Payments: So What is a Start up to do?

As a Payments start up, the objective of Banks is to make your life difficult. Particularly when it comes to POS payments!  They are particularly wary of payments “brand” at the POS, but even when your product is a Mastercard banks are well positioned to make your life miserable (ask Google).  The primary rules “changes” are forcing POS payment providers into a Stored Value Account model. This means account has to be funded.. which practically means a move toward  ACH (given CNP rates), hence NewCos face the challenge of settlement risk, a prepaid account, and/or backup funding instruments. As soon as you move in this direction you will add many regulatory hurdles associated with obtaining 47 State Money Services Business (MSB) Licenses ($50k+/yr per state in maintenance costs alone). Even if you pass these hurdles.. banks are likely to put new ones up around ACH Debit and KYC (see blog and also Origination Risk, Square’s Cease and Desist in Illinios). Moving away from ACH and V/MA creates problems with acceptance and clearing (ie Dwolla, or Paypal/Discover).

My top recommendation… stay away from POS payments (in the US) unless you can raise $500M on $50M in revenue (Square). If you are intent at pursuing, I think Paypal/Discover is the best model.. Discover has the potential to evolve into a common clearing network for all start ups… The “friction” that banks are creating in V/MA, ACH, … is making DFS the dance partner of Choice. DFS has told analysts that their relationship with PayPal is NOT exclusive.. which is a good thing for the Valley. Note if you go this route that acceptance is much, much worse than V/MA.. particularly for small independent retailers.

Owning a bank solves the regulatory MSB issues, but not the customer acquisition issues and the new challenges that ODFIs will have in ACH debit (KYC requirements).

My informed view is that top retailers have now recognized they must “let the consumer decide” what payment instrument to use. Many new opportunities exist for helping retailers “steer” consumers to the lowest cost payment instrument.. combining loyalty, payment, and incentives.


update 21 Aug 2013

It looks like PIN debit “rails” provide the most flexibility in rules..  See my blog post on Winners/Losers

4 thoughts on “Payments: So What is a Start up to do?”

  1. Are you sure Discover has lower acceptance than V/MA in the US? They’re claiming they have improved significantly and are at parity these days.

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