Who needs a Gateway?

I have gotten this question frequently in recent months so I thought I would take a stab at answering it here. I worked at CyberCash which was the very first Internet payment gateway. (p.s. This was a very exciting time and I still have the receipt from my first transaction at Virtual Vinyards!!) The purpose for a gateway at that time was very clear. The only way to connect to your payment processor was through a dial-up or dedicated communication line known as a leased line. CyberCash acted as the protocol converter by enabling merchants to connect to us via IP and we translated that into the communications protocols that the processors were capable of supporting over leased lines out the other side of our systems. For the various start up companies that were pioneering selling over the Internet, the concept of not being able to use the Internet to connect to the processors was ridiculous and therefore a new business was launched. During the lead up to the bubble (& ultimate burst), new payment gateways came out of the woodwork on almost a daily basis. Eventually, as with most similar situations, there were too many and most are now gone. Eventually (about 5 years went by), the various payment processors began adding their own IP gateways and now all of the major payment processors have their own. Of course, the few remaining independent gateway providers were not standing still during these years. They added a variety of value added services to differentiate themselves such as fraud screening, sale tax calculation, alternative payment types, international payment support, FX capabilities, PCI compliance, etc... In today's market, often (as with Vindicia) the gateway function is there simply as a means to an end (delivering a comprehensive value added subscription billing and chargeback management service) rather than the defining capability. The other major reasons to use an independent third party is the fact that no one payment processor has everything a merchant typically needs and since most companies that have embedded gateway capabilities connect to multiple payment processors the merchant is empowered to switch (or as is sometimes necessary connect to multiple processors simultaneously) much more easily if for whatever reason their needs change.

Enrollment - the kiss of death for a new payment method

Tonite I was reading about one of the newest alternative payment players, Moneta and as is my calling, I decided to check it out. I went to the site and although they only have a few merchants functioning, one being Delta Air, I went ahead and enrolled. It was easy enough, the website was well designed, etc. (Note to them - one lame thing is the password challenge questions - they ask you to identify your favorite ____________ which is a bad idea since people's favorites change all the time. Alas, this is a very common mistake.) However, it is not an instantaneous process. They are going to deposit a few small transactions in my checking account which will take 1-2 days and then I am going to have come back and go through a verification process. This is a sound, but not particulary convenient method, to verify that I actually own this checking account.

If I was not a payment geek, I doubt I would go through this effort to enroll, remember yet another username/password and then what is the likelyhood that I will remember to use this method at some point in the future. Delta Air already has my credit card on file and they actively promote their own co-branded American Express card. And, what about my miles/cash back, etc.? Consumers that are concerned about not building up add'l debt can simply use their Visa/MasterCard branded Debit card. And, unless Amazon embraces it (which is unlikely), they are toast.

The inertia any of these new payment methods have to overcome is huge and a multi-step/multi-day enrollment method is one of the many speed bumps. But, with BillmeLater getting acquired for almost $1B by eBay, there will be no shortage of folks trying. One of the beauties of BillMeLater was they figured out how to move the enrollment to the back end, after you already made your purchase. That was brilliant.

Alternative Payment Defined

So what is an alternative payment? Do e-wallets qualify? There are various projections out there that say "alternative payments" will represent n% of all ecommerce payments by "n" date by such well respected research firms such as Javelin Strategy. Unless we define the term, these projections can easily be mis-understood and overstate the actual change underway. Some seem to believe that any payment where the consumer does not directly enter their credit/debit card number into the check-out form qualifies as an "alternative payment". In my opinion, Google Checkout, for example, is not an alternative payment. PayPal transactions that are funded by a Credit Card are not an "alternative payment". BillMeLater and eBillMe are clearly alternative payment. Taking Google Checkout and Credit/Debit card funded PayPal transactions out of the projections would reduce them dramatically.
What do you think?

What is a micropayment?

The answer - it depends on who you ask.
My definition is - a payment of $1.00 or less.
I would like to propose a new term (just what we need, right!) - Minipayment.
What is a minipayment? My definition is - a payment of between $1.01 and $5.00.
Then we would have a plain old "payment" which I would define as anything above $5.00.

There has been a lot of attempts to solve the micropayment problem. They go by the names; Digicash, CyberCash, MagnaCash, PepperCoin (all dead and gone) and the latest incarnations; SpareChange, PayByCash, etc. PayPal has toyed around in this area as well but without much success.

The problem is that if the consumer pays by Credit or Signature Debit (see earlier post), the cost of the transaction includes a flat fee of ~.20-.30 plus some % of ~2%. On a $5 transaction run through PayPal's (& now Google Checkout's) standard pricing, the fee works out to be 9%.

The "solution" has been to have the customer fund a larger amount, say $20 (works out to a 4.5% fee if a typical SMB merchant is using PayPal/Google Checkout). The problem with this are; a) the % of consumers willing to commit that larger amount on the hope that they will use it at one or more merchants that support it, b) the economics for the provider and the merchant of providing customer service around these very low value payments and c) for the credit card companies, the % of these transactions that result in disputes at a very high cost. Other solutions are individual game currency, pre-paid cards, mobile payments but each of these have a variety of issues whether it is; utility, accessibility, cost, fraud, etc.

I do not have a magic bullet for this one, I know too much about how all this works and therefore the challenges. I am always intrigued to observe the volume of noise on this issue and the amount of VC money that finds it way to the latest attempt.

p.s. The biggest challenge is not any particular technical issue. If the credit card companies or PayPal wanted to offer a viable solution, they could. It is the Incumbent's Dilemma in spades, however, since in order to price a micropayment service in the realm of what the merchant would desire, it would undermine the pricing models for the higher value payments since the fact is, it costs about the same to process a $1.00 transaction as a $100.00 transaction and at the volumes the big guys are processing, that incremental cost for the next transaction is pretty low. The other guys that are trying to solve it are faced with all the chicken & egg start-up costs whereas the incumbents are already at scale.

Feeback welcome!

Merchant Risk Council Conference

Just returned from Vegas where I attended the MRC conference. For those of you unfamiliar the MRC is an organization that brings together ecommerce merchants, card brands, alternative payment providers, payment service providers and other peripheral technology providers to network and educate. Of course, this was Vegas, so the rest of what went on I cannot discuss. The sessions provided adequate content but the real serious discussions were happenning in the hallways and byways. One of the interesting challenges is that very often the merchant side is represented by newbies who need 101 level orientation and so a significant amount of time and energy during sessions has to be spent on the very basics. Another issue that is always present is the hesitancy associated with revealing too much to competitors. Lastly, there is the fear of saying something that might alienate one of the Big Brothers in the room by digging into one of those many slippery slope issues that are so prevelent in this realm. If you were at the MRC and have any thoughts to share about what you picked up (hopefully nothing that antibiotics cannot cure) or perhaps topics that were missing, please let me know.

p.s. It was great that numerous people came up to me at the conference and commented that they have read and enjoyed the blog!

PINless Debit is not synonymous with Signature Debit

Signature Debit is used without a PIN but it is not PINless Debit. This is just one of the many perplexing realities of the payment world. You really have to leave your common sense at the door. It is true that you would not be using a physical signature to "sign" a PINless Debit transaction but you would be using your electronic "signature".

PINless Debit is a type of transaction where a consumer can pay a very limited type of bills such as a Utility bill, mortgage payments, etc. with the same card they otherwise would use at the ATM with a PIN or at the POS with a signature or a PIN or online as a signature debit. PINless Debit transactions are processed by the ATM networks such as Star, NYCE, Exchange, etc. The card may have a Visa or MasterCard logo on it but for these unique transaction types and with certain merchants who have been individually qualified by each ATM network, they would be processed as PINless debit. Interlink/PLUS and Maestro/Cirrus which are the Visa/MC PIN based POS/ATM networks do not support PINless Debit. These transactions are priced with a % fee but it usually caps out at around $.50.

Signature debit (used to be referred to as check cards) is where a debit card that also has a Visa or MC logo on it can be used for any retail or online purchase and when it shows up at the bank the funds are debited from the consumer’s checking (DDA) account. These transactions are priced like all Visa/MC transactions under Interchange albeit slightly less than credit card interchange but there isn’t a cap on the fee.

As an example, I have a Wells Fargo card that doubles as my ATM card and as my signature debit card. Depending on where I use it and which button I press on the POS terminal the transaction travels over a different processing network and the merchant would pay a different fee. If I were to use it at my mortgage company online, (and they had set up all the right back end systems and agreements), the transaction would run across the STAR ATM network rails. If I use it at a BofA ATM and enter my PIN, it likely would travel across the PLUS or STAR networks. If I use it at the POS and enter my PIN, it would travel across the Interlink network (owned and operated by Visa) and if I use it online to shop at AMAZON, it would travel across the Visa network.

Have I completely confused you? I have gone back and read this post over a few times and even I am confused. Oh well!

Not Exactly!!!

There seems to be a new alternative payment solution showing up on the scene every day. This week, two new ones appeared. Mazooma and Noca. Where do they get these names from? I visited both sites and right off the bat there is a huge difference here. It is obvious that Mazooma is the more sophisticated company, at least from a marketing perspective. Noca's messaging is clearly techy orientated. What is "not exactly"? I have to pick on Mazooma's messaging. They claim you are paying in "real time". Well, need I say more? Awhile back I tried and commented on another player in this realm, eBillMe. While I was impressed, I experienced the downside of these solutions compared to paying with a Credit or Check card. The merchant is not going to release the merchandise until they actually get the money which is probably going to take 2-4 days. I bought something from Buy.com and since I was paying with eBillMe, the merchant put my order into a pending status whereas if I had paid with a Credit or Check card, they would have immediately released it for shipment. As it turned out, therefore, they ran out by the time they got the funds (or notified confidently enough that the funds were on the way) and I had to wait over a week for them to replenish their stock and ship the item.

The bigger question for all of these types of solutions is will the customer bite? Will they want to enroll and manage yet another account with another username/password for a service they will likely only be able to use at smaller merchants and therefore it has minimal utility.

Final note, I enrolled in Mazooma and of course, their email confirmation back to me got trapped by my ATT/Yahoo webmail SPAM filter. Surprised?