A flood of payments initiatives has come out of the Valley, with more on the way. What is it about this business that gets the mercury rising out there?
Where do people in payments look for innovation? Yes, some of it shows up in Boston, a little in Chicago and even Des Moines and Utah. But for years now the hub of new payments technology has been anchored squarely in the Bay Area.
As with the nearby vineyards in Napa, there’s something in the soil and the air out there that leads investors to fund payments startups and established companies to branch into the business.
This month, Digital Transactions decided to take a look at what that “something” might be, to better define it and gauge its strength. If the industry can get a grip on this, after all, it might more readily predict what innovations are coming next, and perhaps even forecast the future a little more accurately.
The six profiles that follow detail the payments initiatives that have emerged from six Silicon Valley companies. These include three pure-play startups (PayPal, Square, and Stripe) and three established companies that have moved into payments to support their mainline business (Apple, Google, Intuit).
So what have we learned in putting this package together? One big lesson is as obvious as it is neglected: Silicon Valley companies—big boys included—don’t always get payments right. The sensational reception for Apple Pay, for example, can make you forget Google’s three-year struggle with Google Wallet and its even longer travails with the now discontinued Google Checkout.
Another lesson: Payments seems like a natural for the Valley. After all, it depends on three of the region’s strengths: information processing, hardware, and software. And it has a reputation of having been dominated for decades by bankers, a stodgy lot slow to innovate.
At the same time, there’s the ever-present blood feud between merchants and banks over transaction pricing, leading to the conclusion among the tech-minded that “there’s an opportunity for technology to solve that,” says James Wester, practice director for worldwide payment strategies at IDC Financial Insights, Framingham, Mass.
Add it up, and you have “a market that needs to be disrupted,” Wester says. The Valley has been good at that. Witness the growth of PayPal. There’s Square and a technology it didn’t invent but was clever enough to exploit: card acceptance on mobile devices. Also Stripe and its online-acceptance code.
But for all the success of a PayPal—and, perhaps, of an Apple Pay—there’s something else, something the Valley may have overlooked. Those stuck-in-the-mud bankers may be that way for a reason that has nothing to do with clever technology. Rather, they are licensed, regulated entities that by and large have the trust of their customers.
“Consumers don’t see financial services as a technology product,” says Wester. “People don’t want to trust their money to somebody who may not be accurate 100% of the time.”
Still, there’s a key advantage the Valley enjoys, as well. It’s often overlooked in all the talk of funding rounds and cool new tech. “Silicon Valley has a culture that is very supportive of experimental innovation. It’s reasonably tolerant of failure,” notes Eric Grover, a former Valley denizen and now a Minden, Nev.-based payments consultant.
You just don’t find that culture anywhere else, Grover says. And that, more than anything else, may be the most telling lesson of all.
Headquarters: Cupertino, Calif.
The newest Silicon Valley powerhouse to join the payments fray is one of the Valley’s oldest computer firms and certainly its most famous: Apple.
Apple confirmed months, if not years, of rumors that it had designs on mobile payments in September when chief executive Tim Cook unveiled the Apple Pay service for the soon-to-be-launched iPhone 6 and 6 Plus smart phones as well as the Apple Watch, a wearable expected to hit the shelves this year.
The major details of Apple Pay are now well-known. The service uses near-field communication (NFC) technology for contactless transactions, as well as tokenization and biometrics for authentication through Apple’s Touch ID system that records an iPhone user’s fingerprints.
Out of the gate, Apple said it had card issuers representing 83% of U.S. credit card charge volume enlisted in Apple Pay, as well as some of the nation’s biggest merchants. Apart from needing a contactless terminal, these merchants don’t have to pay extra or do anything special to accept Apple Pay. And Apple scored points with privacy advocates when it said Apple Pay wouldn’t be storing consumer data.
On the downside, Apple Pay doesn’t directly interact with merchants’ loyalty programs. And the merchant list, while impressive, does not include some of the nation’s biggest retailers, including Wal-Mart, Target (except its online store), and CVS, as well as other participants in the pending CurrentC mobile-payments system from the retailer-owned Merchant Customer Exchange.
Detractors also noted that Apple Pay, the newest member of Apple’s walled garden of proprietary products and services, doesn’t work with phones running Google Inc.’s Android mobile operating system, which has about 52% of the U.S. mobile-phone market versus 42% for Apple, according to comScore Inc.
But Apple has done its groundwork and likely will be rewarded with a high yield of users, merchants, and transactions in the coming months and years, according to some payments-industry researchers.
For example, even though only about 200,000 U.S. merchant locations currently accept contactless payments, that number is likely to increase as merchants replace old point-of-sale terminals to accept Europay-MasterCard-Visa (EMV) chip cards, a conversion that is likely to greatly increase the number of terminals with contactless capability.
“They’ve eliminated the issuer barrier, they’ve eliminated the infrastructure barrier, and they’ve eliminated the merchant barrier,” says Thad Peterson, a senior analyst at Boston-based Aite Group LLC. He also notes that Apple didn’t try to upend the existing payments infrastructure, so “they haven’t made any enemies.”
Apple Pay over the past several months has added more issuers to its inaugural class, bringing its reach to about 90% of charge volume. One of the very biggest, Bank of America Corp., reported in mid-January that nearly 800,000 of its customers had enrolled 1.1 million BofA cards for use with Apple Pay.
Apple Pay is clearly a work in progress. A growing number of software developers are taking advantage of its “in-app” features to include the service in their own applications, which can only increase its utility.
And in January, Silicon Valley publications reported that Apple had applied for a patent for putting Touch ID in the cloud, which could facilitate the synching of a user’s fingerprints with other mobile devices and POS systems for use with Apple Pay.
But one thing Apple is not doing with Apple Pay is setting itself up as a payments company, says Peterson.
“I think their primary motivation is selling devices, and anything that helps them keep a customer from moving away from Apple is a win,” he says.
Headquarters: Mountain View, Calif.
If there were an established Silicon Valley company that could be counted on to succeed in payments, it might be Google.
It has just about all the assets you need for a killer product: awe-inspiring brain power, formidable financial resources, and the ability to engineer fast growth from a standing start.
The company whose name is derived from the mathematical term “googol,” meaning a 1 followed by 100 zeroes, early on mastered the science of Internet search to generate mind-boggling numbers. In a mere 15 years, it was generating $55.5 billion in annual revenue and $15.4 billion in profit. From its first hire in 1998, it grew to a head count exceeding 44,000 by 2013.
Indeed, it seemed that everything it touched turned to gold. Until it touched payments. Here, the record has been less than mind-boggling. “They’ve been unable to get it right,” says Eric Grover, a Minden, Nev.-based payments consultant who spent 12 years in Silicon Valley.
At first, Google tried to compete with Bay-Area rival PayPal Inc., which by the middle of the last decade had pretty well sewn up the e-commerce payments market. Shrouded in secrecy while in development, Google Checkout debuted in 2006 and met with a sensational response in the press. But Checkout’s wallet was confined to major credit cards, and it struggled to find merchants and users.
The struggle went on for seven years. In May 2013, Google announced it would close Checkout, and six months later it was gone. Ironically, when it shuttered the service, Google referred its merchants to Braintree Payments Solutions LLC, a Chicago-based online processor that is now part of PayPal.
But Google wasn’t through. It saw in the physical world of commerce an ocean of consumer-behavior data that nobody was capturing as it was capturing such data on the Web to support its online-advertising business. It figured if it could introduce a handset-based wallet, tie it to offers and rewards, and get people to use it, it could gobble up consumer data in the real world, as well, where better than 90% of transactions take place.
So in May 2011, at a splashy press event in New York City, it unveiled Google Wallet, which it then launched commercially four months later. The product included a Citibank-issued MasterCard and a Google prepaid card and offered the ability not only to pay but also to redeem offers with a tap of the phone at the checkout counter, using near-field communication (NFC).
Almost immediately, Wallet ran into roadblocks. AT&T, Verizon, and T-Mobile USA, which had developed their own wallet, now known as Softcard, shut Google Wallet out of their networks. Google Wallet was available on a limited number of smart-phone models. Tap-and-pay capability was available at only a few merchants. Tap-and-redeem worked at even fewer. And merchants and banks weren’t so sure they wanted to share valuable customer data with Google.
(Ironically, those telcos that boycotted Google Wallet were reported as Digital Transactions went to press to be in talks with Google about selling Softcard, which has also sputtered with merchants and consumers).
Since then, Wallet has been through two major revisions. It now exists as a physical card linked to virtual funding sources you can control on your phone. You can buy in stores with the card if the stores don’t have NFC terminals. It also allows you to send money to anyone with an email account via the Wallet app or Gmail, and to buy online using a “Buy with Google” button at such sites as Airbnb, Uber, Rue La La, and Travelocity.
Google’s adventure in payments may not have gone as the company had intended, but it’s not over. Its business is all about data, and few activities generate such valuable data as payments. With reasonable ambitions, Google is likely to stick with Wallet. After all, says Grover, “they don’t want to be a Visa or First Data.”
Headquarters: Mountain View, Calif.
Intuit is one of Silicon Valley’s most experienced payments veterans. And you could almost say it got into payments the old-fashioned way—through the nuts-and-bolts business of merchant acquiring.
The provider of QuickBooks accounting software for small businesses as well as the TurboTax tax-preparation program and Quicken financial-management application for consumers dove into acquiring in 2003 when it bought Innovative Merchant Solutions, a California-based independent sales organization, for $116 million.
Today, Intuit provides payment processing to 285,000 merchants, and in fiscal 2014 it processed $31.3 billion in payment card volume. Payment services, which brought in $467 million in revenue in 2014, have accounted for about 10% of Intuit’s total revenue in the past three years—numbers Google and Apple have not yet approached.
Intuit’s less visible payments offerings include payroll services that move $100 billion a year via the automated clearing house network.
Intuit’s long-standing strategy of using payments to reinforce its products for small businesses hasn’t changed. What’s new is Intuit’s new focus on online distribution of QuickBooks, which opens new avenues for subscriber revenues.
QuickBooks Online now has more than 700,000 subscribers worldwide versus about 3 million desktop QuickBooks users. Payment services are part of that migration to the cloud, even though the majority of payment customers remain desktop-based.
“It’s smaller but also growing very rapidly,” Eric Dunn, senior vice president for payments and commerce solutions, says of online distribution. “We need to lean into the future.” He adds that QuickBooks’ desktop version will remain “a huge, important offering that’s not going away.”
Intuit, which also offers the GoPayment mobile-payment service that competes with the likes of Square and similar services from ISOs, has made some major changes under the hood recently. For example, it replaced First Data Corp. with Chase Paymentech as its processor and has taken over the settlement function itself, according to Dunn. Doing so, he says, enables Intuit to improve data reporting for merchants.
“We can control that and make it simple,” Dunn says. “Historically, the customers found the processor-generated reporting difficult to understand.”
The company also is unifying branding under the QuickBooks moniker. The 6-year-old smart-phone mobile service is now called QuickBooks GoPayment, for example. The service’s pricing is 1.75% of the sale for swiped transactions plus 25 cents if the merchant chooses the $19.95 monthly fee option. The no-monthly-fee option has a swipe rate of 2.40%, plus 25 cents.
On the consumer side, Intuit last June paid $360 million to acquire Silicon Valley-based Check Inc., formerly known as Pageonce, which provides mobile bill-pay services to 10 million registered users. Check, now known as Intuit Mint Bills, helped to round out the services available through Quicken and Intuit’s Mint online personal financial-management service.
“Mint Bills is solving the consumer bill-pay problem very nicely,” says Dunn.
Headquarters: San Jose, Calif.
When startups in the Bay Area look at getting into payments, they invariably look to PayPal. And no wonder. From a standing start in 1998, PayPal has laid down a proven track record of success while many other payments startups, both inside and outside Silicon Valley, have failed.
What accounts for this durability? Its 2002 acquisition by eBay Inc. didn’t hurt. PayPal had already been discovered by eBay sellers as a relatively easy way to collect payments on the auction site. Soon, it was able to expand into general e-commerce, where merchants, too, were looking for a secret payments sauce.
“PayPal succeeded because it provided a better way to pay an online merchant,” says James Wester, practice director for worldwide payment strategies at IDC Financial Insights, Framingham, Mass.
Since then, the company has made one move after another to bolster that key advantage. In 2009, it opened its platform to developers, a tactic that led four years later to eBay’s $800 million acquisition of Braintree Payments Solutions LLC, a highly developer-friendly processor headquartered in, of all places, Chicago. EBay lost no time quartering Braintree and its Venmo mobile-payments unit in the PayPal camp.
These days, Braintree’s software-development kit, v.zero SDK, is easing merchant access to PayPal’s 157 million active users and enabling mobile payments with a single click. It’s also allowed PayPal to get in on the hottest mobile-payments service launched so far by enabling merchants to accept Apple Pay.
Where to next? Following a Silicon Valley tradition in talking to the press, PayPal is mum about that. The biggest question mark has to do with how the company will fare as an independent company for the first time in 13 years. Last fall, eBay announced it will spin off PayPal in the second half of 2015 as a publicly traded entity. Days later, it hired Dan Schulman, a highly regarded American Express Co. executive, to run PayPal.
PayPal spokespeople aren’t interested in fielding questions about the post-eBay entity. “We have nothing to add about our plans for the separation at this time,” says one of them in an email message.
One thing is certain: PayPal will build on its strengths, one of which is in mobile payments, where it is a leader with $27 billion processed in 2013. It is also building up a presence in the emerging market for so-called wearables, which can act as payment devices. It has poured money into apps for smart watches like those from Pebble, Android Wear, and Samsung Gear S and the Gear 2 to enable payments.
“In the future, there will be the expectation that the ability to pay or be paid can be embedded everywhere, so wearables is a great place for us to try out these different use cases,” says the spokesperson.
That experimentation may enable PayPal to replicate in mobile and wearable devices the same sort of streamlined payments experience it first fielded on PCs. If so, its best days may yet lie ahead of it. If not, it could go the way of so many other payments startups that just couldn’t quite find the right formula.
Headquarters: San Francisco
Square Inc. has cemented its roots in Silicon Valley and in payments over the past five years. But in its case, the availability of tech talent and investment has been matched by the advantage of testing services with a wide array of readily available merchants.
With no easy road laid out before it, Square initially set out to embrace merchants that most independent sales organizations and acquirers avoided. They were the smallest of the small merchants, those who occasionally needed to serve customers wanting to pay with a credit or debit card, but couldn’t because the expense of a traditional merchant-processing contract was too high.
Jump ahead five years, and payment processing for micromerchants now accounts for a much smaller piece of Square’s revenue pie. Square, thanks in part to its ability to attract and retain talented employees from the Bay Area, offers the point-of-sale software Square Register; processes payments for Starbucks Corp.; and provides merchant cash advances through Square Capital and person-to-person payments via Square Cash.
Indeed, in December Square said merchants processed more than $100 million in sales on a single day. Square has added larger merchants, with 40% processing more than $125,000 annually, an increase from 25% in 2012. Its fastest-growing segment is merchants that process more than $500,000 annually in card payments. Square Capital, in the six months since the cash-advance product’s 2014 launch, distributed $75 million to more than 15,000 small businesses.
Square says one factor in its success is its location in San Francisco, a city and region replete with thousands of technologists. A recent review of the careers section of Square’s Web site shows that, of 72 open positions, 56 are located in San Francisco and range from software and hardware engineering to human resources, marketing, finance, creative, sales, risk, and support.
The San Francisco location also is helpful because Square often will test products and services with local merchants. Square says this helps it make better products. “Our close relationships with independent businesses in San Francisco have allowed us to test, develop, and improve the tools we provide sellers everywhere,” Square says.
For example, Sightglass Coffee in San Francisco has been a Square client since 2009 and has evolved along with Square. In addition to payment card acceptance, Sightglass Coffee now uses Square Capital and services like analytics and digital receipts.
Customers at Square merchants have sent more than 3 million pieces of feedback using the digital receipts, which use a simple happy or frowning face for consumers to tap to indicate how their experience went. Merchants can react immediately to any issues.
Or take Souvla, a Greek restaurant not far from Square’s headquarters that’s serving as a literal test kitchen for services “not yet available to the public,” owner Charles Bililies told Digital Transactions last summer (“Is It Still Hip To Be Square?” September). “We were feeding dozens of Square employees every day who were coming down to test everything.”
Headquarters: San Francisco
Perhaps no company epitomizes what Silicon Valley means for payments startups more than Stripe.
An online-payments specialist that eschews traditional contracts in favor of a simple, single price for processing credit and debit cards online, Stripe was started by two brothers from Ireland and now serves merchants in 18 nations from a former factory in San Francisco’s Mission district.
The story goes that frustration with trying to incorporate online payments into some Web sites resulted in brothers Patrick and John Collison writing a simple piece of code that catered to developers. On that basis, Stripe launched in 2011 with a stated goal to make new types of transactions easier. It now works with a wide range of fellow tech-based startups, including ride-sharing service Lyft and grocery-delivery firm Instacart.
Its San Francisco location is essential to that. “Customer and talent acquisition is primarily driven from our headquarters in San Francisco,” Stripe says. “Many of our largest users and partners are based in the Bay Area as well, including Facebook, Twitter, and Apple.”
That, of course, means there is intense competition for talented employees. “From a talent perspective, while it is a competitive environment, there is a rich pool of engineering and business talent, and as we continue to grow, recruiting the best people will continue to be a focus for Stripe,” the company says.
Indeed, Silicon Valley was instrumental to Stripe’s founding. A 2012 post on Patrick Collison’s Web site laid out three reasons why his startup benefited from a Bay-Area location versus quartering in Ireland. First is that there are more investors in the United States. Among Stripe’s investors is Peter Thiel, a PayPal Inc. founder who was part of a $2 million investment in 2010 that included Sequoia Capital and Andreesen Horowitz. Overall, since its inception, Stripe says it has raised more than $200 million in funding.
Another reason is the abundance of potential employees in Silicon Valley. With 30 employees in 2012, Stripe has grown to 180 on staff, with 36% coming from outside the United States.
The third reason is that a failed startup in the San Francisco region stands a better chance of being bought than in Ireland.
Failure doesn’t appear to be a likely outcome for Stripe. Though it doesn’t disclose transaction or financial data, Stripe says it processes “billions of dollars a year for tens of thousands” of merchants.
Though Stripe calls San Francisco home, its service is available now in 135 currencies in 18 nations.
Its most recent services include Apple Pay integration so that developers can create apps with one-touch payment capability, and the ability to process Bitcoin virtual currency for payments.
Nor have the founders forgotten their homeland. In 2013, Stripe launched in Ireland.