Jun 11, 2008

More on Free Payment Processing

A couple months ago, I wrote a piece called "Free payment processing" which looks at using marketing revenues to subsidize commoditized payment services. Eric Remer (I believe his company's blog is PaySimple blog) just provided an interesting comment to that post.


How are you? I actually live in Boulder, CO and run an electronic payment processing company in Denver.

Love your train of thought as I do believe we are getting closer to a free world. Payment processing is incredibly cumbersome and confusing for merchants (specifically small businesses). However even in a free world, there needs to be one part of the equation that merchants/consumers are willing to pay if they are receiving value. It has been proven time and time again accepting electronic forms of payments increases sales and reduces collection risk. Merchants have accepted that relationship, however, what they don't enjoy is the hidden fees, statement fees, up charges, inept service and provisioning process. I believe the exisitng distribution model is broken.

The problem with marketing supported anything is there is a finite number of marketers willing to spend $$. It is my belief that many of the free social networking sites will begin to feel this pinch relatively soon. FaceBook is the largest social networking site in the world and had $100M of rev. last year. Where will all the ad dollars come from to support the nings, my space, facebook, and the hundreds of others popping up.

So with that hurdle being a relative large one, how would acquirors really replace their Billion's of collective dollars in revenue through ads?

Very interesting concept, but how to execute on the vision is the real question.

Eric Remer

I agree that acquirers would not be able to collectively replace their billions of dollars in revenues through ads. But a single acquirer could use the strategy and create a very new and different offering.

All current billable services would likely not be offered for free. Lots of the things that acquirers sell today look like premium type services, or could be positioned as such, and could still be charged. The things that appear the most as commodities could be offered free.

How big are the advertising budgets that could be funneled through payment related marketing services? According to a promo industry trends report, in-store advertising alone is a $42 billion industry in the US, around the same amount as total interchange fees paid by merchants last year to accept Visa, MasterCard, American Express and Discover cards. Spending on loyalty programs is estimated at $2 billion, the same as sampling (another $2 billion) and just a little more than games ($1.8 billion). Direct marketing still tops the charts at $53 billion.

Catalina Marketing is an interesting company to look at in this space, although they are not involved in payment processing. Catalina provides targeted marketing services based on coupons and marketing messages printed on cash register receipts in supermarkets. They charge on average 7.5 cents per message, depending on the type of targeting criteria used. 2005 revenues were $410 million (their most recent annual report is here).

What Catalina does in the supermarket space is what I keep talking about (roughly speaking) in the much larger retail space including convenience stores, quick service restaurants, fashion, and virtually all other physical retail outlets.

Catalina Marketing was purchased for $1.7 billion in April 2007 by private equity firm Hellman & Friedman. That’s a multiple of sales that many payment companies would love to see.


Citizen Dave said...

"But a single acquirer could use the strategy and create a very new and different offering"

Isn't this, in essence, what Google is already doing in the online world?

Quote Catcher Credit Card Processing said...

Dave that is exactly what I thought when I read this post.