If I had a nickel for every time someone stated “payments is hot,” I’d have enough money to back a whole bunch of new businesses.
This “heat” may be the reason why so many business owners are pulled to payments, similar to how moths are lured to a flame. Some of these entrepreneurs start a payment processing company will be able to develop prosperous businesses that spread like wildfire, but I have a sneaking suspicion that the majority of them won’t be able to turn a profit of any kind, instead igniting into a blaze and eventually fizzling out.
PayNearMe is a company that we’ve been building over the past five years, and based on my experiences with Accept.com, which was one of the first P2P payments companies and was acquired by Amazon in 1999, I wanted to share my thoughts about the current opportunities and challenges that payments entrepreneurs face.
Where exactly is the window of opportunity?
The new chances to generate money that exist today are not in the payments processing industry; rather, they are in utilizing technology in order to circumvent the lock that incumbents have on distribution or scalability. The most successful companies utilize payments as a “excuse” or “hook” that gives them permission to address other difficult problems that consumers are ready to pay for. This allows the company to maximize customer satisfaction and increase revenue.
To begin, I will make the following assertion: monetary transactions prefer to be cost-free.
Why? Because it is difficult to charge a significant amount, if anything at all, for just writing an entry in a ledger that “moves” monies from one account to another, which is, to some extent, what payment processing is. The proliferation of cryptocurrencies such as Bitcoin will further hammer home the point that this is the case.
The only way to make money processing payments without wrapping them in other valuable services is to achieve the kind of mind-boggling scale that Mastercard, Visa, First Data, JPMorganChase, and a few other companies have built up over the past 50 years. Until now, this has been the only way to make money processing payments.
To be clear, the “desire” for payments to be free does not imply that there is not a significant amount of profit to be generated around payments. I want to make that point clear.
What exactly is the issue?
Extending credit, acquiring and serving consumers or merchants, and absorbing the risk of fraud are all examples of difficult difficulties that might arise in the context of card-based payment systems. Because the traditional markets for these “problems” are dominated by large players, many of which are merging for even greater scale, a significant portion of the recent innovation in the card industry has involved the expansion or automation of distribution to new classes of merchants. This is due to the fact that traditional markets are dominated by large players (e.g. folks like Square, Stripe, Braintree, WePay serving SMBs, or WEX in specific verticals like fleet management).
Some of the potentially addressable markets that those in the IT industry service (or adjacencies that they can ultimately reach) are enormous. As a result, it is possible that enormous enterprises might be formed, although doing so will take a large amount of time and/or financial investment.
Building cash-in and cash-out networks around the world, underwriting receivables from those networks, assisting consumers, and managing money laundering and other compliance risks in a wide range of jurisdictions within and across countries are some of the difficult problems associated with remittances (also known as “International Money Transfer”). For example, the United States alone has 48 different jurisdictions in which money laundering and other compliance risks must be managed.
As the remittance sector has developed, margins have decreased, and the walk-up business has consolidated around a few well-known firms such as Western Union, MoneyGram, and Euronet’s Ria. These companies include Western Union, MoneyGram, and Euronet’s Ria. The concept of innovation in remittances has featured hard-to-execute distribution tactics such as substituting cash-in networks with bank accounts (for example, Xoom) or focusing on specific use cases such as sending cross-border tuition payments (e.g Peer Transfer).
Despite widespread knowledge and hope, cryptocurrencies such as Bitcoin would not change remittances on their own unless, or until, shops on the receiving end accept such currencies directly, which would eliminate the requirement for cash-out networks. If something like that occurs, the remittance sector as a whole would be completely disrupted. However, even if this occurs, cash-in or bank-in networks will still be required in the countries of origin in order to convert fiat monies into cryptocurrencies in a manner that is in accordance with the legislation of the respective nations. Those are challenging difficulties for which some company will be compensated, most likely for a very extended period of time.
In the market for closed-loop gift cards (such as the traditional “Bed Bath and Beyond” card), the most difficult challenges involve retail distribution. Retail distribution is typically locked up in carefully negotiated exclusive relationships by businesses such as Blackhawk Network, privately-held Incomm, and Euronet’s ePay subsidiary. These businesses then use their retail contracts as leverage to get into exclusive arrangements with “content” suppliers (retailers whose logos appear on the cards, such as Bed Bath & Beyond), and vice versa. Again, innovation has centered on the establishment of new distribution channels, generally by exchanging physical cards for digital facsimiles, as was the case with Gyft, which was recently bought by First Data.
