As the war for who can do faster ACH, who can hold more money in escrow, and who can transact internationally with less fee rages on, I’m struck that it feels a bit like the wearables (and IoT) sensor race of a few years back. The sensors themselves, from COGS to who had what features, always felt like a race to the bottom, with margin pressure from both the manufacturers and the competitors pushing the prices down, and the marginal revenue similarly down in time. As a result, I concluded, as many did, that the data was the real opportunity. Similarly, managing the infrastructure for payments is only good business at massive scale, the switching costs are high, but getting lower as the API’s get more sophisticated, and integrating with online commerce experiences gets easier. Balanced, our amazing portfolio company, Stripe, a tech industry darling (and great business), Braintree, Paypal’s latest acquisition, are all seeing hockey stick growth, and hitting eye-popping numbers based on their life-cycles. But I wonder what comes next.** What about the data?
I love what inventure.org, a portfolio company that I also advise, is doing in India, Kenya, and South Africa to address this question: scoring. Credit has network effects, because the more people you can score successfully, the more financial institutions rely on you for scoring – the rich get richer, so to speak. Credit has switching costs, because you need data trails to score well, and if you start afresh elsewhere, scoring is harder, so once you start working with one platform, it’s harder to move to another. And finally, credit is a marketplace – matching financial institutions with high-value, low-loss loan books – rather than a utility.
Wallets also may represent a way to make the data useful. My friends over at yoco.co.za have suggested that once we move to digital wallets, there will start to be network effects, that the relationship between merchants and consumers starts to rely more heavily on the payments provider, and that there is a winner-take-all effect there. NFC isn’t there yet, QR codes are a laugh, so there’s still opportunity in this space. I think there’s something to this.
Anyway, Monday musings.
**It may be worth noting that as all of commerce introduces digital components, that there is extraordinary upside in simply being the utilities for this transition. But all utilities eventually care about having an application layer, right?