Why cash on delivery still exists in major markets

Cash on DeliveryGiven the explosive growth of global eCommerce, it can be easy to overlook the fact that effectively selling in a lot of major markets around the world requires a robust “cash on delivery (COD)” infrastructure.  Say again?  Yes, I’m talking about Cash on Delivery: when someone pays with cash, certified check or money order at the point that they receive their ordered product.

First a few stats (these will change based on industry, vendor, etc., but they are more or less in line with others).  COD in the US and Europe is about 1% and 5%, respectively.  That’s probably why this seems like an odd topic for online payments. But…

COD as an online form of payment in Taiwan is 52%, Russia is 41%, Poland is 25%, India is 25% and China is 11%.  The aggregate for Africa and the Middle East is 48% (93% in Ethiopia, 71% in Ghana, 70% in Egypt, and 45% in Kenya to name a few).  You’re probably thinking… that’s a lot of really big markets… with a lot of people paying this way… why?

Customers want COD because:

  1. Lack of cards - They don’t have credit cards or other forms of payment that work well online.
  2. Lack of trust – They don’t want to pay for something in advance and then not have it show up.  If you didn’t trust the US Postal Service, imagine a place where you’ve probably had the experience of someone going through your package or ripping it apart before it gets to you more than a few times.

Merchants want COD because:

  1. Larger market – They can reach a larger portion of their target population who can only pay with COD.
  2. More purchases – Impulse buys tend to increase since customers don’t need the money at the time of purchase.
  3. Cash in hand – It’s always better to get cold hard cash than credit.

Seems simple enough then, right?  You want to sell product in countries where COD is a major form of payment, so you just add it as a payment type.  Well, it’s not easy AT ALL.  Here’s why:

  1. Returns – This is hands down the biggest issue with COD.  The incremental cost of COD is about 1 to 3%.  That’s not insanely high, but without a paid commitment there are a lot more returns (often increasing costs by 30% on each item).  As markets mature, consumers are taking advantage of COD to buy multiple versions of the same item and then refusing the ones that they don’t like.  Returns are the major factor eroding margins at start-ups like Flipkart (who just raised another $1 billion USD), but when 40 to 60% of your sales are on COD and you need to grow like crazy…
  2. Logisitics – There are a few companies that build out shipping logistics themselves, but typically global merchants work to setup relationships with local carriers, etc.  Imagine the operational headaches that come with getting product to the logistics company, bringing cash back into your accounting systems and then dealing with a large number of returns to your COD partner and then back to your warehouse.  It’s a headache.
  3. Black money – One of the other reasons (and probably relatively minor compared to the first two) that consumers choose COD is to have an outlet to use their black money (money that comes from the black market where taxes, etc. have not been paid).  While not necessarily the concern of the merchants, it adds another layer of dubious characters to the mix.

This combination of returns, logistics and black money make COD a necessary, but highly complex/painful topic for eCommerce professionals working in these markets.  The end of COD in many of these markets is many years away, so if you want to play, it’s worth taking a good structured and strategic approach.

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Is the next phase of loyalty marketing a bitcoin enabled Starbucks card?

Bitcoin Starbucks

If you’ve been looking at the numbers on prepaid cards in the US, you may have had to do a double take on the fact that we’re expecting 5% of retail spend (around $200 billion) to go through prepaid this year.  Who is using all of these cards?  Is it the poor and unbanked?  Yeah, maybe a little, but this is a solid mix of prepaid debit, payroll cards and open/closed loop gift and incentive cards.  Go to any grocery store today, and there are large displays with nothing but prepaid cards of well known merchants (restaurants, theme parks, sporting good stores, etc.).  What is going on here?  How did prepaid spending go up by 33% from 2009 to 2012 (with a growth trajectory that keeps going up)?

As Groupon demonstrated, people are willing to pay for things in advance, if they can get a little extra for that commitment.  While you could make the case that group buying sites like Living Social and Groupon reduced loyalty and perceived value in the long run, it’s definitely the case that all of those people loading up their Starbucks cards are paying upfront because they see more not less value from their pre-purchase.

Merchant issued gift cards like the Starbucks card are really interesting because they provide incentives to both merchants and consumers to use them.  The Aité Group did a recent survey of merchants, and it turns out that 60% percent of those surveyed said “increasingly customer loyalty through prepaid cards was a priority over the next 24 months”.

By committing money in advance, consumers can get free items, discounts or bonus cash loaded onto their cards.

On the other side of the coin, the merchant gets access to detailed purchase data (what, when and where someone bought), a committed and loyal customer, the potential to save on credit card fees as well as booked revenue and the potential to keep revenue that consumers forget to use (typically about 20%).

As these prepaid cards move to the mobile phone, there are going to be more points along the consumer decision journey to offer customers the option to be loyal… some may call it bribery, but I’ll take it.  And for the merchant, it’s going to offer more granular data points to understand their customers’ habits and preferences.

The next step of course is to offer prepaid on a global scale.  What if you could pull out your USD prepaid card from your favorite vendor, and just use the card without having to worry about getting local currency or paying foreign exchange fees.  Imagine what you could do with the consumer behavior data sets from something like this.  Today, Starbucks already offers customers the ability to pay for coffees abroad via their prepaid card (charged at the current exchange rate with no additional fees).  They’re taking on some potential risks and fees, but it’s worth it because of the benefits they gain from all the things we’ve discussed.

As we see virtual currencies like bitcoin and others (maybe Facebook with the addition of David Marcus can delve back into virtual currencies…) become more prevalent as a payment type, we are going to see an easier way to provide consumers a global prepaid solution.  And the truth is that it’s really not that far off.


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What the hell does “mining for bitcoins” really mean?

Bitcoin MiningSo where do bitcoins come from?  If you’ve been paying attention, you have probably heard that people can “mine” for bitcoins… almost as if you were deep in a mine covered in dirt searching for gold.  Most people just stop there, but if you dug a bit deeper, someone may have said that “mining” is about solving a math problem.  And then you would stop, because doing complex math sounds painful, and do you really want to subject yourself to this level of brain trauma ;)

Let me see if I can break this down to something a little more tangible.

First, the truth is that there is no physical labor involved in mining for bitcoins, and it really is about getting the answer to a math problem using computing power (which is where the labor sits).

The way that bitcoin transactions work at a high level is the following.

  1. You have bitcoins (BTC) to spend.
  2. You send your bitcoins to someone (there’s a bunch of technical stuff I’m skipping here to focus on the mining part)
  3. All of the transactions that occur (including yours) within a period of about ten minutes are grouped together (this is called a “block”).
  4. All of the blocks of transactions that happened before your block of transactions are called a “blockchain”.  This new block of transactions will add to that blockchain.
  5. The only way that this blockchain can be extended is by making sure that all of the new transactions are valid and then by solving this crazy math problem through a bunch of guesses.  When someone guesses the right answer, they get some bitcoins for doing this “work” (right now the reward is 25 BTC).
  6. Until all of these steps happen, you haven’t completed a transaction, and the point of all of this is to verify transactions in a decentralized way.

Let me stop there, and talk about this crazy math problem for a second.  

Bitcoin uses something called a hash function to turn a bunch of text into a fixed length gobbledygook string of numbers and letters using complex algorithms.  If you want to see what the hell I’m talking about, you can throw some text into a hash generator and see what comes out of the other side.  Don’t worry about what comes out, just know that it’s a unique number and it’s always the same length.

  1. The Bitcoin network sets a target result (T) that people should try to arrive at using the hash of the previous block (A) + the transactions in the current block (B) + a random number – also called a nonce (N).
  2. The goal is for the stuff that comes after you hash all of A + B + N together to be T or lower than T, so the formula would read as follows: Hash of (A + B + N) <= T.
  3. Since you know most of the stuff already (A, B, and T), the math problem is just about figuring out what N can be.  It’s freakin’ hard to say the least, and it’s about banging your head on the wall until you randomly hit the right number.
  4. For finding the right number, you get a reward of 25 bitcoins.  Yeah!

By the way, this reward for figuring out the right answer is cut in half every 210,000 blocks, so it used to be 50 BTC and it will be 12.5 BTC once we get to 420,000 blocks.  We’re around 238,000 blocks in the blockchain right now, so you may want to get cracking.

But before you run to dust off your spare laptop to start making some cash, you should know that bitcoin mining is no longer something that a single person with a laptop can do.  The Bitcoin network is trying to maintain about a 10 minutes buffer between the confirmation of blocks, and to do this, they make the target harder and harder to get.  It’s now to the point that it takes really powerful sets of computers to mine for bitcoin.

Hope that helps, and if you have happen to know of way to simplify this even more, I would love to hear about it.

Here are two videos that I have found to be helpful in understanding the process a little more:

What is Bitcoin Mining? – A high level overview

How Bitcoin Works Under The Hood  - Digging deeper into the details

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Blurring Boundaries with Bitcoin

Bitcoin Blurs BoundariesBeing a savvy global merchant today requires a truly local approach to payments and conversion, but take a step back and this is far from the optimal scenario.  In a fully connected world, why should merchants have to maintain such a detailed understanding of the tax, legal and regulatory issues in every country where they have paying customers?  If the most disruptive innovations emerge when we drive towards how things should be in an ideal world, it makes intuitive sense that there should be a singular payments platform that enables merchants and individuals to send money between each other regardless of where they live.

As more commerce continues to cross borders seamlessly, there is an increasing need for such a platform and people are recognizing that some form of virtual currency may be the way forward.  For many, Bitcoin is the answer, and it’s one of the major reasons that there has been such a heavy focus on this specific virtual currency.  Bitcoin was “invented” in October 2008 by someone called Satoshi Nakamoto (who may or may not be a real person) when he wrote a paper called Peer to Peer Electronic Cash System.  While companies like Overstock.com are now offering Bitcoin as a payment option, the reality is that Bitcoin, for now, is mainly good for exactly what the paper describes.  If you live in one country and want to get money to someone in another country, Bitcoin and other virtual currencies can help make that transaction an easier and cheaper option than going through the traditional banking system.

Money remittance is a massive market ($550 billion expected in 2014) that will definitely transform over the upcoming years, but the allure of Bitcoin is the ability to send money back and forth without worrying about the foreign exchange, bank fees and government regulations that often hamper global commerce.  While there are benefits to removing governmental and regulatory oversight, the negatives are that currencies like Bitcoin can become conduits for illegal trade and are prone to heavy fluctuations in value (as measured by the Bitcoin Pizza Index – where the purchase of a pizza in 2010 for 10,000 Bitcoins is at last count worth $5.7M USD).

Since getting, protecting and using Bitcoins is such a technically mind numbing exercise for most of us, there are a ton of businesses like Coinbase and Circle that have popped up to make it easier on all fronts through what’s called a Bitcoin exchange.  You put in dollars, euros or whatever currency you like, and you get Bitcoins that you can use until you decide to trade them back in for good hard cash (or more likely digital cash…).  The only thing you need to worry about is the current value of your Bitcoins, which for many early adopters is part of the “fun”.  In addition, there are number of companies like Ripple who are creating their own protocols around virtual currency, as a counter bet against Bitcoin not becoming penultimate winner of the virtual currency game.  There’s a lot of innovation happening to say the least.

Ultimately, virtual currencies are going to blur both the way we think about transacting across borders as well as what we consider to be currency itself.  It may not be Bitcoin or any of the other currencies that are emerging today, but they will definitely lead the way to a world that should be… at least from a payments perspective.


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Widen your payment options and stop being so damn US centric

Checking out around the worldWhen thinking about a consumer’s decision to engage and advocate around a brand, it is easy to forget the value that the same consumer places on the brands that he or she will use to make the ultimate purchase.  There’s so much thought put into helping customers understand our brands through social media and other points of contact, and yet at the final moment when a customer is ready to make a financial commitment with their hard-earned dough… we often neglect their need for a safe, fast and easy way to pay.

In North America and a lot of Western Europe, it may seem like credit cards are the simplest and least painful way to pay for stuff.  We see a MasterCard, Visa or American Express logo at checkout, and we know that we are protected in case that website or someone in between makes fraudulent charges on our card.

We have trust in the credit card system because of federal law that does not hold us liable for charges made over $50, if we can show that they are indeed unauthorized.  But what happens within our global consumer base, when a credit card payment is not really the most comforting form of payment?  If the US government didn’t have your back, how likely would you be to fork over very personal payment details to a company outside of your country, even if you really wanted that product or service?

In many countries where the credit system is just evolving or not as forgiving, a lot of people are using other ways to pay online via bank based and cash payments.  And when they do this, they want to see the brands of the companies that they know and trust.  In the Russia, China and Brazil, consumers want to see logos for Yandex/Qiwi, Alipay and Boleto Bancário, respectively.  It shows that you as a global brand know your local consumers, and you recognize their need to pay in something other than a credit card.

To be fair, it’s a mix of the right language and the right payment type.  A recent survey by Common Sense Advisory noted that the percentage of those who buy only at local-language websites is more than 70% of consumers in Japan. France and Turkey are among the countries with more than half those surveyed who would prefer to purchase from websites in their own language.  If language can build such a high level of trust in a brand, imagine what locally preferred payment types must have on conversion rates.  It’s, at the very least, worth a second look.

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Did tapping your phone to pay just get easier?

Pay by Phone

Is the promise of using your phone to make purchases finally here?  Besides using the Starbucks app to get wired on coffee, has something fundamentally changed to allow people to legitimately leave their wallets at home for good?  Well, if you feel like you’ve been hearing more about this lately, it’s because something is actually different.

A bit of background – For a while now, people in the payments world have talked about NFC as a way to pay for stuff using your phone.  NFC stands for Near Field Communication, and it’s basically a way for your phone to talk to the register where you pay and for the register to talk back to your phone, as long as they’re close to each other.  The common thinking for the last few years was that you needed to store the really sensitive stuff on a secure element (SE) on a physical part of the phone.  If you want to get technical, the physical form of the SE can be a Universal Integrated Circuit Card (UICC), embedded SE or microSD.

The problem with secure elements on the phone – In order to get a payments app to use the secure element (SE) on the phone, you need to go through a process called NFC provisioning which requires card issuers to authorize and provide keys to access to the SE.  On top of that, the SE is part of the phone, so you have to deal with the phone carriers as well.  Verizon made a stink about Google Wallet in 2012, because they felt that the SE was on propitiatory hardware.  Add to all of this nonsense on who has control and gets a piece of the action to the limited storage space on the SE, and you have something that is not primed for innovation and development of multiple apps using NFC to interact with the physical world.

The workaround – The way around all of this while still using the NFC chip in the phone as a communication device is something called Host Card Emulation (HCE).  Rather than trying to store all of the secure stuff on some physical piece on the phone, we can now store the payment details or credentials in the application memory or most likely in the cloud.  This is not something new.  Since 2012, a company called SimplyTapp has been enabling people to use HCE to find a better way to think about storing secure data outside of the secure element.

What changed? – While Blackberry has had HCE for a bit, what really made an impact was the inclusion and support of HCE in Google’s latest version of Android (KitKat 4.4 which launched in October 2013).  As more Android phones, especially the new Samsung and Nexus models, start running and supporting KitKat 4.4, there’s going to be a real market for developers and merchants to start putting together apps that take advantage of HCE.

What does this mean? – In addition to being able to pay credit card transactions with your phone, HCE is going to make it a lot easier for merchants to setup loyalty programs, allow customers to pay using their own cards (think Macy’s or Target) and gift cards.  It will also open up the possibilities for governments to offer tap by phone for buses and trains, where it was cost prohibitive before.

If you thought something changed recently on your ability to tap and pay, you’re definitely right.  It was a Google.  But then we always come back to the other question which is whether we even want to take out our phone to make the payment.  Another question for another day…

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Do “paying for meals and drinks” apps actually pay off?

Payment by Phone

About two months ago, OpenTable launched a pilot program here in San Francisco allowing customers to not only book a table, but also to pay for their meal directly from their phone. Customers see their bill populate on their phone as orders are added from the restaurant’s point-of-sale (POS) device. When ready to pay, the customer simply includes a tip amount, and charges the bill to the stored card on file.  No waiting for the check or having a waiter come back for the signature on a credit card receipt.  Pretty cool, right?

It’s something that Yelp and PayPal are talking about as well, and some aspects of this concept are already underway at both of these companies.

However, this is not a new concept…

  • TabbedOut – integrated with restaurant POS systems so customers can pay for their meal as well as get discounts from their phone. Started in 2009 with a total to-date raise of $14M.
  • Cover – a newcomer to this space, and also enables customers to pay for their meals directly from their phone. The sell to restaurants is that they are reducing their cost of payment processing. Started in 2013 with a total to-date raise of $1.5M.
  • Dash – similar concept with marketing tied more closely to bars, but the idea is the same. They’re charging bars and restaurants a flat 1% for payment processing. Started in 2011 with a total to-date raise of $1.2M.

And then there are the ones who started and failed. Flowtab, a start-up that enabled customers to order and pay for drinks from their phone, started in 2011 and closed shop in September 2013 and their current website tells a great story on what worked and why the idea ultimately fell apart.

Flowtab’s business model was a combination of a percentage of total revenue from the bar plus a per transaction cost ($0.25) to the consumer. Further along the road, they would remove the $0.25 charge to the consumer and replace it with in-app advertising. In terms of bar acquisition and conversion, the founders tried a few different channels to acquire new bars, but each bar was also required to use Flowtab issued iPads to view orders.  The team ultimately called it quits because they couldn’t bring on enough bars, competition increased, there weren’t enough regular customers using the app, and there just wasn’t enough money coming in.

While there are clearly some things that Flowtab could have done better, it begs the question: Was Flowtab really any different than all of the other start-ups entering this market?  How much revenue is there in this game, and who should actually be playing?

Where’s the money? – There are a few places to make money:

  1. A cut of the total revenue.  Hands down the easiest place to get money.  Sit in front of the money, and take a little piece of the action.  Dash is charging 1% and Cover is promising lower than typical processing fees.  Even if you can make the case to a bar or restaurant that you are providing incremental value, how much money can you realistically bring in?  Payments processing is a low margin/high volume game, and individually on-boarding establishments for such a small (and potentially negative) amount of money is either for those who hope to get acquired or have a high threshold for pain.
  2. The customer.  Would I pay a little more not to get up and stand at the bar for a drink or wait for someone to bring me a check?  Yes.  How much?  Not much.  It didn’t work for Flowtab, and I don’t think it will work for most.
  3. Advertising.  In-app mobile advertising is a simple way to make money… you just need an audience to make any real cash, especially off of all those pennies…
  4. Loyalty and discounts.  This is where incremental value can be uncovered and delivered both to the bar/restaurant as well as to the consumer.  If some of these apps can take a larger share when someone cashes in on a discount or comes through the door more than X times, that’s a triple win (merchant gets more business, customer pays less and start-ups get more money off the transaction).  It’s exactly what LevelUp is trying to do, but they have $48M and a rock star founder to keep up the momentum on customer and merchant adoption.

For Yelp and OpenTable, it seems like a me-too play.  Sure, it sounds great to be in front of the money, but if there’s no real money in it… then why bother?  What problem are they solving for the merchant and the customer?  Do I want to be able to pay my bill from my phone and bypass the waiter?  Sure.  Does the merchant really care?  Maybe a little, but what do they get?  Without good answers to these questions, we end up in a place where it doesn’t necessarily make sense to be a payments company when that’s not what is at the core of your company’s value proposition.

Overall, this is a payments play that requires either an established base or a truly innovative model that incrementally creates value.  Unless there are acquisitions along the way, it’s going to be a lot of blood, sweat and tears for Dash, Cover and TabbedOut with minimal revenue before they can truly see that hockey stick growth.  Flowtab is not the only app with this type of business model that had to close its doors (BarTab and Coaster are among some of the others).  From where I sit, the ability to see your bill and pay for it, sounds more like an additional piece of functionality that should be a part of a wallet like PayPal, Square or Google.  And entering the wallet wars at this point is probably not the most advisable thing to do…

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What makes now the moment for master merchants like Square?

2011 - Mobile POSFollowing up on the discussion about why Stripe and Square are so interesting as companies to watch, there’s the inevitable question about what’s actually going on behind the scenes with their business model and what happened between the days of PayPal and today to create such a large ecosystem of competition.

Payment Facilitator or PSP Model
Square and PayPal act as a master merchant for all of the smaller merchants that they board. This model of a single merchant aggregating a lot of small merchants used to be called the Internet Payment Service Provider model (IPSP) back when PayPal started. It’s now either called the Payment Facilitator model (MasterCard) or the Payment Service Provider – PSP model (Visa/Discover).

2011 – The Year that Created New Opportunity
IPSP was created more than two decades ago by the credit card schemes (Visa/MasterCard) mainly to enable small internet companies to accept payments online in a cost effective way. In 2011, Visa and MasterCard, as publicly traded companies looking to expand their shares of the pie, opened up this master merchant model to physical sales, in addition to eCommerce sales. That’s when companies like Square had a real way to enable small merchants to take payment in person via their phone or tablet.  Look at some of the companies listed on the MasterCard Payment Facilitator website, and there are quite a few that started pretty recently.

Why This Model Works Well
Aggregating a lot of merchants under a single account can allow companies like Square to reduce the on-boarding costs and remove some of the complex aspects of card acquiring (at least to the small merchant). If they can do all of this while providing merchants a simple cost structure and easy to use reporting tool, then all of a sudden merchants are excited to start accepting credit cards. Merchants pay when they make money and rates are not outrageous. In addition, customers love the experience, and merchants get a user friendly tool from acceptance to reporting.


So great, Visa and MasterCard makes a change in 2011 to allow in-person payments, and Square wakes up some sleeping giants in the payments space to realize that there was a need among small merchants.  What?!?  Has anything inherently changed since the times of IPSP?  Why is there so much interest in this space?

The Pitfalls of the Model – Cost
In the end, many of the people (myself included) who have a Square or PayPal dongle are not using it (often or at all).  And people using these mobile POS devices for a few transactions a year or even a week are generally not worth the overhead cost.  At the end of 2012, VeriFone dropped out of the mobile POS race after less than a year saying that it wasn’t worth the “razor thin margins” on small merchants who were barely using the service.  Many of the start-ups in this space have, up to this point, been acquiring new customers in the name of growth and not necessarily with high profit margins in mind.  As they see growth slow, these start-ups are now itching to start working with some of the larger merchants that traditional payment service providers have worked with.  It’s important to note that the Payment Facilitator model only works for merchants processing under $100k USD a year, so moving to larger merchants means moving away from this current model to one where you have to get a separate merchant ID to process with a bank.  As you can tell, PSP is not exactly the world’s best profit making scheme.

The Pitfalls of the Model – Risk
During the IPSP days, there were a number of players whose sub-merchants were taking payment for illegal, illicit or non-existent products and services.  This resulted in the breaking of scheme rules and/or excessive chargebacks from customers.  Today, the same risk applies for companies like Square and Stripe, but there are much better ways to monitor activity and flag anything that may appear suspicious.  In addition, with the scale and growth of some of these start-ups, the aggregated risk in the portfolio is lowered across all of the merchants.  This tends to keep all of the parties (banks, card schemes and PSP) sleep a little better at night.  In the end, the card schemes are not going to come after Square just because a tiny tiny percentage of merchants is selling something illegal, and Square for their part will do a really good job of monitoring activity to shut down bad merchants quickly and staying within comfortable chargeback levels.

The current interest in these master merchant models is high because, first of all, there’s a lot of money and hype being pumped into some of the more successful start-ups.  Second, technology is reducing costs and improving monitoring to allow companies to offer this model in a profitable way with a balanced risk portfolio.  And third, as collaborative business models like those of Airbnb, Lyft and TaskRabbit, which require these types of payment offerings, grow and become more prevalent, there will be greater interest in servicing them and feeding off of their own hype and growth trajectories.  Many things have obviously come together at the right time, but it is exciting to see how things evolve and how the various players in the payments space will work to provide relevant offerings that make profit in the long run.


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So what is it about Square and Stripe that makes them so interesting?…

Square and Stripe - Valuations

Of all the payments companies that non-payments people talk about, Square and Stripe  always seem to be top of mind.  So what exactly is it that makes them so interesting?

Before I jump into an analysis on what does and does not make them interesting, it’s important to note that my current company, Digital River, as well as a number of others provide very similar solutions to both of these companies.


Physical versus online – They’re often talked about in the same breath, but the biggest difference between the two is that Square is primarily used in the physical world (with that white device that you plug into your mobile phone or tablet) and Stripe is used by merchants who sell in the online world.  In credit processing speak, that’s Card Present versus Card Not Present (CNP).

Processing – In the end, both Stripe and Square act as a payments facilitator or master merchant to board all of the businesses that process with them.  It’s basically what PayPal does as well, so nothing too crazy here.  The actual bank that sits behind Square is Chase and for Stripe it’s First Data to Wells Fargo. They’re taking on a bunch of risk by acting as the master merchant, but if they can put reasonable controls in place to monitor their merchants then they can balance the risk exposure within their portfolio.  Of course, it doesn’t hurt to have raised a lot of capital to make banks like Chase and Wells feel a bit more comfortable with the whole idea of it, because in general, the payments facilitator model is something that is easier for a more established player than a fledgling payments start-up.

Easy integration – Stripe and Square both tout how simple it is to integrate to them.  It’s true that they along with Braintree really have changed the conversation around an easy painless solution to taking credit cards.  Before that, start-ups and small merchants had a choice between either PayPal or Authorize.net, and neither was very good.  The ease of integration, stellar developer community support and mobile-centric ethos of Braintree is one of the reason’s that it was picked up by PayPal for $800M last year.  Today, there are plenty of options for easy to integrate payment gateways and full service acquiring solutions both for the SMB and Enterprise level merchant.


Over a Billion Dollar Valuation and Counting - This January, both companies raised rounds of capital that pushed their valuations sky high.  Stripe raised a series C round at a valuation of $1.75B and Square raised a series D at a valuation of $5B.  Everyone’s anticipating IPOs in 2014 or 2015, and it doesn’t hurt to have tech-celebrity founders like Jack Dorsey running the show.  When was a billion dollars… or five… ever not exciting?

Simple and frictionless – For a long time, the lack of transparency in pricing, reporting and integration coupled with the pains of getting a merchant account has been an accepted truth for merchants, especially start-ups with little to no transaction history.  As the payment facilitator model became a more acceptable model among bank acquirers, companies like Square and Stripe decided they could disrupt the system by taking a tech approach to these problems.  If they could find the financial capital to be the master merchant, they would be able to eliminate many of the banking level challenges: merchant on-boarding, poor analytics, pricing transparency, etc.  This is something that PayPal could have done, but they didn’t.  As a result, these new payments start-ups had an opening to provide easy to understand pricing with a dead simple integration and informative reporting.

Value beyond the transaction – Because of all of the challenges that merchants faced on simply getting accounts and accepting credit cards, it was more or less given that you weren’t going to get anything else besides the actual processing of a transaction.  Be happy that the transaction went through, take your cut, and move on your merry way.  Or something like that.  But as competition increased, the only lever to pull was cost and that meant shrinking margins for payment processors and banks alike.  Rather than work on lowering merchant costs, these new players focused on increasing the perceived value of their offering.  In addition to simple pricing, reporting and integration, merchants now had better ways of converting their customers through one-click buying, optimized mobile integration and seamless sharing of masked card data between other merchants.  In addition to the internal hype that was being generated by the Jack Dorsey’s of the world, it was this new take on added value that got merchants to actually stand up and sing the praises of a processor.  And that was something new.

When I look at what payment processors are doing today, it is obvious to most of the players that this value based approach is the way to make money for the future and avoid the race to the bottom.  The majority of offerings today come with a card reader like the Square device and potentially even a chip and pin option in international markets.  Developer communities are becoming more common place, and they will be standard among anyone in the payments acceptance business.  What makes Square and Stripe so interesting is that they were among the first to be extremely successful in scaling their business through this new approach.  What remains to be seen is whether they can achieve the promise of their high valuations and the associated hype.


Filed under Payments, Product Marketing

Social + payments does not always mean Social Commerce

The difficult part about monetizing social or finding a way to drive revenue through social is that there really isn’t a compelling reason for me to buy something that one of my friends buys… unless I happen to be looking for exactly that thing… right now.  By the way, that’s what Search is for…

Whenever anyone does a study (that is not funded by Facebook, Twitter or someone with a vested interest in the social media ecosystem), the results are generally the same.  Social drives a really tiny part of traffic to retailers.  After the 2012 holiday season, when Adobe looked at last click traffic to retailers they found that only 2% of traffic (this is traffic, and not conversions) were directly from social sites.

Adobe - Traffic Share


So when people start talking about how social and payments can come together, the natural inclination is to think about social commerce.  And within that line of thinking, most people want to innovate on ways to sell stuff on Facebook or Twitter.

I would argue that we’re using the wrong definition for social when we think about driving revenue, and that’s why we’re getting caught up in the trap of social commerce.

From a brand perspective, social networks (Facebook, Twitter, LinkedIn, etc.) are extremely effective marketing and communication tools, however from a commerce perspective, a collective brain or wisdom of the crowds approach to social (Yelp, TripAdvisor, Amazon reviews, etc.) can help drive the right revenue generating actions from your consumers.

One of the reasons that suggestions for restaurants, products and trips are so effective on these social sites is that you need a really big pool of people commenting and evaluating to be meaningful.  While there is validity to the fact that my tastes more closely align with those of my network, it’s hard to deny the benefits of a significantly larger sample size… even if there are more outliers whose opinions I would prefer to ignore.

Which brings us to payments and how that can fit in with a wisdom of the crowds approach to social.  And the answer is more in the payments data than the simple transactional element of payments.

Amazon has perfected the ability to combine reviews with purchase data to show the most relevant products.  It’s gotten to the point where the first item shown is usually always the item that I buy… even when I take 30 minutes to research the other items of pages below.

Last October, American Express teamed up with TripAdvisor to have their customers post verified Amex reviews for places where they have actually made transactions.  This gives more trust and validity to reviews, and it’s something that Amazon has begun doing as well, in order to combat “review trolls” and ideally help convert views into paid transactions.

Amex - TripAdvisor

Imagine if TripAdvisor could show locations by the number of times someone stayed at a hotel or if Yelp could do the same with the number of times someone ate at a restaurant or how much they spent.  As TripAdvisor moves into travel bookings and Yelp plays a bigger part in the various transactions in their ecosystem, this could be pretty impactful.  Bundle.com was already aggregating anonymous card spend data to provide recommendations on restaurants before they were acquired by Capital One in 2012.  The trick is going to be merging all of the payments data that companies like Amex, Capital One, or First Data have in their databases and incorporating some anonymous version of that into a social experience like Yelp.

We just need to stop getting fixated on social commerce, and think about how payments and social can work together to drive real revenue.  A few key partnerships, and we’re really getting there.

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Filed under Big Data, Payments