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PYMNTS Voice
What the Little Engine that Could and Nuclear Physics Have to Do With Ignition Strategies
Remember the kid’s story “The Little Engine That Could.” That describes what goes on with a lot of startups in two-sided markets. The train is trying to get up the mountain, but it needs to accelerate to offset the force of gravity that’s pushing it down. If it picks up enough momentum it can make it. But if not it stalls, and worse, slides back down the mountain. Unfortunately, saying “I think I can, I think I can” won’t get a two-sided business off the ground.
Why Every Payments Product Needs an Ignition Strategy
Hard data are not available but based on my experience billions of dollars each year go poof in the payments industry from investments in products that crash and burn soon after launch. These products didn’t have a sound ignition strategy which should be the foundation of all payments innovation. This series describes what an ignition plan is, why every entrepreneur inside and outside of major corporations should have one, and why investors and directors should insist on seeing one.
Failure itself is hardly surprising. Most new businesses die young and few products become hits. Unless someone really does invent a working crystal ball that’s the way it will always be.
But a lot of money gets wasted in payments because of the failure to deal with a difficult coordination problem. Many payments products provide value only if they are adopted by both buyers (such as consumers) and sellers (such as merchants). They have to achieve a critical mass of these buyers and sellers to provide a valuable product. If they don’t, they will crash and burn, after early adopters lose interest. If they do, they may ignite as an increasing number of buyers attract sellers and an increasing number of sellers attract buyers. Discover ignited. So did PayPal. Pay-by-Touch crashed and burned and hundreds more just can’t get off the ground.
Is Behavioral Economics In-Control?
MasterCard’s new In-Control Card (the name speaks for itself but more details on their Product Profile)--illustrates the good side of behavioral economics. Behavioral economics is the new (within economist-time) field that studies how and why people act the way they do and tosses out old assumption that people are rational.
Is It a Dud or Not: Views on Payments Innovation
PYMNTS.com recently published Separating Fantasy from Reality in the Brave New World of Payments Innovation. In this piece, author David Evans suggests five screening rules for identifying successful payment start-ups and recognizing the ones that are left better off in our dreams. Evans welcomed the PYMNTS community to weight in and we received such an overwhelming response that we want to share them with the rest of the community.
Tilting at Windmills: Some Final Thoughts on Dodd-Frank
If Senators needed any further reason not to vote for the misguided Dodd-Frank bill two stories over the last week should have pushed them into the NO column.
Separating Fantasy from Reality in the Brave New World of Payments Innovation
Last week there was a flurry of articles about cMoney. Here was yet again an incredible new mobile payments platform that will revolutionize the world. It had knocked the socks off of investors who had supposedly given it $100 million. And the press wrote breathily about it, with WSJ’s Venture Capital Dispatch telling us that “a start-up with a funky name has an ambitious plan for replacing consumers’ debit and credit cards with a mobile-payment system.”
PayPal’s Efforts to Capture Payments Share
Three announcements over the last week highlight PayPal’s moves to take a big share of the payments market.
Is Facebook Currency a Ripoff?
The virtual economy is exploding on Facebook as more and more consumers play social games like Farmville and Mafia Wars. Game developers make money largely by selling things that help people play the game like a bullet proof vest or a hand grenade for Mafia Wars which is published by social game behemoth Zynga. Facebook is looking for a cut of the action and it has gotten some developers upset.
Durbin, Debit, and Financial Reform
The U.S. Congress is in the final stretches of passing financial reform legislation which has been under intense discussion and debate since the implosion of the financial system in September 2008. Congress is now trying to reconcile the Senate bill spearheaded by Senator Dodd and the House bill shepherded by Congressman Barney Frank. Financial reform was one of the most important topics that Congress has had to deal with. The housing bubble that burst in the latter part of the decade revealed enormous problems in financial regulation in the United States and other countries. Whether those problems actually caused the crisis, or made a bad situation worse, is a subject that will be debated for a long time. The unfortunate reality is that there was a mass delusion that housing prices would just keep going up forever, untethered to realities such as supply and demand, and it is just hard to know whether any regulator would have done anything about it. Nevertheless, when the bubble burst, it became apparent that there were a lot of aspects about the financial services industry, and how it is regulated, that needed fixing.
Will the Apple Fall Far From the (Contactless) Tree?
Apple started some tongues a’waggin’ about two weeks ago when reports of its contactless patent filing were released. Is Apple getting ready to enable its users to pay with their iPhones at the point-of-sale? Is this the first step in empowering their 110 million iTunes users to start paying for things not-Apple? Or, is it ho hum, companies file patents all the time and hardly anything happens with any of them so what’s the big deal?
Of course Apple isn’t the only one playing the iPhone contactless game. Visa just announced that it and Device Fidelity are going to collaborate and turn iPhone handsets into contactless payment devices.
These efforts come on top of Square: that’s the new iPhone-based system that allows merchants to take cards on their iPhones to sell physical goods. There aren’t any published reports yet, but extrapolating from the number of comments filed about the app and the downloads since its release on May 12, one might surmise that as many as 10k people have downloaded the Square application in less than a week’s time. This strikes me as a pretty good start though the real test is how many merchants sign up for the service and start taking charges.
We’re bound to see more efforts to turn the iPhone into a way for consumers to pay or for merchants to accept. And of course Android isn’t going to be far behind.
The big question is whether these new devices could do what the card networks and their issuers haven’t been able to: persuade merchants to spend the bucks on installing readers at the point-of-sale that take contactless. As our readers have heard from us over many years, the great hopes of contactless have thus far been dashed by the fact that merchants don’t see enough interest on the part of cardholders to make the investment and consumers don’t really see enough benefits from paying with contactless to care much about whether a merchant has contactless or not.
There are few factors now to consider in evaluating whether this could change.
First, most people don’t have a smart phone (75 percent don’t) and only a fraction of those have an iPhone. At the moment there probably aren’t enough people who might want to use these phones at the point-of-sale to get merchants interested.
But that could change quickly. iPhone, Android, and other smart phone sales are exploding. A few years from now it is easy to see that well over half of consumers could have a smart phone and many of these phones would be running the kinds of cool apps that were first developed for the iPhone. It is also important to keep in mind that these users may have an intense desire to use their clever apps to pay and contactless may be what they need to do that. Contactless cards didn’t catch on because consumers didn’t care about them (at least not enough). I’d expect smartphone users to be at lot more enthusiastic. It doesn’t take a large fraction of interested users to get merchants to pay attention to them—we think the magic number is around 5-10%.
If anything is going to get contactless ignited this could well be it.
Second, smart phones are so smart that they may not need contactless. This is a point that we’ve been making for a long time. Contactless seemed like the great technology hope many years ago. But life—and technology—has moved on. Square isn’t using contactless. It’s relying on the fact that the iPhone/iPad are wireless devices with interactive screens. We think this is big. Smartphones may well become the dominant way people pay (and in some form perhaps even the major device used by merchants to take payments) at the physical point of sale. But that doesn’t mean they have to be contactless. They may provide some other clever interface. Apple’s teaching us to tap, not wave.
And that’s my guess—businesses that are focused on putting contactless in mobile phones are, oh, so last decade. Entrepreneurs should be focused on what value can be delivered to consumers and merchants using the new technologies that have become available.
This brings us back to Apple. This company has the incentive and opportunity to drive mobile phone payments. In addition to the device itself Apple has two major assets. First, more than 110 million iTunes account holders all of whom have wallets populated with a credit card. That’s a base that vies with PayPal, but unlike PayPal Apple has a great offline delivery mechanism. Second, Apple has thousands of entrepreneurs who are trying to figure out creative ways to incorporate payment functionality and features into iPhones. It is simply unpredictable what they will do. But what is predictable is they will come up with lots of ideas no one at major payment players have thought about. The combination of these two assets - together with the iPhone customer base - can make Apple a significant player in the payments space.
And, Apple has strong incentives to do this. Think about it: if iPhones could become a highly useful tool for paying for things in the physical world that would vastly expand iPhone sales; then there are the sales of related devices like the iPad to merchants. If that’s not enough there’s also the possibility that Apple could control the wallet for these phones and extract a small fee for managing that wallet—as we know in payments small transaction fees times billions of transaction adds up.
Conclusion: if you are in payments you should watch Apple, but don’t think it is all about contactless.
Now Available!
A PYMNTS.com exclusive!
Chapter three of the Third Edition of Paying with Plastic by David S. Evans and Richard Schmalensee.
The third chapter of the 3rd edition of Paying with Plastic is now available on PYMNTS.com. Readers of the online version will get advance access to the full chapter contents as well as unique insights, additional background information and have the chance to comment on the content and provide the authors with updated facts and figures. Readers whose material is used will be cited in the printed edition.
Subsequent chapters will be posted in 14 installments prior to the book’s publication by The MIT Press in late-2011.
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