How PayPal is taking on the mantle of Innovation Leader in the payment industry

This article by Patrick Gauthier gives an excellent overview of the trends driving payment innovation at Paypal, and compares the company's latest string of announcements with the relative lack of innovation coming from established players.

"Innovation is a matter of culture: PayPal is grounded in the advent of E-Commerce and Push Payments both permitting changes as radical as the introduction of the Association model did… four decades ago. This not only explains best why PayPal would try where other would shy away, it also exemplifies the challenge for leading providers."

I have known Patrick for many years, and am delighted to see that he is sharing his insights on PYMNTS.com

A great ad for Paypal's iPhone app (which doesn't need NFC)

This ad shows two people exchanging money through the Paypal iPhone app with Bump technology, an innovative way around some of the needs for NFC.

NFC still holds a major advantage over Bump technology - with NFC, there is no need to confirm that the match between the two phones is correct, and there is no risk of delays due to pairing errors or uncertainties. Still, this is a wonderful example of innovation.

I wonder if there is some way for a payment terminal to also register a bump, so I can bump my iPhone at the POS and pay without a card.

Why there is no real progress in the search for an NFC alternative for mobile phones

In addition to contactless stickers, First Data is now also exploring Micro SD cards. A comment at the end of this article pretty much sums things up, illustrating why there is no real progress:

"We chose Tyfone's SideTap memory card because it best serves the needs of consumers who want to use contactless payment options with over-the-air access but still want to retain the memory-card functionality of their micro SD card," said Dom Morea, division manager of mobile commerce solutions at First Data, in a statement.

I might be wrong, but I don't think I have ever heard a customer say something like, "I want to use contactless payment options with over-the-air access but still want to retain the memory-card functionality of my micro SD card." How many people even understand what that means?

When you work through all the details and simplify the statement down to something understandable, you end up saying something like this:

"We make it easier for you to add your credit card to your mobile phone, so you don't have to pull your card out of your wallet all the time. You still have to keep your cards in your wallet, because there will still be lots of retailers that need a card. But you can tap your phone at more and more retailers around the world, instead of pulling out your wallet."

Let's see. I still have cards in my wallet. I still have to carry my wallet around. But sometimes I get to tap my phone instead of pulling out my wallet. Wow. Cool. I hope its free, and I hope there is no hassle at all, otherwise the hassles of loading my card to my mobile phone, and getting my phone to work properly when I pay, will be weighed against the hassle of pulling my wallet out.

Here is a simple description of the pain that we are focusing lots of resources on: "We sometimes eliminate the hassle of pulling out your wallet each time you want to buy something."

Nobody presents the pain in this way. We hear all kinds of other pains that we presumably eliminate. "Imagine being able to leave your wallet at home!" Or this one: "People never leave home without their mobile phones or their keys, but sometimes forget their wallets." But the pain we are addressing today is not "leave your wallet at home". We can't offer a solution to that pain until all retailers everywhere accept contactless payments. Instead of recognizing that we are addressing very minor pain ("sometimes you can leave your wallet in your pocket and tap your phone instead") we let our minds slip and focus on some juicier pain that makes our investments worthwhile.

We are so far removed from solving significant pain, or even recognizing it when we see it, and so stuck in the nitty gritty technical whiz bang features that this technology can provide, that our industry just muddles along with little incremental improvements in payment systems that nobody gets really excited about other than ourselves. That's why retailers don't see enough value in paying interchange fees, and why customers don't see value in paying yearly fees.

What a ripe industry for an outsider to come in not knowing anything about "what can't be done".

www.LayAwayCredit.com

I recently wrote about layaway possibly making a comeback, and then a couple days later happened to read about startup LayAwayCredit.com

There is definitely something brewing in this area. LayAwayCredit.com’s business model is based on reselling big-ticket items on their website, which will be a major drag on their growth, but hey, something is happening. I wish them success in ironing out their business model.

I wouldn’t be surprised at all to see return fraud growing as well, for the same reasons.

Merchant acquirers and processors could play a key role in helping retailers design convenient and streamlined solutions dealing with lots of payment related issues such as layaway and return fraud, which the payments community has not yet recognized as being payment related. Payment-centric solutions to many of these problems will be much more simple and convenient than stand-alone solutions like LayAwayCredit.com, and, as an added benefit, could dramatically increase the value of payments.

Taggo video interview

Michael Foong has just released this ITChannel Vidcast interview and demo of Taggo.

theITChannel Vidcast - Interview with Taggo from Michael Foong on Vimeo.

What will happen to fintech companies that are not global?

In a recent interview, Ken Chenault said something else that got my attention, but is not really related to the main post I did on the interview.

"The economy is going to grow slower than it did before the downturn, even when we recover. That emphasizes the criticality for large companies to have a global presence. You can't have a dependence on a single market. We look at countries like China, Mexico, Brazil, Russia, India -- the reality is that those growth rates are still healthy."

Welcome is well positioned in this respect, as a global provider of loyalty/payment technology to banks, but there are still many financial technology suppliers whose customers are almost entirely in one or two countries. That's true of course for almost all small companies, but even some of the big US suppliers (Jack Henry, Metavante, ...) are entirely US based.

Obviously, I am building Taggo as a global provider from day 1, just as I did for Welcome.

Back to the future - charge cards, layaway, and other thoughts

Ken Chenault of American Express sees a resurgence in the company's traditional charge card, that's their pay-in-full product at the end of 30 days.

"Consumers want discipline," he says in a recent interview, "and if we can bring that discipline of paying in full at the end of the month along with the service levels that we provide, plus the rewards and other programs we have, we think that's a tremendous opportunity for us to grow."

Closed loop prepaid, otherwise known as gift cards in the US, is another area that is set to generate much more demand. Especially if retailers can eliminate the need for additional plastic cards that customers are tired of carrying around. Mobile phones and NFC are opening up possibilities here. All sizes of retailers will be keen on collecting money upfront for products and services that will be consumed later. Customers' new found desire for greater discipline could combine with retailers' need for liquidity.

Could we see layaway making a come-back? That's when people reserve an item in a store, make partial payments on it, and get to take the item home once it is fully paid for. This practice used to be very common, but pretty much disappeared when everyone was piling up credit.

Is Square a threat to Verifone?

A recent article in TechCrunch makes it seem like a major war is on between Verifone and Square. It is amusing how the Silicon Valley can get all hot and bothered when one of its heroes (in this case a co-founder of Twitter) launches a new startup.

In terms of hype and mindshare, Square is definitely running strong against Verifone, at least in the microcosm of Silicon Valley. This may be what Verifone is fighting. Given Verifone’s proximity, the battle of hype in the valley might be an important one to win. Or it might be an unnecessary diversion.

I occasionally run a two-hour workshop for MBA students in Singapore called “The Art of Entrepreneurship”, in which I provide a basic framework to increase the chances of success of a new project or venture. The framework applies to new startup ventures as well as projects launched within large organizations. The workshop explores several major failures that have happened in the payments industry when fundamental questions were not asked, and looks at successful products and services in comparison. Square fails the test.

Successful ventures provide simple and compelling answers to three fundamental questions: so what, who cares, and why me? Answering these questions can be difficult and painful. Take biometric payments. The promise sounded something like this: “Biometric payments let customers shop without their wallets.” So what? How can I leave my wallet at home if most stores don’t let me touch my thumb? How big of a hassle is it to carry a wallet? Who cares? The average shopper? Or the person out jogging who doesn’t want to carry money or cards yet still wants to stop at their favorite coffee shop. Is that a big market? Do those people care enough to adopt your service? Will retailers be interested enough in that market segment? Not too long ago, a silicon valley company called Pay By Touch raised $340 million, hired over 800 employees, and promptly went out of business.

Does the product resemble vitamins, painkiller, or cocaine? With vitamins, buyers are concerned about their future well-being and will pay for something that could improve their lives sometime in the future. They will think seriously about ROI before buying. The vast majority of products fall into this category. With pain killer products, buyers are much less price sensitive. They are in pain now and want relief immediately. With cocaine, buyers find themselves addicted and can't get enough of your product or service. Think iPhones and social networking. Twitter is of course in this category.

“Why me?” That’s the question that defines the soul of the new venture. What is your special story that makes this venture something that nobody other than you could launch? Here is Square’s answer, taken from their website: “In February 2009, Jim McKelvey wasn’t able to sell a piece of his glass art because he couldn’t accept a credit card as payment. Even though a majority of payments has moved to plastic cards, accepting payments from cards is still difficult, requiring long applications, expensive hardware, and an overly complex experience. Square was born a few days later right next to the old San Francisco US Mint.”

The process I describe in my workshop is demanding and humbling. You ask yourself hard questions, over and over again until the answers are compelling.

“Why you?”

“Because my partner wanted to sell a piece of artwork and couldn’t.”

“OK, interesting. But, so what? Why you?”

“I was co-founder of Twitter. I’ve got lots of clout and visibility. I know everything about social media.”

“OK. This is about payments. So why you? Also, what was that bit about the San Francisco US Mint? What’s that got to do with anything, other than maybe appeal to Silicon Valley readers?"

You get the picture.

Participants in my workshop get animated and excited when they are going through these questions. I have them work in groups of 5 or 6, and have them send one person up at the end to present their project to everyone. The class then grades each project based on how compelling the answers are. Major weaknesses are immediately apparent and can be focused on for improvement.

Square would fail this process miserably.