There hasn’t been a major consumer payments innovation in the US in two decades.
Paypal was invented in 1999 because existing payment methods didn’t work well for peer-to-peer transactions on the Web.
Ebay had successfully connected individuals and small merchants with customer demand but did not help to facilitate the transaction itself. At the time, most eBay sellers were unable to or had no desire to, set up merchant accounts and accept card payments. And since It was the seller’s responsibility to protect against fraud, this meant waiting for a check in the mail before shipping the goods. Paypal recognized the opportunity to help eBay sellers streamline the entire transaction between buyer and seller. The result was an entirely new type of transaction and kickstarted peer-to-peer (P2P) payments on the web.
Paypal had invented a new payment method. And since then, payments innovation has focused on optimizing the payment methods we’ve already got.
Accepting payments today is easy
Accepting payments got a lot easier in the mid-2000’s. The payments facilitation model allowed companies like Square to profitably offer payments services to small merchants as part of a broader solution.
In the 2010’s, Stripe and Adyen took embedded payments farther by helping platforms like Lyft and Shopify process payments, mitigate counterparty risk, and generally streamline the entire transaction between buyer and seller.
The payment innovations above have enabled new business models and allowed upstarts to compete with incumbents, but they are optimizations of existing payment methods.
US Payment Methods
New payment methods are rare.
In the early 1920’s, charge accounts served some of the same purpose as embedded payments in the 2010’s. Compared to handling cash, charge accounts simplified payment acceptance, streamlined back-office operations, and encouraged customer loyalty.
By the mid-19th century, checks had replaced charge accounts. Like cash, checks were widely available, widely accepted, and low-risk. Like charge accounts, they were also convenient.
Checks still represent 10% of all consumer payments, even though general-purpose charge and credit cards were introduced in the 1950’s.
Like checks, card payments were convenient, secure, and efficient. But cards allowed the holder to borrow money instantly and that innovation changed the psychology of money and the way we transact.
Finally, in the mid-1990’s Blockbuster Video introduced the first large-scale gift card program. Gift cards enabled a new type of transaction at-scale. In 2018 there were over $160B worth of gift cards sold in the US.
Which brings us back to Paypal, and points us towards mobile.
The Seeds of New Payment Methods
Mobile devices have reshaped most of our world, so why haven’t they reshaped the way we pay?
New payment methods have a chicken-and-egg problem. In the Paypal example, demand for a new payment medium emerged from the seller. Looking back even further to checks and charge accounts you find that new payment mediums almost always emerge to address the needs of a person or entity receiving the funds.
This might explain why the shift to mobile hasn’t produced a corresponding shift in payment methods. The way we transact on the web has so far been sufficient on mobile. Card payments are widely accepted and peer-to-peer platforms are ubiquitous.
In other words, sellers (and other recipients) are happy.
To illustrate the point, let’s look at Tilt, which was one of the most hyped consumer payments startups of the 2010’s. The company hypothesized about a social payments platform; a sort of collision between payments and Facebook. However, what Tilt taught us that when it came to paying a friend, existing P2P payment methods would do.
Like Tilt, Venmo has improved P2P payments on mobile, but mostly for the sender, and not enough to establish a new method of transacting that is ubiquitous enough to challenge the status quo.
In contrast, Square focused almost solely on the seller side of their market, at least initially. As a buyer, Square always created delight, with features like signing with your finger and sending digital receipts. However, by and large, their focus has been on solving a problem for the seller. With the release of Cash App in 2013, Square is hinting at how they might leverage its merchant scale to create a new type of payment method.
There are over 15 million Cash App users in the US. Over 3.5 million of those Cash App users are also using the optional debit card that links to the account. In 2017, Square reported having over 2 million merchants using its point-of-sale tools. That’s a critical mass of small merchants in the US with a deep desire for simplified payment processing and better tools to engage customers. It’s easy to imagine how Square might bring the two sides of their market together to create tremendous value beyond the movement of money. This ability to create new types of transactions is what defines a new payment method.
Shopify is also well-positioned to enable a new type of transaction centered around mobile payments for physical goods. In 2013, Shopify partnered with Stripe to begin offering a first-party payment processing service. While Shopify maintains integrations with over 100 payments processors, the first-party service addresses a merchant’s needs well beyond the movement of money. Shopify doesn’t explicitly break out payments revenue but estimates put it at 40-50% of total revenue.
Page 9 of Shopify’s 2018 annual report illustrates how the company’s focus on merchants is leading them to create a payment medium of their own:
“For merchants using Shopify Payments, buyers are already getting a superior experience, and with our investments in additional customer touchpoints such as retail and shipping, brands that sell on Shopify can offer buyers an end-to-end, managed shopping experience that previously was only available to much larger businesses.”
On the surface, Shopify is simply competing in a category that is adjacent to its SaaS shopping cart solution. However, a deeper analysis reveals a company that understands how payments fit into the overall value stream for merchants and how that value stream is changing alongside consumer behaviour.
In order to better service merchants, Shopify will need to find ways to make the transaction experience better for consumers as well.
Earlier this year, Shopify Pay became Shop Pay. It appears to be a focused effort to bring value to the buyer, independent of the merchant side of the transaction. By creating new value for the buyer, Shopify will presumably be helping the merchant.
Shopify will continue to deemphasize the payment itself, instead, focusing on the entire value stream from re-marketing (one-click payments via social ads) through to unboxing (Arrive app). Using only my phone number, I can complete an order through a Shopify powered store. Imagine all of the ways Shopify or others could develop my phone number into a payment medium. By my earlier definition, Shopify may have already invented a new payment medium.
Stripe has shifted the payment landscape significantly since it launched in 2009. At launch, Stripe famously allowed developers to accept card payments with just seven lines of code. No merchant account, no PCI certification, and no legal entity or business bank account required. By 2013, Stripe was fueling growth in marketplace businesses by enabling those businesses to reduce friction across their networks. Like Square and Shopify, Stripe is focused on helping entities receive payments. The company has wrapped its core capability in a startling number of value-add services, and like the examples above, Stripe’s value stream also extends out to touch the buyer. For example, the company introduced Stripe Subscriptions to help businesses reduce missed and late customer payments. This includes tools that prompt a customer for updated card information and predict the right date to retry a failed payment. Stripe even worked with the major payment networks (Visa, MasterCard, American Express, Discover) to update end customer records when new card numbers were generated. By focusing on the merchant, Stripe has created distinct value for the person or entity on the other side of the transaction. Even still, Stripe never reveals itself to the buyer in a transaction.
At my last startup, Eighty percent of our software spend was processed by Stripe.
In the future, enabling a new type of transaction like metered billing could require that Stripe build a more direct relationship with buyers. If the overlap between buyers and sellers is big enough, Stripe could act as a buyer’s payment method too. From this position, they might combine the source of funds with a tool for managing the subscriptions being paid for. Stripe has already introduced a credit card targeted at its base of existing seller-customers. With a dense network already in place, it’s only a matter of time before Stripe uncovers a use that case that only a new medium will solve.
Apple might be the only company in the world with the scale and engagement to build a new payment medium by starting with buyers/senders. Today, Apple Pay is an enabler of the existing credit card payment medium/method, but it does not enable a new type of transaction. Even Apple Card is a marginal extension of the existing card payment medium. Apple Pay transactions are processed using whichever network is prioritized by the two parties at each end of the network, in this case, the merchant’s payments provider and the card-issuing financial institution.
There is one notable exception. Apple Cash transactions are processed exclusively on the Discover network. Apple Cash is not a card payment and therefore does not need to comply with the regulation stating that all credit, debit, and prepaid cards must be available for processing on multiple networks at the discretion of the merchant.
Apple has effectively set up a direct link between the merchant terminal and the stored-value balance in Apple Wallet, with Discover acting as a service provider.
Discover represents less than 4% of all credit card processing volume in the US. With one-hundred million users, a ubiquitous network, and increasingly powerful mobile devices, Apple might be able to turn a first purchase into a relationship, or a loyal customer into a referrer.
New payment methods enable completely new types of transactions. Usually, this means bringing both sides of a network closer together by reducing cost, removing friction, and aligning incentives. The result is something that feels more like an experience than a means of transferring value from one person or organization to another. This new transaction experience starts by creating value for the receiver and then layering on value for the buyer/sender.
Payment methods can be built as open or closed systems. The medium can be tightly or loosely coupled to the sources of funds that underly it.
The most popular payment methods in the US are cards, cash, and check/ACH debit. And the only new payment method to emerge since the 1950’s is peer-to-peer digital payments, which Paypal popularized in the late 1990’s.
The way we transact is broken. Fees are high because legacy payment networks are hard to maintain. Customer experiences haven’t evolved because the primary stakeholders in our current networks are the rent-seekers (banks, network managers, merchant acquirers).
Companies like Square, Shopify, Stripe, and to some degree Apple, are aggregating merchants at scale and starting to deliver new types of value to both merchant and buyer. It’s possible that these merchant networks, mobile devices, and open financial rails (blockchains, etc.), are the combination that unlocks the next payment method. As rare as new payment methods are, I’m convinced that at least one will emerge this decade.