch ACH processes to drive bank payments – but that’s not a network nor is it intended to be one – it is a unique capability that PayPal built for itself. Actually, the only two available network infrastructures are cash and credit card. Sure, controlled by a centralized entity and require killer fees, but commoditized, widely acceptable and easy to use. So if you want to pierce another hole in the wallet you have to do it yourself instead of working with a network; the one company that was close to creating a lower-cost credit network (Bill Me Later) was rightfully snagged by PayPal, and there’s no general solution for mobile payments – mobile payment companies are integrating with operators one by one. So to make worthwhile margins you either need to wait for a network (see why I like the idea so much?) or build something yourself. And that’s a whole new pain.

 

So – a viable niche to start from and real expansion capabilities is what you need to have to really play it big. That part of why I think the Klarna story is interesting; but that’s a topic for another post.

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