Growth Vector #1 – Embedding Payments

Embedding of payments into new commerce and business flows will quickly drive $500BTPV gains over the next 5 yrs and replace eCommerce as the source of TPV growth. Cash, ACH, and other Networks (ex Swift) will lose, MVP, Adyen and others will gain.

Pardon Typos.. still in proof mode

Previous Blogs on Topic 

  1. Payments in the OS – Browser Tokens – May 2016
  2. Payment in the OS – mCom/eCom Converge – Dec 2014
  3. Apple Pay in Browser – Mar 2016
  4. eCom Thoughts – Sept 2015

Feb Earnings Recap

Wow, what a week in Payments! Earnings for MVP are out and all are on target (or almost so). Additionally Visa, held its first investor day in 3 years this Tuesday. Paypal was a particularly great earnings call.. With mobile growing to 44% of TPV and Venmo growing 56% YoY and $29B for 4Q. 

For Paypal, I was particularly thrilled to see the payout and B2B growth powered by hyperWALLET (see blog). Integrating Venmo to payout allows everyone from Walmart, United Airlines, Pepsi and Chubb Insurance to make payments globally. These payout flows are stable with high margin. Integrating both existing flows and new loyalty based payments. This could be a 200%-300% YoY growth area easily (ex dividend payments, gig economy payout). As a side note, hyperWALLET had been a top 5 prepaid card issuer (Visa) prior to its acquisition.   

Embedding Payments – 2 Categories

Tom’s Rule #1: There are very few payment problems! None of us leave a store without our goods because the merchant didn’t take our form of payment.  Complexity in payments is driven by the quest for control and margin of the various participants, not by necessity. This is what makes understanding payments so hard…. most of the changes are not logical, but political. The friction (inefficiencies and illogical design) in payments is what makes payments work (blog).

The transaction growth rates of MVP are driven by changes in: Commerce, Banking and most importantly Consumer Behavior. Changes in consumer behavior are driving transformation of commercial networks. New players create new value propositions (ie bundles) and make new payment decisions. Within this evolving landscape there are 2 primary categories of embedded payment flows. 

  1. Consumer Side 
    1. In App (ApplePay, PayPal, GooglePay, …)
    2. In Browser (PayPal, SRC/W3C, ApplePay, GooglePay, ..)
    3. P2P (Venmo, Zelle, Visa Direct, .. )
    4. POS – Target RedCard, Wallets, iZettle, .. 
    5. Instant Lending (Affirm, Paypal Credit, ..)
  2. Merchant Side
    1. Disbursements 
    2. Supply Chain Finance – AR/AP
    3. Core Finance – Treasury/Cash Management
    4. Payroll
    5. Loyalty/Rewards
    6. Rebates/Returns
    7. Merchant/Inventory financing
    8. Acquiring/Acceptance
    9. AR Factoring, … and other smaller categories

When evaluating changes in payments it is necessary to look at the value of the “bundle” AND the role new entrants have in establishing THE PRIMARY “last mile” to either the consumer or the merchant (see Google Example).  Rule #2, never invest in payment innovation.. But rather a new merchant or consumer value proposition (new bundles may treat core payments as a loss leader for other services).   

Example 1 – Citi GTS

One of my all time favorite payments businesses is Citibank’s GTS (created by Frank Bisignano). Commercial payment flows are regular, recurring and change infrequently.  Much of the United Nations transfer payments are managed by Citi GTS. The magic behind the Citi GTS business is that global net settlement allows Citi to charge FX fees without incurring them. The challenge for working with corporations is paying many small sized checks. For example GE paying dividends to every stockholder globally. Individual consumers don’t want a USD denominated check to cash, particularly with fees of more than 30% on the value AND 2 months to clear. Rather than paying dividends or small $$ payments globally via check PayPal/HW provide a pay anyone engine with FCY/LCY (Foreign Currency/Local Currency) distribution engine that puts the beneficiary in charge (no more checks). Visa’s Earthport plays a role in this today. 

Example 2 – Adyen

Adyen is my role model for embedding payments. Most know Adyen for taking eBay away from PayPal. They have set a new standard for integrating eCommerce and POS globally. When Adyen shows up at a merchant, its as if they are a software platform company. They talk about acceptance, and POS .. but they also talk about Payroll, AR/AP integration, Supply Chain (items above). The merchants I have spoken to have said they are “in a different league” and do so much more than just payments.. (example SAP and Salesforce Ad Ons).

Adyen’s partnership network is unmatched. What Stripe is to eCommerce, Adyen has become for core backend integration. Making payments easy… is hard… particularly MCY international.  Enterprise deals take a tad longer to sell.. But enterprise integration makes payment flows very very sticky. The warning call for commercial banks is clear: Adyen is well positioned to enable commercial bank “switching”. 

Example 3 – Paypal Venmo and Pepsi

The CONSUMER is the most important network endpoint of any payment flow. My top payment innovation for 2019 would be Venmo/Pepsi (see Press Release). Venmo/Pepsi integrates CPG loyalty to Venmo and product. The opportunities here are just endless, from CPGs to a small service provider with a QR code on their invoice. Most CPGs have no idea who their customers are.. This provides both value and a direct connection. Better yet, I can pay anyone globally..  There are $470B in coupons and over $50B in loyalty spend.. Just in the US. The market opportunity is tremendous. 

I am very very high on Paypal.  Why? They have assets in almost every one of the categories above… their biggest challenge? Sales and partnerships.. (What to focus on)? 

Payments in the OS – Who will Succeed?

Technically, I would credit PayPal’s X (Osama’s team) for creating the first “open platform” for payments in 2007. Unfortunately for Paypal Braintree, Stripe, Poynt, Adyen and others took it to market.  There are many companies with the components to make this work, however existing companies (and networks) have a very poor track record in bringing new products to market. Existing networks serve existing value propositions. It is not only hard to change technology, but also to change operating agreements and sales teams. 

Leaders will have the closest relationship either to the consumer or to the merchant. Paypal is the only company that has both components.  Banks win when they invest in a common network with common standards (as a side note my new team is working with banks in this area). Banks take 20 years to make innovation happen (ATMs, Debit Cards, Zelle P2P), FinTech is where we will see short term success. I believe Visa’s bet on Plaid is consistent with this view. 

Key Attributes for Winners

  1. Direct Consumer Relationship
  2. Direct Merchant Relationship
  3. Role in Building Great Customer Experience
  4. Exec Team that Knows Enterprise Software (Key challenge for MVP)
  5. Partnerships. Network Value = Sum of Investment.. Who is investing in the network?
  6. Enterprise Sales (Key MVP Challenge)
  7. Global Experience 
  8. Control over Bundle/Operating Agreement
  9. Speed to Execute

Winners – Next 5 Yrs

  1. Paypal
  2. Visa/MA 
  3. Adyen
  4. Glad to discuss others. 

4 thoughts on “Growth Vector #1 – Embedding Payments”

  1. I’m really glad you are back to blogging. I forgot how awesome the information and your opinions are.

    FYI – I first heard about PepCoin here today on your blog (I think). My favorite pairing is typically Pepsi’s water and one of their chip products. I’ve missed out. I never heard about this nor did I notice it on their packaging. If I did see it on their packaging, I just ignored it. I guess I’m not their target demo. If I remember I should see if it’s still a thing later today.

  2. Supply Chain Finance (aka Reverse Factoring) is a buyer led financing proposition. Requires both irrevocable payment obligation from a corporate buyers and receible purchase agreement with a supplier. It is AP proposition. Not AR.

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