Monday, November 9, 2009

Payment services and user experiences

Recently I have been doing some research around businesses around online payment services.

The internet is attractive essentially because it offers experiences in real time without any consideration of physical borders. With a few clicks, you can buy a piece of software or stream a movie right now, no matter where you are. You can send an email to anyone in the world, and they will receive it immediately.

But there is a glitch there: whenever you have to pay for anything, some serious obstacles get in the way. Many websites believe it's enough to accept two or three major credit cards. They forget that credit cards are not widespread in developing countries, and that even in developed countries children and teenagers (mostly) don't have their own credit cards. Credit cards transaction costs are also very expensive for websites and almost automatically corrode any margin from small ticket businesses such as virtual gifts and in-game items.

So the ideal payment service would be one that:

(a) is perfectly scalable, working fine for payments from 5 cents to 500 dollars;

(b) does not require the user to have a bank account or a credit card;

(c) works in every jurisdiction - there is few things more annoying than having your credit card turned down because it comes from the wrong country; and

(d) is safe, that is, has a reliable technology to prevent frauds and eventual hacking of the system does not spill over to your bank account.

It's clear that meeting all those criteria is virtually impossible. So it's no surprise that despite PayPal being a very successful business, there are many many micropayment start-ups popping up everywhere, each one trying to focus in a niche or offering some different value proposition.

As with many things online, the network effect will be a deciding factor: having the best payment platform means nothing if your business development team failed at making partnerships and your solution is not accepted anywhere. PayPal might look ugly and offer a less than optimal user experience, but the are very widely accepted, and that is their real competitive advantage.

Interestingly, Amazon might become a large player overnight. Amazon already owns payment data for about 200M users, gathered since their early days. Amazon also has the trust of their users. If now Amazon manages to convince website owners to sign in for Amazon Payments, Amazon might turn overnight into a major headache to PayPal.

Cellphone carriers are also in a good position. They already have a billing relationship in place with their subscribers and, since communication happens over the cellphone network, the data infrastructure piece of the equation is already in place. Finally, with about three times more cell phones than landlines on the planet, it's fair to say that the potential is huge, especially in countries with low broadband penetration where the primary mean of internet access is (or will be) the mobile phone itself.

Unfortunately, one of the most complicated parts of this business is regulation, and I don't expect this to change so soon. In the contrary, since 9/11 countries have enacted increasingly restrictive rules about anything resembling international money transfers.

Let's wait and see what the future brings us.

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