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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Filed under Local, Mobile, Payments, Product Innovation

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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Filed under Local, Payments

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.

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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

Alternative payment types – More than just a cultural choice.

Piggy Bank - Alternative Forms

As companies move more aggressively into new global markets, there is a natural progression to think about alternative payment types to help improve conversion rates and customer satisfaction.  I’m not talking about PayPal, but rather bank-based payment options that are often considered the “preferred” payment method in countries from Germany to India to Brazil.  This includes direct debit, wires (electronic funds transfer) or real-time bank transfers.

Many of these markets have traditionally been cash-based societies, and as more commerce has moved online, the primary mode of payment has not shifted all the way to credit.  When we say that certain payment types are “preferred”, I think it gives the improper connotation that individuals in these countries would rather not use credit cards because of a “cultural choice”.  While the US is undoubtedly a credit driven society, it is important to note that the use of alternative bank payment options in these other markets is primarily driven by a less evolved credit and risk ecosystem rather than an aversion to credit.

Low credit limits – A credit card is really just a short term loan.  Since the data points required to gauge someone’s credit worthiness are often limited in these markets, it is a lot harder to do a quick and dirty risk and underwriting using something like a social security number and an associated credit history with a FICO score.  That typically means that credit limits for most consumers can be very low.  In Brazil, credit card limits can often range between 100 USD and 500 USD.  In India, many bank issued credit cards require fixed deposits (starting at about 300 USD) with a credit limit that is 70 to 80% of the fixed deposit.  If you’re trying to buy an airplane ticket or an iPad over the internet, it’s going to be pretty hard to do with that low of a limit on your card.

High APR – In addition to low credit limits, most cards in these markets come with significantly higher annual rates than in the US.  Rather that offering a very specific APR to an individual with a certain risk profile based on a number of data points, banks are typically offering a few tiers of APRs based on limited information.  As a result, rates remain high so that the portfolio of individuals in a specific tier can offset each other regardless of their true credit worthiness.  In India, we are talking about 30 to 45% APRs, and in Brazil, which has one of the worst rates globally, APRs start around 120% and go up from there.  So even if you manage to secure a credit limit that is high enough to pay for a high ticket item, you’re going to have to find a way to pay for it during that billing cycle to avoid some hefty fees.

Reasons like these are what force consumers in these markets to “prefer” alternative payment options.  This is also why many of these markets have evolved installment plans for the payment of expensive products and services.  Yes, there is some aspect of this type of buying habit that is cultural.  But let’s face it, if these consumers had access to the credit system that we enjoy in the US, they would probably buy everything on credit as well.  Changing the issuance of credit is a systemic change that will take time, and in the meanwhile, it is important for companies moving into these markets to understand the specific payment types that make sense for their business and the underlying reasons why.

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Local card acquiring – Why every company with significant global volume should care.

Local Acquiring

For most companies looking to optimize and advance their international customer acquisition strategies, there are a number of factors that are typically top of mind.  Market size, growth, language, culture, etc.  As strategies become more fleshed out, the details around conversion start becoming more important.  Number of clicks to purchase, fields of personal information to complete, and perhaps even what type of payment type should be offered besides credit cards.  But the one thing that is often the easiest to miss is whether or not local acquiring should be considered.  To be fair, local acquiring is a decision that is most often tackled once a market has been established in another country, but it is worth understanding why local acquiring matters before brushing this factor aside.

What is acquiring?

Before we get into local acquiring, let’s just take a few steps back and make sure we’re all on the same page about card acquiring in general.  At the most basic level, a credit card transaction is a short term loan.  The consumer has a contract with their credit card which is issued by a financial institution or issuing bank that he or she will repay the bank at the end of the month.  The company or merchant who has a product or service to sell to the consumer also has a contract with a financial institution or acquiring bank that they are selling a legitimate product in a legal and financially stable manner.

The way the system works is that the acquiring bank takes the credit card information from the customer and reaches out to the issuing bank to make sure that the consumer is good for the money (for a bit more on the nuts and bolts of what really happens, check out this white paper by the Federal Reserve Bank of Atlanta).  Once the issuing bank gives the okay, the merchant can then feel confident in providing the customer the required services.

Okay, so what is local acquiring? 

Even though the issuing bank gives the okay, there still needs to be a bit of trust between the issuing bank and the acquiring bank.  It’s only the issuing bank that ran the credit checks on the consumer, and it’s only the acquiring bank that ran the risk and underwriting on the merchant.  If either the consumer or the merchant turns out to be different than expected, one or the other financial institution could end up taking on the burden of that short term loan.  So if a Korean consumer is buying a subscription to let’s say Evernote, which happens to be based in the US and for argument’s sake also only has a US bank acquirer, then the US acquiring bank is going to have to talk to the consumer’s Korean issuing bank to make sure that the consumer is good for the money.

As you can probably tell, neither bank is going to be as familiar with each other as they would be if both were Korean or US based, and any merchant’s statistics will show that even legitimate credit card transactions get declined because of the unfamiliarity between the two institutions.  I’m not talking about zero transactions getting through, but rather a smaller percentage, and this really depends on the regions of the acquiring and issuing banks.

Local acquiring really means that the acquiring bank and the issuing bank are in the same region or country.  They have a higher level of trust between each other, and as a result the process is a lot smoother.  In the example above, Evernote may want to consider contracting to Korean acquiring channel through a payments service provider to get access to better local credit card processing for their Korean customers.

The bottom line

In the end, there are a few major items that local acquiring can help with:

  1. Improve your success rate – When both the issuing bank and acquiring bank have enough trust to let good transactions go through, you’re going to have more conversions when consumers are ready to buy.
  2. Eliminate cross border fees for your customer – Since the issuing bank and the acquiring bank are in the same region, there is no FX risk to the issuing bank and thus no cross border fee is assessed to the consumer.
  3. Potentially reduce interchange costs – In the US, we happen to have really high interchange rates (the rates that the banks and card schemes like Visa and MasterCard charge merchants for acquiring). This is mainly because of the affinity cards (Visa Signature, Corporate Cards, Hotel Reward Cards, etc.) that issuers give to consumers in the US. Someone has to pay for all of those rewards, and it’s typically the merchant who ends up footing the bill (often passed back to the consumer as a mark-up on the product, but that’s another story). Since this does not exist in many non-US markets like Europe and Australia, merchants can take advantage of lower interchange by locally acquiring credit cards in those regions.

Whether the time to optimize for local acquiring is today or not, it would be advisable for any merchant to understand the complexities that surround acquiring in general to be ready when the time is right.


Filed under Local, Payments

Giving credit… onto a credit card

Trying to think of better ways to get money back to someone who didn’t make an initial credit card purchase, I have been hitting a bit of road block on a clean solution that is cost effective and simple.

This is the dilemma that I discussed in my previous post…  Paul in Singapore rents his apartment on Airbnb to Ellen who is in town from Australia.  How does Airbnb get Paul money in SGD that Ellen paid in AUD?  PayPal, bank transfer, local schemes…

I know that I am avoiding some important risk factors here, but the answer here may lie in the credit card schemes.  Visa has had something called the Original Credit Transaction (OCT) for a bit of time, and it looks like they are actively promoting it to developers as Visa Personal Payments.  The caveat is that you need to be a large financial institution with a Visa acquiring license to actually use the APIs provided, but when you do, you as a service provider can send money through the system to individuals globally onto their Visa card on file.

To be clear, the main purpose that it is outlined in the marketing collateral for OCT and Personal Payments is a person-to-person international payment network.  In the example above, Ellen could directly send money to Paul’s Visa card for the amount required.  Here’s what this would look like in real life:

But if you dig into some of the Personal Payments API documentation, you realize that there are some really robust tools for either a company like Airbnb or a payments company partnering with Airbnb to plug in and manage all of those outbound payments for their users through the use of FX, OCT and other tools to facilitate payment into the service provider’s Visa card.

cross_border_payments_flow - Visa Personal Payments


If this is all that is seems to be, a service provider would need to do a few things.  First, get all of the required funds from the inbound flow of payments into a funding account.  Second, validate that the person getting paid is indeed the right person with the proper AML (anti-money laundering) checks and balances.  And finally, ensure that the card on file checks out against the person who need to be paid.  If you could get all of these items to line up, it would appear that there is a workable solution here that would make the lives of a lot of people much easier.  Would love to hear more from anyone who has more insight on Visa Personal Payments, and how this could potentially not be as simple as it sounds.

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Filed under Payments, Product Innovation

Helping complete the last leg of a marketplace payments journey…

Global Payouts

Over the last few months, I have become increasingly interested in solutions for outbound payments, especially from a global perspective.  The more you talk to marketplace type businesses (Airbnb, Uber, oDesk, 99Designs, etc.), the more you notice a need for a seamless payout experience on a global basis.

It’s easy enough to accept a payment, especially if your customer can pay with credit.  The really hard part is giving back someone money when they weren’t the person who made the initial payment.  For example, if Dan who lives in London wants to get designers from around the world to help put together a new logo for his company, Dan might use a site like 99Designs.  He would see all of the submissions, and perhaps he ends up choosing a logo from a woman named Julia based in Ecuador.  The entire process is managed by 99Designs, and they can take a credit card payment from Dan relatively painlessly.  Paying Julia her cut is where it becomes a lot more complicated.

Today, Julia can only get payment back in USD through 4 different options (PayPal, MoneyBookers, Payoneer or Western Union).  All of these options take time, cost money in the exchange and transfer and create a ton of friction.  This is not a problem faced only by 99Designs, but pretty much every marketplace with global reach is finding it difficult to make these outbound payments after a service or product is delivered.  It’s a broken system, and marketplaces are hungry for new solutions and partners to help manage the complexities of their payment needs.  The alternative of not having the right solution means that these types of companies are devoting a lot of time and energy in a part of the business that really should be left to a payments company.

If the seller and the buyer are both in the US, it’s a bit of an easier problem to solve.  Balanced Payments is one start-up trying to make it easier for marketplaces to think about both inbound and outbound payments in a single solution.  But it is a solution intended for smaller or newer marketplaces who are not truly global in nature and just need a simple method to manage payments for a unqiue business need.  It’s an offering that satisfies the needs of a domestic market, but starts falling short when we think from a global perspective.

Perhaps a cleaner way to send money globally will be through the issuance of credit to an existing credit or debit card, although this is currently a relatively difficult method to get approved from a risk and underwriting perspective.  Visa does allow for credits to be sent via the Original Credit Transaction, and some gateways like Braintree and Authorize.net are able to do the same.  While the winds of change are probably wafting through financial institutions to think more creatively about managing risk while meeting the needs of market, I think payouts to credit cards in countries across the world (especially those with higher risk profiles) will be a difficult thing to do.

I don’t know if I have missed an offering here, and I do know that Earthport and Envoy continue to do a solid job bridging the gap as start-ups think of innovative ways to meet this growing need.  For anyone who has more information on this topic, I would love to find time to connect and discuss.

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PayPal App – Happy stomach but more payments friction

PayPal for Food


Since the debut of the latest version of the PayPal mobile app at the beginning of September, the payments giant recently teamed up with Eat24 to entice customers to start using the app to pay for food through $5 and $10 coupons.  Using this incentive to test out the app and fill my belly with some food, I hit the streets of San Francisco over the course of a week in search of subsidized  lunches… and to that I am thankful.

What I realized is that there is still a lot more groundwork to be done, and there are aspects of getting traction with an app like this that still are not justified to the consumer unless someone is literally paying for their lunch.

  • Irregular payment processes – If you’re going to try to change behavior, it is best to have the same process from merchant to merchant.
  1. The first place I used the app was at an Indian burrito place called Tava.  I hadn’t used the app before, and so I had to awkwardly take a self picture and add it to my profile while waiting in line.  The process here was that the consumer checks in and then tells the cashier that they are paying with PayPal.  I checked in twice (logging in each time), and when I got to the checkout counter I was already checked out.  Fumbling with the app, I let two others pay before me as my lackluster portrait showed up on the tablet register and I was able to make the purchase.
  2. The next day, I decided to go to Jamba Juice for a smoothie.  I wanted to be well prepared, so I checked in outside before I even walked in.  As I approached the counter, I proudly told the cashier that I would be paying with PayPal.  “Hmm.  Not sure how you would do that”, she said.  She runs to the manager in the back, who tells me that I need to pre-order my beverage via the app.  As I stand in a corner looking up at the menu for some fresh carrot juice, the manager says,  “Oh by the way, the whole menu isn’t on the app.  There aren’t any fresh juices on there.  Kind of a work in progress.”  I order something that is on the menu, and walk away for a few minutes while they get the order and prepare it.
  • Lack of education among merchants – For most of the merchants that I visited (even those who had the little paper table advertisements displayed) almost nobody knew exactly how to take a payment, how the promotion worked and what to do in cases where there was a problem.
  1. After these varied paying experiences, I was a bit afraid to use the app for another purchase, but the call of free food beckoned.  I showed up at a small Middle Eastern restaurant, where the owner didn’t even really know how to take a PayPal order.  I figured it out myself, placed the order on the phone, and the order showed up on his register.  “You really should have tried to get the $5 off”, he said pointing to the placard next to his register.  When I tell him that I already got the $5 off, and that PayPal would be taking care of that while paying him the full amount, you could see that he wanted to start telling his customers immediately to use the app and buy more food.
  • A LOT more friction to pay with than a credit card – Had it not been for the subsidized lunches, I would have stopped using the app after the first attempt.  The number of times that I had to log-in, explain the process to merchants and try to decipher the right payment approach for each vendor was a net increase in friction rather than a decrease in my payments journey.

Overall, PayPal is going to learn a lot through these types of promotions, and the reality is that they are in a good position to figure out how to make a wallet work at the point of sale.  Payment processes can be streamlined for the customer, and merchants will soon see enough of these types of transactions to understand what it means to pay by PayPal (or Square, Google Wallet, etc.).

While there was definitively more friction in my experiences with the app than through a traditional form of payment, I can see how not having to enter card details or provide them during pickup or delivery can help reduce friction.  Unfortunately for PayPal, this is already something that Yelp is partnering with Eat24 since July of this year, and that’s a more likely place for me to look for food.  The other area that I think is interesting is the ability to pay a dining check with tip without having to wait for your server to physically bring out a pen and paper.  And again, Yelp and OpenTable are thinking through similar ideas which will make it hard for PayPal to be top of mind when at a restaurant or searching for food.  It could make sense for PayPal to become the preferred payment option from a Yelp app, but then again the wallet wars are still anyone’s game to win or lose.


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