A payments startup worth backing …

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You didn’t ask, but I’ll tell you anyway – here’s my view on payments startups worth backing.

First off, payments is a tough space. Consumers like innovation a lot less than people think, and in the area of payments and personal finance people are even more risk averse. Often the perceived risk of trial vastly outweighs the immediate benefits (e.g. I’ll pay 5 seconds faster, but may have all my money stolen).

Second off, payments is a heavily regulated industry dominated by a large oligopoly. You have to ‘dance with elephants’ and may easily get crushed if you choose the wrong part of the value chain. In general there are very few startups that have succeeded in payments – the odds seem worse than other industry areas.

Thirdly, payments is less interesting than you may think! At least the handling of the money is. People look at high percentage fees and instantly assume this is valueless profiteering by a monopoly system. I’m not saying it is fairly priced, but there are hidden costs in payments which drive/require fees (e.g. fraud/insurance).

So, all that said, what would I invest in. I see a few themes, each with different merits:-

1) Increase consumer Point-of-Sale conversion
– 1.1 Increase the addressable market to those without debit/credit cards (unbanked, youth …)
– 1.2 Reduce PoS hurdles by reducing the time-to-pay (stored details, NFC)
– 1.3 Reduce the effective price (by channeling back payment fee savings)
– 1.4 Offer ‘easy’ credit at the Point-of-Sale (storecards, BillMeLater)

2) Deliver better merchant service levels
– 2.1 Reduce barriers to acquiring an initial MID (the first step to accepting card payments)
– 2.2 Deliver ‘betters. faster, cheaper’ payments processing (a matter of scale and attitude)

3) Payments as Identity based plays
– 3.1 Customer identification and behavioural profiling (with possible linkage to PoS data)
– 3.2 Consumer facing loyalty and discounting schemes

Of the themes above I would say that 2) is best suited to growth capital/private equity. You need a modicum of technology, but you mainly need funding to build and buy a large merchant customer base. Number 1) is increasingly difficult, but if I were to place a bet it would be on the PoS credit concepts – big plays like Klarna and BillMeLater can still be improved upon and rolled-out wider. Number 3) is where the garage start-up may yet unsettled the status quo. Depending on how rules & regulations are amended, it may be possible for the treasure trove of payments data to be exploited by players outside the existing ecosystem.

In general, I think payments will trend towards enabling big companies to do what you see happening everyday (in a very low tech way) in your average ‘cafe’:-

1) You’ll pay after you’ve consumed/seen your goods (* but based on a ‘soft’ credit check you may be asked to pay up-front if you look a little rough around the edges – the check won’t ask any questions!)

2) If you’re a regular you may get a secret discount at the till if the owner thinks its important to you (* so as not to upset other customers who pay full price, nor embrassas you with vouchers etc…)

3) When you walk in they know you, and know what you like – you’re coffee may even be waiting for you (* over time the staff pay attention to what you like, and if they haven’t seen you in a while – they make you feel extra special [and a little guilty])

4) If you’re a really good customer, you’ll be allowed to ‘settle up tomorrow’ – not because you need the credit, but because they know it makes you feel special – and makes you come back tomorrow!

All of the above are being worked on, with various degrees of buzz-wording around NFC, Mobile, SMB, Card Readers etc…. I think the winner is likely to be the company that attaches itself least to the new technologies, and makes the maximum use of existing data and existing tech.

Topic continued over a coffee/beer …

1,465 thoughts on “A payments startup worth backing …

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