Musings on Full Stack Financial Services startups

(This post has been long in the making). One of the posts that sparked my interest in the last months is a post by Chris Dixon, Full Stacked Startups. In it, Chris highlights several startups such as Nest, Uber, Tesla, Warby Parker as companies that have gone after the market as full-fledged businesses instead stacking on top or in partnership with other players. Notably the …

[…]  full stack approach lets you bypass industry incumbents, completely control the customer experience, and capture a greater portion of the economic benefits you provide.

Recent transactions, such as Twitter’s acquisition of Gnip, are also showing, in my view, the business tension by any tech startups to move vertically upstream or downstream to find the right mix of economic models.

There have also been more conversation around the idea of changing at its core financial services. Marc Andreessen has jumped in the discussion with the idea of building a full new bank:

Note 1: Bitcoin is a strong factor here, not so much from a direct technology perspective, but more from bringing into the public’s mind that the financial services sector can be disrupted / affected in its own core. 
Note 2: API banking has been at the center of what we are building at Anthemis and a personal passion of mine:

Jack Gavigan answered with this excellent post on a blueprint for a new disruptive bank:



A system blueprint is a great way to start but is one of the views of a fractal of perspectives that needs to be taken when considering financial services (I highlighted in red what I think is one of the key area). Another important one is the financial view. A full stack financial services startups is, in my view, a balance sheet driven startup. Balance sheet driven startups are a bit of an exception in the world of technology startups. In the past years, a lot has been made to make these less and less driven by balance sheet. From renting infrastructure to outsourcing functionalities to other companies, most tech startups have been driven at first with little focus on balance sheet. However in the world of financial services whether banking or insurance, balance sheet driven startups are the default structure for full stack startups.

That makes them more difficult to be considered from a venture capital perspective:

– First, they require capital, much more than a typical tech startup. Oscar’s minimum capital requirement for operating as a health insurer in the state of New York is USD 45M : , most/all of which will need to be kept aside. That’s a $45M raise just for the right to play. Additional funds will be required for development, marketing, …

– Second, they are very difficult to grow hockey stick. Think of balance sheet driven financial services startups as the weird cousin of multi-sided marketplaces startups. Taking the example of a new bank, for every new customer that will subscribe and deposit, a matching capital will need to be added following Basel III or another local capital requirement rule, invested in secure products. In parallel, you will want to deploy your customers’ deposits in money-making investments with risk profiles compatible with your capital requirements. Either you run your own lending / investment business which adds further complexity or you look for partners to deploy. Low risk with relatively good returns investments are chased by investors and your new bank is a small fish in that pond. All of this contributes to make growth more difficult than in a typical startup.

Even for a simpler version of balance sheet driven startups, say a lender with little/no prudential ratio, every growth in customers will need to be matched with an increase in available capital. Kabbage debt raise is a good example of that: ~$53M raised in equity for ~$345M raised in debt.

So why are full stack financial services startups interesting?:

– From an operational point of view, these activities are enormously inefficient in existing banks. The software they are using (Core Banking Software) is old, batch based and difficult to replace – understandably, once you have built a full balance sheet, something that can affect its management is high risk. Anything build on top of this software base is affected, from your customer front end to your risk management software to your lending activities. This leads to more operational margins being taken to ensure you are operating within regulation. A new player will have tremendous opportunities using the flexibility that current software allows. I am playing our book here (Anthemis) but Fidor Bank‘s ability to connect to P2P lending platforms, virtual currency exchanges or to manage multicurrency /commodity accounts is a good example. This is an incredible opportunity space.

– From a business point of view, once you are past the more difficult early stage balance sheet growth phase, you have built a resilient, flexible company. Flexible is not an adjective often used for banks, but with the right infrastructure and API layers I think modern banks will have the opportunity to open themselves to many business models. Built in-house or in partnership with others. This is also the case in terms of their capability to deploy assets. Financial products, liquidity providers, exchanges are evolving at a rapid pace. New platforms appear to access private companies equities, alternative debts (P2P but also factoring, data driven SMB debt). Non banks are becoming investors as well, investing in their own supply chain to guarantee its performance. And these platforms are becoming more and more digital, creating new opportunities for a bank to connect and invest.

Note 3: This is also where the evolution around contracts in the blockchain such as Ethereum, or distributed open ledger such as Ripple (which recently partnered with Fidor Bank) are really important. Making transactions fully electronic and real-time has massive implications for banks in terms of their investments as well as their risk monitoring.

There are a lot of additional perspectives to consider and I will gladly take additional insights, critics, comments. However if you are working on building a full stack financial services startups, whether in banking or insurance, I am really interested in talking with you. There are very few now but I am betting we will see more and more people try in the coming years.

Disrupting Insurance: The Other Financial Services Opportunity

In the last years, most of the focus on innovation in financial services has been, it seems, on banking (investing and lending) and payment. Comparatively, fewer startups have been addressing the insurance space. This is about to change and the opportunity space is amazing. To give a few numbers, non-life insurance market world-wide in 2011 was estimated at $1,877.2 billions. The global life insurance market had total gross written premiums of $2,464.2 billion the same year.

As banks, insurance companies are a balance sheet driven business, more specifically a float driven business. In the past 20 years, arguably the investment side of the insurance business has seen the most innovation. New financial products have been created  (not to the most benefit in some cases – AIG and MBS for example), access to markets have become more global and cheaper.

However on the distribution and actuarial front not much disruption has happened, as highlighted by IBM in its Insurance in 2020 report:

Changes in value chain automation, data management, and the use of online mechanisms made over the course of the last several decades were at the tail end of larger technological or societal changes and were directed towards improving existing processes and mechanisms.

This is about to change, and as most digital driven disruption, it is start with the distribution model. Now, insurance distribution has important variations by country but overall the industry distribution model has been built around agents and brokers, a physical distribution network.


What has started happening in the last years to bank branches is happening and will happen to the insurance agent networks. As more and more people spend their life in a digital world and value convenience there over other factors, digital distribution increases. More than with banks, it creates a complex competition dynamic for insurers as a direct digital distribution is at cross against their agent network. A classic case of Innovator’s dilemma. Some insurance companies have responded by branding their direct offer differently and playing with their pricing strategy to ensure their agents will not too negatively affected but in my view, this strategy will not last long as from a customer behaviour perspective, more business will shift online over the next years.

From a startup perspective, this creates an opportunity space in online brokerage, there is a small step from online distribution to online comparison and this type of void is filled quickly. In the UK, comparison websites such as MoneySupermarket have been quick to jump on the bandwagon (or in Switzerland Comparis). Google has seen an opportunity as well and is promoting its own comparison engine in that space. In the US, websites such as CoverPath offer the same type of service for more complex product like term life, and their online experience is much better than any of the existing competitors.

One of the unanswered question is that space is up to which level of complexity can a customer be self-directed? In an insurance world, there is a conflict between the requirements of the underwriting algorithm for being able to price the premium and the optimal UX for users to be able to obtain a product. A term life insurance product for example, cannot be properly priced with just a few field. Also, what if a startup could have its own data sources for underwriting insurance?

The distribution model is also bound to be changed by players that provide value added services out of which insurance is just a component. Trov (an Anthemis investment) is a good example of this new type of potential distribution platforms for insurers. Trov’s objective is to unlock the value of all your physical assets by making them digital. Protection on stuff you deeply care about (as in insurance) is a phenomenal value proposition but creating liquidity can be equally as important. From a customer perspective, there is more value add in a platform that can cater to all their needs than in an industry specific one. Insurer will need let a little go in the direct client relationship to leverage these customer oriented platforms.

Hybrid Model

Insurance is a data and calculation model, ie amassing enough data on events to calculate and price risk. This is an important barrier to entry as the historical data of insurers is impossible to reproduce (you have to bear the risk to get the data). However, from a technical perspective, the cost of acquiring, storing, managing and calculating on data has become lower and lower. The technical moot of the insurance business is disappearing or even reversing (considering their existing technical architecture is expensive to maintain vs new technical solutions).

Take the example of MetroMile based in Portland. As telematics (for end customers) is a new field for the industry, there is much less historical data advantage. Whoever will amass the most data on instant driving behaviour and use it for actuarial purpose will have a strong advantage.

At the same time, insurance pricing is based on average, which means if you are on the low-end of an average, the economic deal you are getting is pretty bad. A person who drives his car on low mileage is probably paying too much insurance. The solution so far has been to reduce coverage, but the reduced risk of low mileage for the insurer does not mean a reduced risk for the driver in terms of his protection. Telematics devices such as Metromile’s, by tracking actual miles driven, allows for more flexible contracts with lower overall premiums but high coverage.

For a new player, a way to enter this field is to propose first a new insurance distribution models, like insurance by the mile. However, my assumption is that the long-term objective from Metromile is to record enough driving behaviour information to be able to underwrite motor insurance based on driving criteria as well as nudge behaviours to reduce the overall risk of Metromile drivers.

Now Metromile is not an insurance carrier and the actual insurance is provided by National General Insurance Company. It is unclear how much the underwriting model is controlled by Metromile or their partner but I am assuming Metromile had input into it. I am expecting to see (and interested to discuss with) more companies adopting this approach. A combination of online customer acquisition and proprietary data sources / data relationships on top of an efficient balance sheet is an interesting business combination and is less capital intensive than a full new carrier. 

A new carrier? Alternative to carriers?

Creating a new insurer is expensive. If we take the example of Oscar, a New York based Health Insurance firm. Their minimal capital requirement for operating was around USD 45M ( As is the case with most balance sheet driven business, hypergrowth is not an easy possibility as capital requirements keep increase with more customers (ie the better you perform, the more your need to raise capital, from a requirement perspective). Not impossible but it takes a certain type of investors to fund this type of startups, from a capital deployed to return ratio, other businesses may appear more interesting.

Another interesting possibility is in peer to peer insurance. Peer to peer insurance is very much different from peer to peer lending. Peer to Peer lending is about increase your investment returns by cutting on intermediary fees, while managing risk exposure through diversification. Peer to Peer insurance is about reducing your cost of insurance by co-managing your own pool of money and claims. Peer to peer lending is about managing several one time low implication relationships (loan agreements), peer to peer insurance is about managing one high implication relationship with many people. Failure in peer to peer lending is on an individual basis, failure on peer to peer insurance is on global basis.

While still very much far fetched, the algorithmic approach to peer to peer insurance is really interesting. Climate Corporation (previously an Anthemis Investment) has proven that with automated data feeds, claim management can be made into a seamless experience: a weather event would be registered by the nearest station and the claim would be reimbursed automatically. Algorithmic and programmable ownership ledger, such as Ripple and Ethereum set an interesting groundwork for expending this to other types of insurance (say your Iphone sensor register a bad fall and trigger an automatic claim reimbursement). Peercover was an interesting player in that space (but has since pivoted).

Other models?

Last, an interesting number of players have emerged in the “behaviour nudging” space. From wearables à la Up to Sherpaa, several companies are tackling the gap between historical health behaviour and digital life. An interesting space indeed.

Smart Commerce will only succeed with Smart Banking

Bill Ready had a great post at PandoDaily on the growing importance of smart mobile driven commerce. In my view this is one side of the equation of the future of commerce, the other side being the creation of smart banking services.

Using Bill’s example: I book a flight to San Francisco, my financial service app warns me that my travel budget will most likely be exceeded this month and has pushed back the budget allocation for new electronics by 1 month. My extra rental revenue from Airbnb should help cover cash flow needs for the month so that new MacBook is still a go. I take an Uber upon landing and check a restaurant for the group. Bills is split between us automatically, referring back to our positions in a global distributed ledger including interests owed (built on the Bitcoin protocol foundation). After the lunch, I check recent communications from my Angellist portfolio. My portfolio allocation to startups is split across various syndicates. Through tasks performed to help these startups, I have also earned additional exposure to a few. A good way to not only increase my upside potential but build my skills and experience.

Is this future far away? With the increase in sensors in mobile, shops, objects and the digitisation of money, the capabilities of financial services are changing quickly. A lot of this effort in calculation is currently focused on market activities (high frequency trading being probably the most discussed) but I am convinced we will see the same push start in consumer finance. The current push to integrate more data sources, including social data sources, in online lending is a good example.

Mobile is becoming an integral part of people’s financial life. Starbucks success with its mobile app proves that people, when given a good use case for mobile (increase in convenience and additional services) are more than ready to use their mobile. Payments on mobile are increasing at an amazing pace: Paypal’s total payment volume increased to $27 billions in 2013. But the increase in payments on mobile also highlights the gap between how easy it has become to spend online and how little has been done in helping people manage their spending.

Cash was the base budget management tool for a lot of people. A wallet is probably one of the best UX for money. Visually checking how much is left in a wallet is one of the most used and simple budget management tool. The rise of prepaid card with underbanked and neobanked is in some ways following the same trend, as closed cards, especially with easy to access mobile balance reminders, are the modern equivalent of counting the number of $10 left.

However, as highlighted above, as more and more of our purchase experience will not only shift to mobile online or offline but also to 1-click / no click payment, having a single credit card or debit card as a default payment mean can potentially increase the tensions in budget management and understanding of personal finance. In a world where payment is bound to disappear, the pressure for financial understanding will increase further.This is a vast opportunity for financial services startups.

The same technology that let applications recommend you what to purchase, how good a restaurant is or how to manage a fleet of cars / pricing to match demand can be used to optimize your personal financial management. As the age of mobile concierge is coming, the age of mobile financial advisors is coming as well. I am biased, professionally and personally on Simple but they are, in my view, a good example. Smart balance and goals are the beginning of a payment experience based around managing and optimising personal finance. And while this effort begins with spending, it will soon integrate as well with saving and borrowing. Paying overdraft fees with a saving account or other type of liquid assets is an incoherence in a time where a simple excel spreadsheet can compare borrowing and savings rates.

If we push this idea a little further, there is a potential for algorithmic finance becoming even more intelligent. We are on the verge of being able to record how people feel at any point in time. What about a financial algorithm that would help people maximize their happiness over time? What about a mobile agent that prevents you from buying stuff at checkout by automatically reminding of the other activities you would like to do that will be more rewarding?

The battle for the POS is the battle for digitization of physical retail

The POS market has recently seen interesting transactions and announcements:

First Data acquired Clover end of2013 and launched its Clover Point of Sales in 2014. First Data Quietly Buys Payments Startup Clover; Launches Point Of Sale Platform For Merchants

Amazon acquired GoPago’s asset and team. Amazon Bought GoPago’s Mobile Payment Tech And Product/Engineering Team, DoubleBeam Bought The POS Business

Trends in retail and their impact for the POS.

In a world of horizontal e-commerce behemoths such as Amazon or vertical specialized online stores such as Fab, the pressure on physical retail is high whether it is through showrooming or easier commerce. Reinventing retail around usage and experience is a possible solution. The percentage of non commercial square footage in Apple stores is telling.

Because the payment component will disappear from the customer’s experience (the absence of checkout registers for the last years in Apple stores is telling), the Point of Sale is becoming the customer interaction interface within stores. The focus on personal names (introduced notably by Square) is key in this evolution. Recognizing people by their first name is a great feature for IRL CRM.

Impact of the reorganization of hardware and softare for the POS

The Point of Sale market is following the reorganization of hardware and software that is seen across other industries. Software wins over hardware. The mobile phones and tablets are at the core of the hardware experience (run the applications, connected). The customer’s mobile phone will become the main interaction screen (I tend to be skeptical of additional tablet screens in store, customers already spend most of their time glued to their own screen).

iBeacon in an Apple store

Physical adds-on, such as Bluetooth beacons (Apple, Paypal, Estimotes) provides the ultra-localized experience to interact with the products themselves, but should disappear when products become connected themselves

Market dynamics

There has been a flurry of POS and wallet startups following Square’s success. However not a lot of them have shown as much success. More established players, such as Paypal, getting in the market have not helped.

User acquisition is particularly difficult in B2B markets, especially for small and medium businesses (though signing mainstream chains is another important challenge). This plays a role in the vertical acquisitions we have seen were acquirers/processors have moved to buy Point of Sales startups. Their customer acquisition weight is just too important and their margins are being compressed by rates reduction and competition.

On the other hands, the demands of data enriched services is pushing for more horizontal organizations where connectivity to payment, accounting, global CRM, ecommerce and devices are becoming key. This is where Amazon acquiring POS software could fit. Square’s success as a stand alone company also depends on it.

Where will it start?

We are still very early in this game but there early indications can be found:

In service businesses. They have been facing less competitions than merchants businesses from the online world and, after the Groupon experiment, are looking to build repeat business.

In the expension of Bluetooth LE. It couldbe the first local connectivity technology to reach the masses. Bluetooth LE success might not come from marketing but from recreating value with the customer in enhancing support.

In online businesses going offline. New stores opened by brands such as Bonobo, Warby Parker are interesting to follow. But more importantly Apple is leading the way here, the Apple Store App is probably the most undervalued example of the new Point of Sale paradigm.

As the POS is moving from accepting payments, to accepting wallets, to enhancing the customer relation, there is plenty of opportunities for startups to help reinvent retail in the digital world.

Understanding a Bitcoin advocate

After an eventful last year, 2014 is starting with more debate and conversations around Bitcoin.

Bitcoin 2013

It is often said that understanding Bitcoin is too technical for the average user (and at core it is, for a good summary of Bitcoin, this things the following is one of my favorite posts : ), but understanding Bitcoin advocates might be an easier tasks. In my view they split among 3 categories:

> The Libertarian: he is most likely an early Bitcoin supporter. As mentioned by the ECB, his economic background comes from the Austrian school , they see in Bitcoin a competitive currency with the main advantage of not being linked to any State. Often a goldbug as well, he considers  the limit of 21 million (or so) Bitcoins an important advantage as well. The deflationary nature of Bitcoin is an asset.

How to spot him: look for mentions of Hayek, fiat currency, algorithmic currency

> The Speculator: he bought Bitcoin at X and now it is at Y. Will share any rumours mentioning a high Bitcoin price. Bitcoin the new currency in China: share. Bitcoin coming from Alpha Centauri (thanks @azeem): share. He is a Libertarian when needed and a Protocolist as well.

How to spot him: look for retweets of Bitcoin going to $1M posts

> The Protocolist: often a techie, he sees Bitcoin as the equivalent of the internet protocol for payment or even further as a distributed ledger for all contractual agreement between a number of parties. Notably, the much lower transaction fee on the Bitcoin network appears as a great alternative to the 2.x% of credit card networks.

How  to spot him: look for mentions of interchange, remittance and http for payment.

In truth the distinction is not that clear and most people interested in Bitcoin are a blend of various proportions of these different types (and most likely different at different times).

There is also a Fourth category, one that does not have so much public exposure and that would be interesting to know more about:

> The Consumer: I am talking about the Chinese investor that use Bitcoin for Tax/Currency evasion. The underground population that transacts with Bitcoin. But also the buyer on, Zynga or other more mainstream ecommerce sites. Maybe the best way to start is to look for technical services providers such as hosting, etc. Because it is difficult to isolate commerce from other flows, the actual volume is tough to estimate at the moment. If you have bought (as more than an experiment) services and products using Bitcoin, I would love to hear your feedback.

Welcome to Banks’ new competitors

Founded in 2006 by a single repeat entrepreneur. IPOed the next year. Raised a total of USD 232 M, including a last round in 2013 of USD 150M that puts it firmly in the dollar billion valuation club (aka the unicorn club) …… If you have not figured out which company it is, I will just add 3 words:

– All Blacks

– Sailing

– The Lord of the Rings

If you still have no figured out which company it is or why I am starting to speak about Xero on a financial services / banking blog, then you are pretty much in the same position as most Banks.



The same can be said of Amazon. Founded in 1995 by a former Wall Street Hedge Funder, starting as on online bookstore and now the biggest ecommerce seller and platform online.

How Big is Amazon


What do these two companies have in common? They have both started to distribute financial services products via their platform, whether it being working capital loans on stocks or data on small and medium business financial performance.

One way to look at Banking is that it is a data arbitrage business, whether by exclusivity on data itself or control over the aggregated value of data. That data to simplify enormously is used to arbitrage interest rates between deposit and credit. As software is hacking the world, the ownership of financial data is moving from the existing financial players to the new global platforms. 

Interestingly, businesses are more and more leveraging several of these platforms at the same time. For example, online retailers may use both Amazon and Ebay to distribute their products or local competitors. Several online accounting platforms are competing for medium and small businesses, with the aggregated accounting data across companies distributed across them.

Therefore  lot of the early competitive pressure we are seeing is whether each of these platforms have a critical size (and the business appetite) to be an exclusive channel for financial services? Or whether innovative cross platforms financial services providers, such as Kabbage or Fundbox will prove that most of the value lies in cross platform companies? One thing is sure, the market for non-bank financial data, whether productized internally or distributed via APIs, will boom on the next years. 


Braintree takes Venmo Touch international with AMEX > what it means for credit

With Simple and now AMEX on board as preferred marketing partners in the US and UK, expect Braintree to follow a similar playbook in future markets. There also could be some significant competition in these initial two markets from other payment card companies (Visa, Mastercard, Discover, etc.) seeking to get their cards installed into Venmo’s valuable default payment card real estate.

via One small step for Braintree, one large step for mobile payments: Braintree takes Venmo Touch international | PandoDaily.

Spot on, multiple card selection on mobile within 1 click payments / facilitated payment (à la Uber) is not a UX problem to solve. It just won’t happen. 

This is why it is so smart from Simple (disclosure, Anthemis is an investor) and AMEX to partner with Braintree to become the default card. But the implications are much more important. With a single default card, the position of credit card is put at risk. Credit Cards are tools made for a card selection environment, with people doing arbitrage while looking at their wallet between debit, credit, credit limits and points. This behaviour is not possible in a 1 click environment, even less in a seamless environment.

Additionally, studies show Gen Y is moving away from credit cards (I am definitely part of that population). According to a recent FICO study ( “16% of people aged 18 to 29 had no credit cards in 2012, up from 9% in 2005. As a result of lower credit usage, Generation Y’s average outstanding credit card debt was $2,087 last year, down 32% from a $3,073 average for young people in 2007.” According to Frederic Huynh at FICO “it stands to reason that the Great Recession has influenced, to a certain degree, consumer credit behavior as well.”

There is also pressure to move some or all of payments off the card network to direct debit. A potential in Paypal’s acquisition of Braintree is for Paypal to export its arbitrage business model to Braintree. And Dwolla’s effort in building an alternate network is the ultimate push in the direction of direct debit.

This is a great opportunity for credit innovation. What we are seeing in B2B online lending with Kabbage, Paypal and Amazon will very soon spill over in the consumer world. B2B is the low hanging fruit as the market places (Ebay, Amazon), einvoicing networks (Tradeshift), online accounting tools (Xero) act as booth data providers to support credit risk scoring and aggregators to improve cost of origination. But Consumer Credit will be next and the mobile payment providers have an amazing opportunity to act as the future credit platforms. New Banks, such as Simple will also be the winners of this world. The card is only a tool for payment, credit is better managed within the budgeting, goal setting, savings experience of a smart bank.

Credit Card is an obfuscation, the credit and the payment mean are two disconnected products, the digital unbundling machine will soon make it a reality.

Tradeshift’s Christian Lanng on Capital8, Financing, and Supplier Adoption « Spend Matters

Finally, the last parameter is funding cost, for supplier financing. This is important because Tradeshift already has very advanced semantic analyses of content (this is in fact how we build CloudScan). We use this to give CapitalAid and other financing parties access to a proprietary risk model to gauge factoring risk.

A lot of material is being considered in this model, including all past transactional data. This has led us to a model that has low funding costs with much less than 3% bad debt. We can guarantee a pretty high yield, and the rates of return are in the range where hedge funds are buying into the model.

via Tradeshift’s Christian Lanng on Capital8, Financing, and Supplier Adoption « Spend Matters.

< Interesting that it is Tradeshift that appears to supply the risk model instead of each financing company? Or is it because of Capital8 close relationship with Tradeshift? In a sense it could be a model that is close to what Lending Club has put in place with its investment arm. Standard grading and the level of exposure is defined by the portfolio strategy.

Payment startups: thoughts on acquisition cost, payment processing cost and marketing services

With the cambrian explosion of payment startups, clones tackling mobile, NFC, QR codes, cryptography etc. it is quite a confusing market, especially when looking for the startups and companies that will shape the market. One possible framework to look at payment startups is to focus on the 2 main competitive  forces in the market in terms of merchant services.

– Acquisition cost

Because in our current card dominated world there is a relative equilibrium on the payment processing costs (crumbling under government push?), the main (only(?)) way to compete is to lower acquisition costs. In my view any price premium will be driven down by market forces (relative to the risk component included). In this perspective the main trend in physical and digital world is self service. API driven payment companies (Braintree, Stripe for example) have lowered the acquisition cost of merchants by reducing significantly integration costs and in Stripe cases, documentation on the merchant side by accepting more risk internally.

The existing sales, software integrator model has difficulties competing with these new players. In a typical case of disruptive innovation use case, they are picking up first the lower part of the market, high risk merchants and startups. But they are doing it at a pivotal moment.

It is important to look at there merchant client base in the perspective of the ongoing digital transformation of all industries. In fact their merchant base needs to be looked at as a venture portfolio. Only a couple of winners make most of the gain. But if you are processing payments, it is quite phenomenal to have client with a 10% weekly growth rate. Paul Graham has a very good post on what growth means in the startup world ( Think what Airbnb meant to Braintree’s growth. There is also some network effect as winner attract winners and good reputation in the startup world matter a lot as referral. (note: I am being somewhat of an absolutist here, user support has also been one of Braintree’s forte).


Screen Shot 2013-07-18 at 18.46.15



–  Payment processing cost

This is the red herring of the payment world. In that perspective startups like Dwolla, Technology protocols such as Bitcoin, Supermerchants partnerships such as MCX are the same. They all target  much lower cost of transaction vs the credit card networks, in most cases a few cents vs a fixed percentage.

This is different from arbitrage business model strategies such as Paypal’s where you find a way to reduce the cost of some of your transactions which allows you: to have little/no margins on others, increase your overall margin.

However so far, the value proposition of lower transaction costs has not proven enough for massive merchants acquisition. Obviously this is because changing the rails of payment means changing the consumer behaviour at point of sales, getting him a new wallet or payment mean to complete the transaction. This is a long haul process .. and that does not prevent to have a successful merchant acquisition strategy beyond cheaper processing. Additionally, moving risk around does not make for a cheaper proposition overall. No chargeback  does not mean an insurance cost component will not be added in some forms to a transaction. 

I think for the rail changing players, a combination with the first strategy will be necessary to grow. Grow on the existing rails and switch the population to new rails, while committing to passing the price difference down to the merchant. Or focus on a market where cards have much less penetration.

What about marketing tools, coupons etc ? Aren’t they value ad services for the merchants? 

So far we have not seen much success on this front and I think this is because using transactional data has put too much emphasis on discounts, coupons, instant buy strategies. Mobile, connected devices will not make people more discount, coupons push marketing addicts than television and comfy living room has made QVC shopping the most popular way to shop. Impulse buying, coupons are an important part of advertising/marketing but is not the solution to everything. Especially when you have Amazon in the picture. In the end most merchants prefer to sell at full price vs discounted price. 

On the same idea, selling CRM tool to small merchants is somewhat of a contradiction. Most small shops, if they are successful don’t need to know who their best customers are, they already do. They know what they buy, like etc. Even a giant like Starbucks is successful at it, any morning regulars is known by name and type of coffee. There is a potential for marginal improvement (still a good thing) but no revolution /”I cant wait to get this” factor.

However they are other services that can be tagged to payment and in my view bring more value to merchants (think Square business dashboard as a start)…

The payment startup market is crowded and only  a few will survive. The coolness factor of mobile, code will not be enough to succeed.  On the startup front, it seems to me the merchants will make the winners,  in the same way as a few startups tend to make a whole portfolio successful.




Google I/O payment announcements: is a revolution with no insurgency possible?

Google’s megafest was happening last week, with big announcement for Hangout, Google +, Android and Search / Maps. Among these were a couple of announcements related to Payments (but no major push from Google since Wallet 2.0 last year  and no Google Card):

– The headline-grabbing announcement – send money via email.

Wow, dollar button in Gmail, massively sexy and headline worthy …..


… with the main issue that, in my view, P2P payments do not drive behaviour changes. Various startups, established players (Obopay, ClearXchange, Popmoney etc..) have tried and not succeeded. I am betting Barclays Pingit has not found major traction with this use case. The main reason is not implementation quality. It’s just that people don’t do that many P2P transactions relative to Commerce transactions and are much less attached to those. Frequency is a major driver in behaviour changes (as with contactless cards) people just forget they have it if they don’t use it enough. Also this is currently limited to the US only and while free with a linked bank account or prepaid Google card, it will cost you 2.9% (minimum 0.30$) from a debit or credit card (note: Google is not willing to take a loss on these non-commerce transactions …)

Also, while I am sure Google is focused on this, this could become a massive risk challenge with compromised Gmail accounts. Extending it beyond US only (it could be really powerful in remittance markets) will require much more work

My prediction: in this current form this will have limited traction and remain relatively small. 

The more interesting announcement was in my view Google Instant Buy:

Per Google, 97% of mobile shoppers abandon their cart. The solution is broadly known, with a central point for registering Id, address and payment means. Google’s solution appears quite complex:

– It works on the existing credit card rails. In more details, it interfaces a virtualised Mastercard debit card with the users payment means to connect with the merchant processor as a Card Not Present Transaction. As a consequence, Google is taking a loss on every transactions made through the system.

– It still requires merchant / app creators on boarding. While it runs before the payment processor, it still requires implementation on the merchant side (though Google claims this is an easy implementation).

There are several issue with this solution:

– It leverages Android to help on adoption but this may not be as much of a strength position as it looks. Every app with a strong enough sign in infrastructure could  provide the same simplicity or has done so. Amazon is the main example. Airbnb, while part of the Google Wallet launch, uses Venmo Touch (from their payment provider Braintree) on the iPhone. iOS is just the start if we are to believe this: Paypal can do this as well.

– Instant Buy may become major on the Android platform, for new mobile only services, but will face strong competition from other devices platforms and cross devices platforms (Amazon, Ebay etc…). For a strong enough merchant, driving customers through their payment system while not disclosing additional data to Google will become a major focus. It’s no surprise that Google Request full line items details in the Instant Buy implementation.

“The full wallet request specifies purchase details. You should include information such as the line items in the user’s shopping cart, purchase total, and a few other parameters. Google recommends that you include the description field so that you can use it in the receipt to describe purchases made with Google Wallet. This parameter describes the backing instrument with the last four numbers, such as “VISA-1234 via Google Wallet”.”

– Google is losing money on every transactions (on difference between cost of customer card and their rate of 160 bps), that should be compensated via advertising. This is not new for Google in terms of Business model but the difference here is they have no control over the costs. In every other services, their infrastructure cost structurally trends down (Moore’s law, etc..) but payment is one of the few area where this has not happened. Nothing in their current implementation shows a focus on addressing this problem (they are limited to Mastercard CNP). They still need to convince merchants to use Instant Buy (vs pushing a standard for checkout information), I hope they can leverage it in some ways to propose new payment rails.

My prediction: this will face strong competition even on the Android platform and will have difficulties expanding beyond.

Taken at first view, these two Google I/O announcements show a great potential … but appear limited, in some was because they are constrained by the payment platforms they are built on. Google’s “revolution” is a derivative on existing rails; I wish they would show a more insurgent approach and build to improve / replace those. They need to convince merchants to onboard Google Wallet, a radical approach could help was well.

Note: this post is indebted to Tom Noyes twitter exchange and blog post:

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