The Gimlet Eye: The Perilous Business of Electronic Payments

In putting together this month’s issue, we were struck, as we are every year, with the changes we found with our Annual Field Guide to Alternative Payments. In just the course of the past 12 months, about half a dozen entries have fallen out of our guide because they no longer do business, have been absorbed into other products, or have been acquired. These include some prominent names like Bling Nation and Tempo Payments (shut down) and Google Checkout (absorbed into Google Wallet). Meanwhile, new startups have emerged and are now included, such as Dwolla and LevelUp.

This process got us thinking about just how forbidding this market is for alternatives to the major-brand payments networks, and about what it takes for startups to succeed. Much of our coverage since we started eight years ago has dealt, one way or another, with these questions. But this month, in tandem with our Field Guide, we’ve included a cautionary piece by contributing writer Eric Grover. Eric takes us on a tour of failed payments initiatives across the continents, and reminds us how susceptible entrepreneurs are to the siren song of “doing things better” than Visa and MasterCard.

More than that, both the Guide and Eric’s article show the volatility of the startup market in payments, while Eric ventures some ideas about what entrepreneurs must do make their projects take root. Chief among these, he says, is to find that elusive pathway to critical mass—that great mass of consumers whose adoption and use of a product ensure at least its short-term success. Many are the payments ventures that appealed to merchants with, say, lower acceptance costs or sophisticated data security, only to find no purchase with consumers.

As it turns out in all too many cases, the startup’s ideas for doing things better than the incumbents are notions the incumbents once entertained—and rejected for good reason.

That most payments startups fail, though, doesn’t discredit every idea that comes along. Nor does this fact discourage entrepreneurs, which is one of the glories of the payments business. The hurdle consumers set for new systems is high, but not insurmountable. The new idea must improve, in some overwhelmingly compelling way, how they make payments now. This is one of the reasons, for example, why card-based contactless payments have struggled. Tapping or waving a card, while interesting, doesn’t improve enough on swiping one.

We’ll see in a few years’ time which of the entries in this 2012 Field Guide will have found that path to mass usage. History tells us some will, but also cautions that the way is narrow and hard.

John Stewart, Editor

john@digitaltransactions.net