Intersections and Frequency

Where can new payment products begin? a look back on a few payment efforts and how frequency of use drives consumer behavior.

Short 101 blog today. Sharing with my start up friends as I’ve replayed this story 4 times this week. 

Starting a new payment network, or method, is very difficult. One of the core challenges relates to frequency of use, which is the key driver of consumer behavior change.  Frequency is the #1 litmus test I use to assess any new payment approach. Why? Payments present a two sided network problem: consumer use and merchant acceptance. Logically, for consumers to use a new payment instrument it must be accepted. Beyond acceptance, for behavior to change, regular use must be established. As I’ve often stated, historically there are 4 categories of purchases that drive frequency:

    1. Groceries
    2. Gas 
    3. Transit
    4. eCommerce/marketplace

Frequency Examples

Example 1 – Grocery

    • National Grocer – 30M consumers, 10% yr 1 adoption
    • 1 Purchase per week $150
    • 85% debit card use, MDR 28bps cost
    • NewPay cost,  15bps
    • Program cost $20M + Fraud


    • 3M consumers purchasing $150 in groceries – $450M/week = $23.4B/yr sales
    • Transaction Intersection – 3M transactions per week – 156M transactions/yr
    • Potential Payment Savings (13bps) = $30.4M
    • Net Savings = $10M – Fraud

Example 2 – Bank Pay

    • 4 National Banks – 100M consumers, 10% adoption
    • 10 large merchants  (none of which are top 10) – 100M consumers that purchase 5 times per year (10% of purchases)
    • 50% debit use, average MDR 140bps (ecom heavy)
    • Average transaction size $200
    • NewPay Cost: 120bps
    • Program cost: $5M across 10 merchants (no fraud)


    • Transaction Intersection – 10M consumers that have instrument shopping at 10% of merchants 5x per yr:  5M potential transactions per yr. 
    • Potential Payment Savings (20 bps) – $20M (across 10 participating merchants)
    • Net savings – $5M

This simplified analysis shows how merchants are much better positioned to drive a new instrument. While consumer driven efforts must contend with both partial consumer adoption and partial merchant adoption, the merchant can lock down their side of the effort. 

However Merchant-driven innovation is also hard (see MCX blog). While in control of acceptance, consumer “loyalty” is seldom placed through distribution of a commodity CPG goods. While there is brand loyalty, retailers and marketers know that there is very little loyalty in any kind of purchase. Consumers are more attracted to convenience and ease of use (see 2012 blog covering retail). In the US, the most successful retail driven payments schemes are Target Redcard and Starbucks. These successful programs took over a decade to establish, and their success is not in the payment mechanism, but in the marketing and loyalty programs which surround them

For physical retailers, debit is the primary instrument used and the costs of debit acceptance is low (debit ~23bps). Thus merchants are focused on improving convenience and the conversion funnel (online). How focused? Today BNPL is a high priority among retailers, a product with a much higher cost than Visa/MA (see blog). The thought of “guiding” a consumer to toward a new payment method at checkout is an anathema to an experience retailer. Why? For what purpose? Will they be more loyal?  This is why retailers are much more likely to create a co-brand card than they are unique payment instrument. 

Starting with Consumer

Payment initiatives which start with a consumer have a very poor track record. In the example above these initiatives must contend with BOTH partial consumer adoption AND partial merchant adoption. While consumer driven innovation can create something operational, the product must exceed the value of what is in place with both consumer and merchant from day one

There are no payment “problems” today. In other words none of us leave a merchant without our goods because the merchant didn’t take our preferred form of payment.   

A few consumer led examples: 

    1. Chase’s request to Amazon 8 yrs ago to add Chase’s Pay (blog).
    2. PayPal at Point of Sale (2014)
    3. Google Wallet
    4. Zelle at POS, Fed Now, Stripe/Plaid A2A
    5. Telecom –  ISIS/Softcard, GSMA/NFC, Firethorne
    6. …. Etc

Investor View

Top payment FinTech’s start with the merchant side: Stripe, Adyen, Shopify, Square, Affirm, … etc. The problems they solve are BEYOND the payment (see embedding payments). Payments are the part of purchase, payroll, supply chain, marketing, finance, treasury, …etc.  but they are the easiest part.   Neither consumers nor merchants focus on the mechanism for payment. Consumers want their stuff. Merchants seek to market, sell, retain and operate. 

P2P payments are perhaps the top exception to consumer driven adoption. In this model the P2P scheme has no “acceptance” issue. The growth of P2P creates mass consumer adoption, which can be expanded to merchant adoption. PIX in Brazil is currently the leading international example. In the US it is Zelle and Venmo. The challenge for P2P schemes is in pricing at merchant.  

Amazon… Of all the companies in the US that Bank issuers (and V/MA) should fear, at the TOP of the list is Amazon. This is one reason I believe Amazon received what they asked for this year (see blog). 

Apple …. This week we see rumblings of Apple looking to “bring payment processing in house”. I believe the best way to look at this story is from the perspective of Apple as a top retailer with $370B in sales. The eCommerce and Retail teams are best in the industry. Their apple card with GS is an amazing success driven primarily through  “equipment financing”. Just as Apple has created their own chip and controls the manufacturing supply chain, they are likely taking the same approach to the retail and eCommerce purchasing (and financing).  I don’t see any negatives for V/MA, or for goldman sachs. They want to own the tools and processes surrounding how they sell and finance their products, they will own 100% of all the rules. 

Thoughts appreciated. 

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