December 24, 2013
The Emperor Was Naked, I Had To Be Honest, Now It May Be Obvious
I just finished a call with a Venture Capitalist who famously invested in a well known and famous payment startup. The call was prompted by the recent news of Amazon acquiring Gopago and how I presented in private and public for over 5 years, ways that Amazon will enter retail payments just as Apple would. He was rather shocked to note that my early advice to this payment startup was ignored and it had a rather large financial impact. Yep, I was shocked myself back then, apparently it was heretical and charlatan to suggest this to a startup. I did not get the be dishonest memo.
The retail payments space will see a radical change in 2014 as Apple and Amazon both will be entering into this very crowded space of assisting small to very large merchants accept payments and to construct true wallets systems and technologies to enhance the consumer experience in ways not yet thought of. This will not be good news for any company that has assumed this would not happen, most particular, payment startups.
The perils of any startup are to ignore history and to be convinced that what they are doing is truly a textbook disruption. I have not seen a single payment startup that is a textbook disruption', as all of these companies use the services of Visa and MasterCard or the ACH system. The road one takes if they assume they are disruptors and they are not is a dead end. The results are and always will be the same, huge amounts of lost time and money wasted on projects that should have been obvious, a dead end.
This folly always seemed to remind me of The Emperor’s New Clothes, a story that was cemented into my mind when I was 5 years old. Many startups are fueled by a mentality that they are doing something that is unique and historically so different, that new rules will be created for judging what they are doing.
All of this funny business creates a culture that literally becomes blind to reality. So much so, that it has been the central cause of a vast majority of payment startup failures. For many payment startups, the company, the founders, the mission, the product, the time, the talent and the money all get contorted around this warped reality. When the Emperor is really naked, and someone points it out, it does not go so well for that person. Some call this Silicon Valley/Startup arrogance; I call it all quite regrettable.
The Naked Emperor with stylish and disruptive undergarment.
I get asked advice about the huge opportunities in the payments market and formulate insights based on empirical praxis and the realities of the Practical and Pragmatic merchant. Have no doubt, there are huge opportunities for any company especially very talented startups in payments. There is a huge need for innovation. The regrettable part is, it is not in the areas that most startups wind up going.
Back on Mar 21st, 2012 I answered a question: Online and Mobile Payments: Who will enter the retail Payments market next? This was a very controversial answer in a number of ways. One was I made the cardinal error and I presented a very logical and reality based thesis that some startup payment companies with dreams of creating a mobile wallet may want to check in with the direction that Apple and Amazon is moving in. Some very talented companies I was working with that were ready to enter into the mobile payment space choose to take the advice and move into other areas. Other startups choose to ignore the advice and are now going to face pressure from the two largest companies in the world, Apple and Amazon. These companies will join PayPal and the 1000s of other legacy payment solutions.
If You Don’t Own It, You Don’t Control It
The problem for even what seems a successful payment startup is the fact they do not control the payment network (Visa, MasterCard, ACH), the hardware platform (iOS and Android devices) and do not hold the payment card numbers of millions of active consumers (they sell no products to consumers).
Hardware Platform Ownership:
Active On File Payment Card Consumers:
One will notice that the dominance these companies have in these two examples took decades. There was no disruption and none of these companies started out in payments (PayPal only prospered when eBay acquired them).
I will not say it is impossible to challenge these highly successful and rather aggressively competitive companies. I would just ask any startup, what problem are you trying to solve?
Amazon started Amazon Payments over a decade ago. They did not always innovate but they did try with things like the PayPhrase. This was an early online wallet system that actually was successful in some limited ways. Amazon quietly shut it down in 2012. Amazon had the vision to support Kickstarter when few understood the company and today the Amazon Payments platform is central to Kickstarter’s success. Recently we have seen Amazon reawaken with a new Pay With Amazon online wallet system. The service is just a few months old and it already is becoming quite popular with some websites.
Wait! Isn’t Amazon A Competitor To Small To Large Merchants?
With the acquisition of Gopago, it should be very clear that Amazon will enter into retail payments. However I would caution anyone from assuming that this is just a very simple reaction to Apple, PayPal and Square. It is not. Amazon will craft a rather new and unique basis for just about any retail merchant to consider connections to its service. Of course some of this seems to be absurd, Amazon is a huge competitor to many businesses and why would they trust this to a competitor. The answer will be simple to understand, Amazon will send paying customers to these businesses, over 200 million of them, and counting. It is really that simple.
Amazon has delivered billions of sales to over 2 million merchants already. This number will likely double during the holiday season in 2013. Understand this clearly, through the Amazon platform Amazon lost the sale, but in turn, sent the sale to a smaller merchant and made a small part of the transaction. This system is not a startup pitch deck, some crazy theory, it has been a working business model for over a decade and a half, just not very widely known.
This highly successful Win-Win model is going to be opened to retail merchants in 2014. I predict it to be widely successful. It will not impact Apple or many legacy payment companies, however it will impact companies like Square and PayPal. The startup will take the largest impact.
It will be argued that this is insane and no merchant will sign up for this. I suggest a remedial study of this program’s success with small and medium sized merchants. I would also suggest one understand the power of over 200 million active payment cards on file with data that suggest quite accurately what these consumers like and purchase. Read that again, Amazon knows what its customers like and purchase and they will be sending these customer to retail merchants.
Stated another way, almost overnight the entire world will literally become an Amazon Locker or Amazon warehouse and merchants would not only love it, they will wait in line to participate.
Win-win brilliance, Jeff Bezos style? You bet it is.
In 2014 keep an eye out for an Amazon Logo next to the Visa and MasterCard logo at your small local businesses. Amazon is getting ready to send 200 million customers to them and they will be using parts of the Gopago platform attached to a shiny new free merchant Kindle to make some of this happen.
Oh one last thing, Amazon may pay these merchants to use the retail payment system.
In so many ways and on so many dimensions, in 2014 your former enemy is now your closest friend.