Alternative payment providers see opportunity
Posted on Tuesday, August 28, 2007
Capitalism is alive and well in the payment processing industry. Since 1949 when Diners Club issued the first credit card, the credit card issuing world has been highly lucrative. It's become even more lucrative considering that in the past six years the fees that issuing financial institutions banks charge on every credit card transaction, known as Interchange, have increased an amazing 117%. That increase of profits has come directly out of the bottom line of every merchant who accepts credit cards a form of payment.
Those profits have also lured in quite a few players who want a piece of the action. Companies like PayPal, Google Checkout, Amazon, Tempo, Bill me Later, and Gratis Card are just a few who are trying to capture a small part of the pie. Others like Dream Play Ventures have been trying to squeeze themselves into the value equation by offering valued added services on top of processing like targeted advertising.
The opportunity for these companies is that Visa and MasterCard, which collectively account for something like 70% of all processing volume, represent over 20,000 financial institutions that are fat and happy making a lot of money with their current revenue model. They've unilaterally been able to raise their fees and dictate their terms for years now. They've created a lot of animosity in the process and left the door wide open for new entrants.
Each of the alternative payment providers has a different value proposition for merchants. Companies like Gratis Card and Tempo are making a play for lower cost interchange which offers merchants a reprieve in their credit card processing fees. Their focus is also primarily on swiped merchants like restaurants and retailers. Other providers, who are focused on ecommerce, like Bill Me Later, PayPal, Google Checkout have created value propositions that include higher conversion rates, customer convenience and accommodating buyer security fears and preferences.
There is certainly a land grab going on right now as all of these providers are working both sides of the demand and supply equation. They need consumers to demand the service from merchants and merchants need the demand to justify the option. PayPal and Google obviously see this and have been trying to buy market share to secure a top 1, 2 or 3 position. There are many more entrants that what I've listed and their not all going to make it. Unlike the current boom in social networking where new entrants can be successful by carving out a vertical, payment providers including alternative payment types will have to achieve some level of critical mass to remain viable. If they don't, they'll end up like Peppercoin, a micro payments provider, who raised over $10MM and then got swept up for something probably substantially less than that.
