Internet Payment Processing for Online Businesses

Internet-payments monolith PayPal (responsible for about $5.5 billion of eBay’s $14 billion net revenues in 2012) recently acquired Braintree, an internet payment-solutions provider, for $800 million in cash. [1, 2] This is bad news for entrepreneurs and developers in the online economy.

Online Payment Processing Market
Software for processing payments on the internet enables much of e-commerce, and thus much of online business, today. It is a fast-growing and highly fragmented industry. PayPal’s parent company eBay was responsible for about 24% of revenues for online payment processing software in the United States in 2012, far and away the largest market share. [3] Several other big companies are active in the space, including Visa, through its subsidiary Authorize.net, and Google, through its Google Checkout product, but both of these have low single-digit market share.

Logistical Difficulties in Payments
Payments is a tricky space for several logistical reasons. The most significant are the regulatory and industry hurdles that have to be cleared in order to enter the market. Established payments companies, including those in the payment-card industry, have encouraged and established rules that raise the barriers to entry for online payments. In most cases, these rules are designed to protect users’ data and financial security. But such rules—ranging from the compliance guidelines established by the payment-card industry (PCI), known as the data security standard (DSS), to money-transmitting licensure requirements imposed by state governments—create significant burdens on small new entrants and have allowed the dominant players to remain on top.

New Startups Improve Online Payments
Several young companies have braved the hurdle over the last few years to enter online payments. The new entrants have all distinguished themselves by the ease with which they enable online businesses to engage the complicated payments ecosystem. Most frequently, this means the creation of a simple three-step process: 1) a website sends the user a script from an internet-payments software company, 2) the script creates a direct connection between the user and the company whenever payments need to be processed, 3) the company reports those payments to the website. In this way, the website itself is never privy to any of the user’s financial information. Not only does this add a layer of safety and security for the user, but it means that the website does not need to worry about the licensing and compliance requirements for payments processing. Many other additional features can then supplement this basic offering, including interfaces for reviewing and refunding charges; keeping track of customers and their orders; or implementing subscriptions, discounts, and coupons.

These companies, such as Braintree, Stripe, WePay, and Recurly (for recurring payments), operate to make payments easy for online businesses to integrate and seamless for customers to use. Pricing is nearly identical between the companies, and each has tried to distinguish itself in some way—Stripe with ease of use, WePay with fraud prevention, Recurly with subscription billing—because attracting users (businesses) is such a challenge. Braintree has distinguished itself with excellent customer service. Paypal’s president noted in an interview about the acquisition that “[Braintree’s] obsession with removing friction for next-generation commerce matched our own.”[4] The deep irony here is that PayPal is notorious, to the extent it even has functionality available to compete with these younger companies, for having outdated, inefficient, and expensive interfaces coupled with terrible customer service.

Shifting Between Providers
Up-front development costs and small variations in product make it hard to convince websites to switch services once they have implemented a payments processing solution. Many of the websites that these companies serve are websites that were developed after the companies were founded, suggesting that the switching costs away from a service, even one as reviled as PayPal, are a significant barrier. This is an important factor in online payments, because businesses do not receive notable network effects for using a particular payments company. In that way, the market exhibits a large first-mover advantage: once a website has been coded to integrate with a particular payments company, it is costly to change that decision.

Looking Forward
Braintree will certainly be able to take advantage of the additional resources and regulatory benefits that come from PayPal’s existing presence in online-payments processing and other payments markets. But it remains to be seen whether PayPal will allow Braintree to continue innovating. That would be the best outcome the online-payments community could hope for, and younger competitors such as Stripe will continue to push to keep the industry moving forward. But PayPal’s track record on innovation over the past few years is lackluster at best. There is a real risk that Braintree, which has played a significant role in the recent revolution in internet-payments provision for online business, will be dragged into a similar stasis now that it is part of the dominant market player. For this reason, entrepreneurs and developers should be worried about the implications of this acquisition.


[1] Form 10-K 2012. eBay, Inc. <http://www.sec.gov/Archives/edgar/data/1065088/000106508813000004/ebay2012_10k.htm>

[2] “EBay’s PayPal Acquires Payments Gateway Braintree For $800M In Cash.” TechCrunch. Sept. 26, 2013. <http://techcrunch.com/2013/09/26/paypal-acquires-payments-gateway-braintree-for-800m-in-cash/>

[3] “Online Payment Processing Software Developers in the US.” IBISWorld Industry Report OD4521. July 2012.

[4] “EBay Buys Braintree, a Payments Start-Up.” New York Times. Sept. 26, 2013. <http://bits.blogs.nytimes.com/2013/09/26/paypal-buys-braintree-a-payments-start-up/>


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Payment platforms for online and mobile businesses – current and future landscape

While most of the press around mobile payments has focused around B2C solutions such as Square and LevelUp, online payment platforms such as Zuora, Stripe and Braintree are also seeing robust growth, riding the tremendous growth in e-commerce and P2P mobile payments. Example client include Uber, LivingSocial and AirBnB (Braintree), box.net and zendesk (Zuora) and shopify and edmodo (Stripe).  Such platforms have a few key elements that all competitors in this space try to replicate:

  • A robust, reliable and scalable solution
  • Simple developer-friendly APIs
  • Excellent customer service
  • Quick (and in some cases “instant”) set up, including setting up a new merchant account for the client

A robust, reliable and scalable solution

Accepting payments for a new high-growth startup can be a very painful process if attempted on your own, but companies such as Braintree, Stripe and Zuora attempt to simplify the process as much as possible. The goal is to provide a solution that scales as your startup scales – from facilitating 100 transactions a week to a 1000 transactions a minute, all the while providing a reliable, secure and affordable service. Key to this space is supporting both desktop and mobile transactions, as a growing number of e-transactions occur on mobile devices. A number of startups also make international expansion a very early priority, as they attempt to be the first-mover in several markets. Payment providers try to stay one step ahead of the curve by expanding internationally and having a deep understanding of foreign legal and financial frameworks.

Simple developer-friendly APIs

Stripe is perhaps the best poster-child for having developer-friendly payment APIs. Stripe boasts having APIs “that get of your way” and also pioneered the “instant” setup features that were replicated by Braintree – which allow you to get started with a payment solution in under a day. The key here is to have API wrappers for various languages such as Ruby, PHP, Python and many more to make it incredibly easy to get started and integrate with your service.

Excellent customer service

Braintree seems to be leading here, and promises to always have a real person answer a customer service call. Customer service is key in this business, which is based on having reliable, trustworthy service with quick turnarounds if something goes wrong. Parts of the payments process remain tedious and high-touch. For example, setting up a new merchant can often involve multiple long-threads between the payment-solution provider and the client, where the payment-solution provider acts as the middleman (and underwriter) between the client and the bank. The client wants to have the account set up as soon as possible, while the bank wants to make sure that a proper risk assessment as done – companies like Braintree try to simplify the process by having excellent customer service and quick turnaround times.

Instant set-up

Now that Stripe and Braintree have instant setup (by eliminating the waiting period for a new merchant account or underwriting approval), startups can have a quick headstart in facilitating e-commerce transactions.  Through this process, companies such as Braintree also get more insight about the client’s business model and growth plans, and try to ensure that clients’ accounts are never frozen or shut down because of unanticipated activity.

Disruption and future landscape

While there are certainly scale benefits to serving many clients, I do not see any network effects associated with providing online payments. However, this could change as some of these providers attempt to get into the mobile P2P payments space, such as Braintree’s acquisition of Venmo.

On the other hand, the companies in this space are addressing an unmet need. For many high-growth startups, solutions such as PayPal, authorize.net are too expensive, slow, outdated and too hard to integrate with. I see solutions by Braintree and Stripe taking away a lot of business from PayPal. Switching costs are also high – it is usually hard to migrate customer payment information from one platform to another.

Although payment providers are seeing tremendous growth just because of the amount of growth in e-commerce and online/mobile transactions, all these solutions (except for Braintree’s Venmo business) are still reliant on the infrastructure provided by the credit-card networks. All the startups in this space seem to be playing the puppy-dog strategy – posing as small players who are friendly with the credit-card networks and are doing little to disintermediate them.

Competition is tough in the payment space, and more and more players (both large and small) are getting into this space everyday. Braintree, Stripe and Zuora seem to have carved out a niche, but need to remain innovative and competitive to stay relevant going forward. I’m looking forward to seeing many more innovate solutions come out of these companies to make payments for young, high-growth startups even easier.

 


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