6 ms·

Why Payments Are Hard, Even For Apple And Google

52 points by solipsist 16y ago

thinkcomp 16y ago
Ohad knows his stuff, but he didn't cover everything here. There are other reasons payments are hard for everyone. You can't really have this discussion without talking about point of sale systems. The existing retail point of sale infrastructure in the United States is unbelievably fragmented and old. Apple and Google are in a good position to make devices that replace registers, but adoption is still just as much an issue for them as for everyone else. This is good for payment startups (such as mine), but you have to have a lot of tenacity to untangle such a giant knot.
- lisper 16y ago
  What do you think of Square?
  - thinkcomp 16y ago
    I think it's the most gorgeous eight-track player ever made. They have enough money to shift, so for their sake, I hope they shift soon. For my sake I hope they don't.
    - jaskerr 16y ago
      I'll bite ... what is it about their reader / product line that makes it equivalent to a "gorgeous eight-track"? I've thought the reader looked a bit fragile (and wouldn't hold up to heavy use), but that doesn't make it obsolete right out of the gate.
      - thinkcomp 16y ago
        The next generation of payment technology will not be plastic card-based or involve a magnetic strip. They've created a really nice magnetic strip reader for plastic cards. It's kind of making the most amazing tape deck ever right before the mass distribution of Audio CD. Certainly it's an impressive feat of engineering and design, but it's not what I would pour my time into as an entrepreneur or my money into as an investor. Personally I think my company's technology does make Square's obsolete right out of the gate. We just face a much different adoption hurdle because we replace the entire system from end to end.
        ryanwaggoner 16y ago
        And that's probably why they'll win. This generation of payment technology isn't going away in the next 12-18 months. I bet we won't see the next generation surpass this generation (in usage) for at least five years. During that time, someone like Square can build tremendous momentum and relationships that will allow it to much more easily transition to the next generation, because it has a strong brand, strong relationships with the marketplace, and corporate competency in the space. For a fantastic example of what I'm talking about in another space, see Netflix.
        thinkcomp 16y ago
        Maybe. But relationships with whom? Why would a large retailer want to use Square? Why would a competing point of sale vendor with an enormous installed base want to work with Square? Netflix isn't a very good analogy. The retail payment space involves a three-sided market: consumers, merchants and POS vendors. Netflix didn't even have to struggle with the complexity of a two-sided market. Though it's done well for itself, it also hasn't completed rendered the previous standard useless. Plenty of people use DVD and Blu-Ray today. I think your view is possible but I'm not sure I understand the details. In contrast, I can answer both of those questions given the model for my company's technology.
        rdl 16y ago
        I agree, Square has the best possible strategy -- they catch the laggard businesses who still don't have merchant accounts, individual people who have never had merchant accounts (i.e. everyone) and let them get away from PayPal, AND get a platform deployed which can handle NFC or some new payment/loyalty credential for early adopters on the merchant side. On top of that, Keith Rabois is one of the top operating executives anywhere, and has extensive paypal experience. NFC has been "the next thing" for years. I worked for an NFC reader company in ... 2003, which had been around for years. (ViVoTech). We don't even use chip and pin cards in the USA -- the magstripe is going to remain a major part of the market for the rest of the decade.
ghshephard 16y ago
The author suggests that Amazon hasn't dealt with third parties at major scale. That seems counter to my experience, where almost 50% of my purchases on Amazon are fulfilled by a third party. For companies at the scale of Google, Amazon, and Apple - I'd suggest that hiring the talent and developing the risk management processes aren't as large a hurdle as he would suggest. The major challenge is convincing people (vendors and sellers) as to why they should use your system.
- thinkcomp 16y ago
  Ohad's background is in risk so he's inclined to view the hurdles as being more related to what he's familiar with. I agree with you though, there are much more important factors at play.
- lsc 16y ago
  >The major challenge is convincing people (vendors and sellers) as to why they should use your system. See, that is the /first/ challenge; but as you start overcoming that barrier, you start hitting the problem the author starts talking about. E-gold, for instance, did pretty well solving the "convince people to use us" problem, but choosing to ignore the fraud issue killed them (and almost landed them in jail)
  - ghshephard 16y ago
    I'm going to (respectfully) take issue with your claim here, though I would happy to be proven wrong. I am clearly an early adopter (as pretty much 95% of people on HN likely are) when it comes to technology, particularly online technology. I routinely use paypal (+bump), buy almost everything online, haven't touched a paper book or newspaper in over two years. I even have a SquareUp dongle and use it from time to time. I have over 200 transactions in Paypal and over 500 purchases from Amazon.com. I won't even try to calculate the number of iTunes purchases (content+Apps) I've made. I've heard of E-Gold, and may have created an account- but I've never used them. I just IM'd three of my friends - one had heard of it, two hadn't. None had ever used it. They all frequently use both Paypal and Amazon (one is a prime member). I realize that anecdote is not the singular of data, but, a quick glance at Wikipedia, shows that at their peak, E-gold only had 5 million accounts - 2.5% of what Apple has today. (And, in Apple's case, these accounts are connected to an actual Credit Card customer) So - two things to be aware of: o E-Gold was relatively small. When you are small, you can't afford to hire the high-level risk management talent. These people are rare, and very expensive. Therefore, one of the critical tasks of _small_ payment processors (not the large ones, Apple/Google/Amazon can afford their salaries and departmental budgets) is to survive long enough and not get shut down by making these mistakes. I'm certain Paypal, when it was smaller, also came close to the abyss several times before they got to scale. o Of course, the way you get to scale is you make yourself attractive, _or_ you subsidized your payment processing with the rest of your business. (Think about Microsoft buying their way into Console Entertainment) I'll agree that fraud and risk management are important, but I do not believe that they are barriers to success for the companies the author had identified, they are more important to the smaller players (E-Gold). For the larger players the question they have to answer for sellers is "Why should we use you? Which consumers are using your system that would make it worthwhile to going to the hassle to adding you as a payment option?" For the consumers it is "What do you do better than my existing Credit Card/Paypal Account which has served me well as a consumer?"
cletus 16y ago
It's worth pointing articles like this whenever the Apple haters berate Apple's "greedy" 30% cut. Particularly when you only spend, say, $1-3 at a time, the fees take up most of that. The only way you could have a more efficient system without cutting the credit card companies entirely (which is a huge proposition with enormous barrier to entry) is to buy prepaid credit in larger blocks (say $20 minimum) rather than charging each transaction (or day's transactions) in one small lump. Apple partially has this with it's retail cards but they probably lose 20% of that to the retailer. Payments seems to me to be one of those areas like music (and really all digital content) where there are players that have cooperate who basically have no interest in cooperating. In music and digital content it's the labels, publishers and studios, all of whom are investing heavily into turning the clock back to 1997 (thank you, 30 Rock). In payments, it's banks and other financial institutions (including credit card companies). One player that has huge potential in this space in coming years are the mobile telecommunication providers. They have the network for POS system, mobile payments is an area growing in leaps and bounds and they have a payments infrastructure already. Carriers seem intent on fighting progress too (as really does any large incumbent). Apple totally changed this industry with one product release [1], something the Apple haters seem to conveniently forget. If it wasn't for the iPhone, none of what we currently take for granted (even on other platforms) would be possible. Carriers (and other distributors like cable companies) are terrified of becoming dumb data pipes for which the only differentiators are price and service area. But that is (IMHO) their inescapable fate. What carriers could be however is the infrastructure for mobile payments, which has enormous potential. But currently they're ceding that market to Apple and Google. EDIT: let me be clear, I'm not advocating Apple's position on mandatory use of their system. Far from it. I think the move is arrogant and short-sighted beyond belief. But criticisms of them being "greedy" predate that move by years. Personally I think Apple's payment infrastructure makes sense if you're small and not if you're large (much like hosting actually). As such it should be voluntary. Let it stand on it's own merits. I for one am going to be extremely pissed off if Kindle disappears from my iPad. [1]: http://cdixon.org/2010/06/06/steve-jobs-single-handedly-restructured-the-mobile-industry/ http://cdixon.org/2010/06/06/steve-jobs-single-handedly-rest...
- jonknee 16y ago
  > It's worth pointing articles like this whenever the Apple haters berate Apple's "greedy" 30% cut. Particularly when you only spend, say, $1-3 at a time, the fees take up most of that. I think the greedy part is more based on Apple's requirement that you use their system (and thus pay their 30% vig). If it was voluntary I don't think people would care too much about how big of a cut they took because you could always try and do better on your own.
mjfern 16y ago
>In addition, you only get the bank’s confirmation of the payment 3-5 days (in the US) to 3 weeks (in some EU countries) after the payment attempt. I find it surprising that it's been 15 years since the commercialization of the Internet and (near) instant global data communication and it still takes banks 3-5 days to confirm payment (e.g., the time it takes to send a physical letter, coast-to-coast, via the USPS). This is the timeframe of a standard Electronics Fund Transfer (ETF) for bill pay, bank-to-bank transfers, etc. The only alternative, as far as I know, is a wire transfer, which is a tedious and expensive option. Does anyone know what's preventing the U.S. banking system from improving its electronic transfer capabilities? Given the importance of the free flow of money and goods (and liquidity) to our economy, it seems like the quick movement of funds would be a significant priority for our overall banking system. (Note that if banks could confirm electronic transfers within a few seconds (and if we added an extra layer of security beyond simple passwords, such as a challenge/response system), we could significantly reduce the occurrence of fraud. Near instant confirmation would also alleviate, or eliminate, the issue of short-term credit mentioned in this article.)
- jasonlotito 16y ago
  That's what I like about Canadian banks. They have a system in place they promote as sending money via email. You don't really send it through email. It's simple a system all the major banks in Canada have adopted. I can transfer money from one account to another, quickly and easily, with minimal fuss. It takes 30 minutes, and I believe this is more for security reasons then purely technical reasons. It makes sending money in Canada so incredibly easy.
  - mjfern 16y ago
    Yes, I lived in Canada for three years, and had the impression that the electronic transfer capabilities of their banks surpassed what's available in the U.S. Perhaps this is due (in part) to the fragmentation of the banking system in the U.S.? In Canada there are essentially five banks that dominate the banking industry - see http://en.wikipedia.org/wiki/Big_Five_(banks) http://en.wikipedia.org/wiki/Big_Five_(banks). There is also more regulatory control of banks in Canada, which likely makes it easier to require standard operating procedures, consistent infrastructure, etc.
sprash 16y ago
Time for Bitcoin to take over the world.
bigiain 16y ago
I wonder if Google's smartphone Google Authenticator app and three factor auth will prove to be a competitive advantage for them in the payments space? Given the choice between a Paypal and a Google Checkout option, I think I'd be significantly more likely to choose to use a 3 factor authorised Google service over an emailaddress/password authorised Paypal one (especially if I was using an untrusted network) I'm not sure Apple would be able to ramp up a cross platform 3 factor auth system particularly quickly... (seeing iTunes on Windows makes me suspect market takeup of "iThirdPartyAuth on Android app(tm)" isn't going to be world-changingly rapid...)
perlgeek 16y ago
I wonder if technically a bank wouldn't be a in a better position than a tech company to disrupt the online payment scene. Sure, banks are not universally known for their innovative powers, but they usually have the infrastructure and the customer support necessary for such a system (so they are more where the author sees Apple)

52 points by solipsist 16y ago

Ohad knows his stuff, but he didn't cover everything here. There are other reasons payments are hard for everyone. You can't really have this discussion without talking about point of sale systems. The existing retail point of sale infrastructure in the United States is unbelievably fragmented and old. Apple and Google are in a good position to make devices that replace registers, but adoption is still just as much an issue for them as for everyone else. This is good for payment startups (such as mine), but you have to have a lot of tenacity to untangle such a giant knot.

lisper 16y ago
What do you think of Square?
- thinkcomp 16y ago
  I think it's the most gorgeous eight-track player ever made. They have enough money to shift, so for their sake, I hope they shift soon. For my sake I hope they don't.
  - jaskerr 16y ago
    I'll bite ... what is it about their reader / product line that makes it equivalent to a "gorgeous eight-track"? I've thought the reader looked a bit fragile (and wouldn't hold up to heavy use), but that doesn't make it obsolete right out of the gate.
    - thinkcomp 16y ago
      The next generation of payment technology will not be plastic card-based or involve a magnetic strip. They've created a really nice magnetic strip reader for plastic cards. It's kind of making the most amazing tape deck ever right before the mass distribution of Audio CD. Certainly it's an impressive feat of engineering and design, but it's not what I would pour my time into as an entrepreneur or my money into as an investor. Personally I think my company's technology does make Square's obsolete right out of the gate. We just face a much different adoption hurdle because we replace the entire system from end to end.
      - ryanwaggoner 16y ago
        And that's probably why they'll win. This generation of payment technology isn't going away in the next 12-18 months. I bet we won't see the next generation surpass this generation (in usage) for at least five years. During that time, someone like Square can build tremendous momentum and relationships that will allow it to much more easily transition to the next generation, because it has a strong brand, strong relationships with the marketplace, and corporate competency in the space. For a fantastic example of what I'm talking about in another space, see Netflix.
        thinkcomp 16y ago
        Maybe. But relationships with whom? Why would a large retailer want to use Square? Why would a competing point of sale vendor with an enormous installed base want to work with Square? Netflix isn't a very good analogy. The retail payment space involves a three-sided market: consumers, merchants and POS vendors. Netflix didn't even have to struggle with the complexity of a two-sided market. Though it's done well for itself, it also hasn't completed rendered the previous standard useless. Plenty of people use DVD and Blu-Ray today. I think your view is possible but I'm not sure I understand the details. In contrast, I can answer both of those questions given the model for my company's technology.
        rdl 16y ago
        I agree, Square has the best possible strategy -- they catch the laggard businesses who still don't have merchant accounts, individual people who have never had merchant accounts (i.e. everyone) and let them get away from PayPal, AND get a platform deployed which can handle NFC or some new payment/loyalty credential for early adopters on the merchant side. On top of that, Keith Rabois is one of the top operating executives anywhere, and has extensive paypal experience. NFC has been "the next thing" for years. I worked for an NFC reader company in ... 2003, which had been around for years. (ViVoTech). We don't even use chip and pin cards in the USA -- the magstripe is going to remain a major part of the market for the rest of the decade.

ghshephard 16y ago

The author suggests that Amazon hasn't dealt with third parties at major scale. That seems counter to my experience, where almost 50% of my purchases on Amazon are fulfilled by a third party. For companies at the scale of Google, Amazon, and Apple - I'd suggest that hiring the talent and developing the risk management processes aren't as large a hurdle as he would suggest. The major challenge is convincing people (vendors and sellers) as to why they should use your system.

thinkcomp 16y ago
Ohad's background is in risk so he's inclined to view the hurdles as being more related to what he's familiar with. I agree with you though, there are much more important factors at play.
lsc 16y ago
>The major challenge is convincing people (vendors and sellers) as to why they should use your system. See, that is the /first/ challenge; but as you start overcoming that barrier, you start hitting the problem the author starts talking about. E-gold, for instance, did pretty well solving the "convince people to use us" problem, but choosing to ignore the fraud issue killed them (and almost landed them in jail)
- ghshephard 16y ago
  I'm going to (respectfully) take issue with your claim here, though I would happy to be proven wrong. I am clearly an early adopter (as pretty much 95% of people on HN likely are) when it comes to technology, particularly online technology. I routinely use paypal (+bump), buy almost everything online, haven't touched a paper book or newspaper in over two years. I even have a SquareUp dongle and use it from time to time. I have over 200 transactions in Paypal and over 500 purchases from Amazon.com. I won't even try to calculate the number of iTunes purchases (content+Apps) I've made. I've heard of E-Gold, and may have created an account- but I've never used them. I just IM'd three of my friends - one had heard of it, two hadn't. None had ever used it. They all frequently use both Paypal and Amazon (one is a prime member). I realize that anecdote is not the singular of data, but, a quick glance at Wikipedia, shows that at their peak, E-gold only had 5 million accounts - 2.5% of what Apple has today. (And, in Apple's case, these accounts are connected to an actual Credit Card customer) So - two things to be aware of: o E-Gold was relatively small. When you are small, you can't afford to hire the high-level risk management talent. These people are rare, and very expensive. Therefore, one of the critical tasks of _small_ payment processors (not the large ones, Apple/Google/Amazon can afford their salaries and departmental budgets) is to survive long enough and not get shut down by making these mistakes. I'm certain Paypal, when it was smaller, also came close to the abyss several times before they got to scale. o Of course, the way you get to scale is you make yourself attractive, _or_ you subsidized your payment processing with the rest of your business. (Think about Microsoft buying their way into Console Entertainment) I'll agree that fraud and risk management are important, but I do not believe that they are barriers to success for the companies the author had identified, they are more important to the smaller players (E-Gold). For the larger players the question they have to answer for sellers is "Why should we use you? Which consumers are using your system that would make it worthwhile to going to the hassle to adding you as a payment option?" For the consumers it is "What do you do better than my existing Credit Card/Paypal Account which has served me well as a consumer?"

cletus 16y ago

It's worth pointing articles like this whenever the Apple haters berate Apple's "greedy" 30% cut. Particularly when you only spend, say, $1-3 at a time, the fees take up most of that. The only way you could have a more efficient system without cutting the credit card companies entirely (which is a huge proposition with enormous barrier to entry) is to buy prepaid credit in larger blocks (say $20 minimum) rather than charging each transaction (or day's transactions) in one small lump. Apple partially has this with it's retail cards but they probably lose 20% of that to the retailer. Payments seems to me to be one of those areas like music (and really all digital content) where there are players that have cooperate who basically have no interest in cooperating. In music and digital content it's the labels, publishers and studios, all of whom are investing heavily into turning the clock back to 1997 (thank you, 30 Rock). In payments, it's banks and other financial institutions (including credit card companies). One player that has huge potential in this space in coming years are the mobile telecommunication providers. They have the network for POS system, mobile payments is an area growing in leaps and bounds and they have a payments infrastructure already. Carriers seem intent on fighting progress too (as really does any large incumbent). Apple totally changed this industry with one product release [1], something the Apple haters seem to conveniently forget. If it wasn't for the iPhone, none of what we currently take for granted (even on other platforms) would be possible. Carriers (and other distributors like cable companies) are terrified of becoming dumb data pipes for which the only differentiators are price and service area. But that is (IMHO) their inescapable fate. What carriers could be however is the infrastructure for mobile payments, which has enormous potential. But currently they're ceding that market to Apple and Google. EDIT: let me be clear, I'm not advocating Apple's position on mandatory use of their system. Far from it. I think the move is arrogant and short-sighted beyond belief. But criticisms of them being "greedy" predate that move by years. Personally I think Apple's payment infrastructure makes sense if you're small and not if you're large (much like hosting actually). As such it should be voluntary. Let it stand on it's own merits. I for one am going to be extremely pissed off if Kindle disappears from my iPad. [1]: http://cdixon.org/2010/06/06/steve-jobs-single-handedly-restructured-the-mobile-industry/ http://cdixon.org/2010/06/06/steve-jobs-single-handedly-rest...

jonknee 16y ago
> It's worth pointing articles like this whenever the Apple haters berate Apple's "greedy" 30% cut. Particularly when you only spend, say, $1-3 at a time, the fees take up most of that. I think the greedy part is more based on Apple's requirement that you use their system (and thus pay their 30% vig). If it was voluntary I don't think people would care too much about how big of a cut they took because you could always try and do better on your own.

mjfern 16y ago

>In addition, you only get the bank’s confirmation of the payment 3-5 days (in the US) to 3 weeks (in some EU countries) after the payment attempt. I find it surprising that it's been 15 years since the commercialization of the Internet and (near) instant global data communication and it still takes banks 3-5 days to confirm payment (e.g., the time it takes to send a physical letter, coast-to-coast, via the USPS). This is the timeframe of a standard Electronics Fund Transfer (ETF) for bill pay, bank-to-bank transfers, etc. The only alternative, as far as I know, is a wire transfer, which is a tedious and expensive option. Does anyone know what's preventing the U.S. banking system from improving its electronic transfer capabilities? Given the importance of the free flow of money and goods (and liquidity) to our economy, it seems like the quick movement of funds would be a significant priority for our overall banking system. (Note that if banks could confirm electronic transfers within a few seconds (and if we added an extra layer of security beyond simple passwords, such as a challenge/response system), we could significantly reduce the occurrence of fraud. Near instant confirmation would also alleviate, or eliminate, the issue of short-term credit mentioned in this article.)

jasonlotito 16y ago
That's what I like about Canadian banks. They have a system in place they promote as sending money via email. You don't really send it through email. It's simple a system all the major banks in Canada have adopted. I can transfer money from one account to another, quickly and easily, with minimal fuss. It takes 30 minutes, and I believe this is more for security reasons then purely technical reasons. It makes sending money in Canada so incredibly easy.
- mjfern 16y ago
  Yes, I lived in Canada for three years, and had the impression that the electronic transfer capabilities of their banks surpassed what's available in the U.S. Perhaps this is due (in part) to the fragmentation of the banking system in the U.S.? In Canada there are essentially five banks that dominate the banking industry - see http://en.wikipedia.org/wiki/Big_Five_(banks) http://en.wikipedia.org/wiki/Big_Five_(banks). There is also more regulatory control of banks in Canada, which likely makes it easier to require standard operating procedures, consistent infrastructure, etc.

sprash 16y ago

Time for Bitcoin to take over the world.

bigiain 16y ago

I wonder if Google's smartphone Google Authenticator app and three factor auth will prove to be a competitive advantage for them in the payments space? Given the choice between a Paypal and a Google Checkout option, I think I'd be significantly more likely to choose to use a 3 factor authorised Google service over an emailaddress/password authorised Paypal one (especially if I was using an untrusted network) I'm not sure Apple would be able to ramp up a cross platform 3 factor auth system particularly quickly... (seeing iTunes on Windows makes me suspect market takeup of "iThirdPartyAuth on Android app(tm)" isn't going to be world-changingly rapid...)

perlgeek 16y ago

I wonder if technically a bank wouldn't be a in a better position than a tech company to disrupt the online payment scene. Sure, banks are not universally known for their innovative powers, but they usually have the infrastructure and the customer support necessary for such a system (so they are more where the author sees Apple)