Open Season

By Lauri Giesen

PayPal, followed by Visa and MasterCard, have thrown open their networks to outside developers, sparking a geyser of payments innovation while slicing R&D costs. Why didn’t they do this a long time ago?

You’ve heard of open platforms. Well, now they’re coming to the payments business—and with a vengeance.

While alternative-payment companies such as PayPal Inc. have had open platforms for some time, recent moves by payments titans Visa Inc. and MasterCard Inc. are taking the concept to a new level.

Once owners of proprietary payments networks where only a limited number of formal partners were allowed to write software applications, Visa and MasterCard are now setting the stage for a plethora of outside software developers to come up with new applications.

This is expected to dramatically accelerate the development of new payment options. “This absolutely changes the merchant-acquiring business in terms of promoting future innovation,” says Adil Moussa, a senior analyst at Boston-based Aite Group LLC who follows acquiring. “It allows companies to write directly to the APIs [application programming interfaces].  And that says a lot in terms of the potential for new applications and innovation in payments.”

“This is not dissimilar to how the iPhone’s open platform resulted in the proliferation of new applications for mobile telephones,” adds Zilvinas Bareisis, a senior analyst with Celent LLC, also in Boston.

‘They Want To Get Started’

The most obvious benefit of these open networks is that software developers can shorten the time it takes to bring a new product to market. By using tool kits provided by Visa and MasterCard, developers will be able to go right to the heart of specific applications rather than spend time writing duplicate software code to provide basic payment functionality.

Another benefit is how open platforms expand the number and size of software companies involved in the payments business. Previously, many small startups didn’t have the resources needed to be considered a partner of Visa and MasterCard. And often only companies that had a strong background in payments typically could be considered.

“By opening up the platform, they are allowing hundreds of companies to write new applications,” says Moussa. “There are lots of good applications out there and almost anyone can come up with new ideas.”

Many of these new developers will be small niche players. “This is not targeted toward the Oracles and Microsofts of the world. It’s going to be mostly smaller players—individual developers with creative ideas who needed access to the payments networks. And they’ll each be concentrating on new niche markets and applications that most of us might not even be able to conceive of today,” says Bareisis.

Visa’s move toward open platforms came about as the result of updates to the Authorize.Net unit of Visa’s new CyberSource Corp. subsidiary. Authorize.Net operates a payments gateway for e-commerce merchants, a service it re-sells through a network of independent sales organizations.

New features include a workflow system that enables developers and integrators to create an Authorize.Net test account, download software developments kits (SDKs) in the major programming languages and test transactions. There will also be sample applications with templates for faster development of payment products.

While Visa’s announcement was made in mid-October, Visa executives had reported in early January that they had already sent out “hundreds” of SDKs to interested software developers and have seen a jump of between 15% and 20% in the number of test accounts with outside developers, according to John Bodine, Authorize.Net vice president.

“There has been a huge growth in the development community itself during the past year and we are finding that software developers are excited to see how our tools work and they want to get started,” Bodine says.

Authorize.Net has also set up online community forums where outside software developers can post technology questions and engage in peer-to-peer discussions about their work.

And while Bodine says Visa is just finishing up “stage one,” which is to test and enhance the network to facilitate these outside developers, he expects there could be some new applications coming to market as early as the first half of this year.

Meanwhile, MasterCard announced a plan in mid-May by which it would make its platform available to developers through APIs. This initiative springs from the new MasterCard Labs R&D unit the company established in April.

MasterCard executives did not respond to requests for interviews for this story, but weeks after the announcement executives were already reporting a number of inquiries from outside developers.

‘A Godsend’

Still, the pioneer in the open-platform movement appears to be PayPal. In November 2009, it turned its global payment engine over to software developers with an array of new APIs. This was done at the processor’s first developers’ conference in which it debuted its new Platform X.

Since that time, PayPal reports that nearly 50,000 developers from 129 countries have jointed Platform X and approximately $175 million in payments moved over the platform during its first year. Although most of the 50,000 companies are still in the development stage with their products, already 1,000 new apps have been launched on Platform X, according to a spokesperson.

For its part, PayPal welcomes Visa and MasterCard into the open-platform arena. “We are pleased that they’re following our lead. It’s important to note that the card companies are important partners for PayPal. Our infrastructure drives incremental volume to these networks and by expanding the electronic payments universe, we expect to increase that volume,” the spokesperson says.

Similarly, software developers are welcoming the new openness among payments networks. San Francisco-based Payvment Inc., for example, has been working for about 18 months on PayPal’s Platform X to develop and offer e-commerce applications for Facebook.

“PayPal was a Godsend to us. It allows us to focus on our core business, which is letting merchants sell on Facebook, and we don’t have to worry about handling payment transactions or be concerned about card fraud. PayPal made it easy for us to be in business through their APIs,” says Christian Taylor, Payvment CEO.

While Payvment is committed to working through PayPal for now, Taylor is pleased that Visa and MasterCard are now additional options for companies such as his.

“We don’t have an exclusive with PayPal and we’ve talked to Visa and MasterCard, but there is nothing in play right now,” Taylor says.

‘Full Payments Suite’

There also appears to be a movement by some payments processors to ease the burden for developers that choose to go through third-party processors to access the networks.

Atlanta-based First Data Corp. has long offered developers access to payments networks through the merchant acquirers for which it provides processing service. But in the past year, First Data’s merchant-processing unit has been working to open up its access to a greater array of developers.

First Data has focused on sending SDKs to developers working in the e-commerce arena. The coming year will be focused on getting tool kits into the hands of brick-and-mortar players, according to Bruce Dragt, First Data division manager.

“These tool kits educate developers about the ability to write simple code so that they can expand upon their applications. This should broaden the base of people who are interested in working with us,” Dragt says.

Dragt says more than 100 new software companies began working with First Data last year and he expects to see significant growth again this year.

While developers can now write directly to Visa and MasterCard, Dragt believes there will still be companies that will want to work through traditional merchant acquirers and processors.

“We provide a full payments suite. Rather than have to go to Visa, MasterCard, and other networks directly, they can develop one link to us and we can get them to Visa, MasterCard, American Express, Discover, the electronic funds transfer networks, electronic benefit transfer networks, check-authorization companies  and any proprietary prepaid networks they want,” he says. “I think some developers will want to go directly to Visa and MasterCard but others will continue to go through merchant acquirers and First Data. We have hundreds of acquirers in the market that approach developers about payments applications.”

‘Managing Data’

Where all these new developments will come from is anyone’s guess, but most are expected to be niche-based. Visa executives say these niches could be based on vertical markets such as special payment options dedicated to doctors’ offices, fast-food restaurants, insurance companies, or hotels. Others could be centered on the devices used to initiate payment, such as kiosks, e-commerce, mobile devices, and retail point of sale.

Similarly, MasterCard has listed customer relationship systems, online games, e-commerce sites, e-wallets, mobile apps, and payroll systems among potential applications that it has in its sights.

“These innovations can come from anywhere. The companies developing these applications don’t have to even have payment expertise. If they have an idea for a new way to do business, we can provide the payment expertise,” says Gerry Sweeney, head of global e-commerce for Visa.

One example of how this might work is a project with the New York City Department of Transportation, Bodine explains. The city wanted to replace its old parking meters and found Parkeon Inc., a spinoff of Schlumberger’s E-City Solution division that has a U.S.-based operation in Moorestown, N.J. 

Parkeon had a wireless parking meter that could accept New York City transit cards and credit cards. But Parkeon did not have all the payment expertise in-house that was necessary to facilitate all aspects of the payment. So Parkeon and the city worked with Visa and Authorize.Net to come up with a solution. Now other cities in the U.S. are looking at the project, Bodine adds.

Another example is Kickstarter.com, an online company that helps artists raise funds to finance their projects. With Kickstarter, individuals can pledge money to support artistic endeavors. But individuals’ inclination to make payment is based on whether enough other people also pledge funds.

“Previously, this was too much of a niche application for Visa and MasterCard. The difficulty wasn’t in making the payments themselves—that is easy enough. The trick was in managing the data to see if a payment was required or not,” says Celent’s Bareisis. “I think managing data related to payments will be a big issue in the next few years.”

And one of the examples that PayPal points to that came about through its open platform is iConcessionStand, which creates a new way for customers to bypass long concession lines at sporting events. Guests at stadiums can order from a menu on their iPad and be alerted when their food is ready for pickup.

While the new openness is expected to benefit a wide range of vertical markets and applications, the bulk of the greatest innovations may come in mobile and e-commerce, experts say. “I think mobile and e-commerce hold the most potential today. I don’t think we’ll see a whole lot of innovation directed toward the traditional point of sale in retail,” Bareisis says.

And while observers talk about how “just about anybody” will be able connect to the networks, that is not quite true. There will be security measures to keep out fraudulent companies and those whose security measures are not up to par.

“You can only connect to VisaNet in certain ways and we will be able to tell by the connection method if a company is operating correctly,” Bodine says. Additionally, he says all participants will have to adhere to standards set by the Payments Card Industry Security Standards Council and Visa will evaluate the firms’ management and their track records.

While the open platform is expected to help software developers, some believe there will be a benefit to Visa and MasterCard as well. “The networks don’t have to worry about new product developments and they can focus their resources elsewhere,” says Moussa. “This takes the burden off of Visa and MasterCard.  Before they had to spend a lot of time researching potential partners and making sure they have the capabilities and time to work with these outside parties.”

And while Visa’s Sweeney agrees that much of the future innovation will come from outside companies, he adds that Visa will continue to work on unique applications as well. “Visa will continue to innovate our core products in payment applications while much of the outside development will come from folks who are innovating on the edge,” he says.

Why Now?

With so much benefit expected to come as the result of open platforms, why weren’t the networks opened up before?

The networks say they are responding to the rapid growth in outside developments and only recently have they had some of the infrastructure in place to facilitate these changes. Still, many experts believe competitive factors and the change by both companies from bank associations to private companies were driving forces.

 “Associations tend to be less innovative and you don’t always have the flexibility to be creative. But also I think the competitive pressures from Amazon and PayPal, which already had open networks, forced Visa and MasterCard to succumb and open up their networks,” Bareisis says.

When announcing MasterCard’s plans last May, however, Josh Peirez, then chief innovation officer at MasterCard (who has since left the company), said that MasterCard was not influenced by Pay­Pal’s experience. “I’m always cautious about accepting the PR put out by my competitors,” he said in May.

Still, Payvment’s Taylor agrees with Bareisis’s contention that new payment competition in the market has put pressure on Visa and MasterCard to ditch their exclusive reliance on proprietary networks. And he thinks this might just be the beginning.

“The whole payments business is sitting on top of an old system. We have all these new startups and so much innovation coming out, but it is being placed on top of an old infrastructure. I think we will see a driving force coming about to change how electronic payments are made. Right now there are so many parties involved in making a payment that it is a lot more complicated than it has to be. Hopefully the payments industry will get smart before it is too late,” Taylor says.