There has been a lot of activity in the market for peer-to-peer (P2P) payments lately. While the concept of P2P payments is not new (one could argue it started once upon a time with the barter system), multiple products are trying to capture a share of this market today in the world of mobile. PayPal’s latest quarterly earnings report notes that $2.1 billion of payments were processed through Venmo in Q3–2015, growing at the rate of 200% a year! Venmo is just one of the products, although arguably the most popular, and competes with many other products such as Square Cash, Google Wallet, Facebook Messenger and PayPal itself. Apple is also planning to launch a P2P payment service, according to the New York Times.

The objective of this post is to analyze

  1. Whether P2P payments is a winner-takes-all market and
  2. Brief strategies that both larger incumbents and newer entrants can pursue to succeed in this market.

This post does not cover the market size, different features and nuances of the various products (unless they’re relevant to the above objectives), various stakeholders involved in building such products and their incentives (e.g. banks, credit card network operators etc.) and other considerations such as security and privacy.

Is P2P payments a winner-takes-all market? ?

To evaluate the extent to which this is a winner-takes-all market, we can evaluate the following:

  1. Strength of network effects

    In a P2P payment transaction, by definition, there is a ‘payer’ and a ‘receiver’. The products above clearly exhibit network effects in these terms because more payers in a network attract more receivers and vice versa. A user can play the role of both ‘payer’ and ‘receiver’ across different transactions and, hence, each additional user increases the value of the network to the other users too.

    But how strong are these network effects? In P2P payments, a user could potentially want to use this service with multiple other people (including friends, family, colleagues at work, an acquitance at a party etc.). It is also not easy to predict in advance when or with whom a user will transact. However, there is not much value in the ability to transact with a ‘random’ person (unlike the ability to check the profile of or connect with a ‘random’ new person on Facebook). Hence, on a scale from 0 (none) to 5 (high), I would rate the strength of network effects in this market as 4.

  2. Multi-homing costs

    Multi-homing means the ability to check multiple products offering the same functionality in parallel (which product the user ultimately decides to use depends on various other factors such as cost, user experience and so on). The process of homing has 1 to 2 steps in this case: installing the product and signing up for it (if not already done) and making a transaction.

    How high are the multi-homing costs? I would argue that the first step of installing a product and signing up is costly. While some products allow signing up through a debit or credit card, they may charge fees in making P2P payments (especially when using a credit card). The one mode of payment that is mostly free across several products is transacting through a bank account. However, signing up through a bank account takes time: the user needs to recall the bank account number, routing number and wait for a day or two to verify the account (usually done through a debit and credit of random amounts less than $1).

    However, once a user has signed up for another product, multi-homing is not as costly. It depends primarily on the user experience (e.g. details the user would need to enter to make a transaction and the ease of use).

    Overall, on a scale of 0 (none) to 5 (high), I would rate multi-homing costs in this market as 3.5.

  3. Demand for differentiated products

    While the core functionality may not be different across products, users would appreciate differentiation of the products in terms of the user experience (e.g. ability to start a transaction even without signing up, a feature of Square Cash and Google Wallet), platforms it is available on (e.g. mobile-only or both mobile and desktop) and other related features such as tracking, security and so on.

Overall, while there are strong network effects and strong (although less so) multi-homing costs, there is also a demand for differentiated products. Hence, the P2P payments market is not likely to be winner-takes-all and will likely have multiple products competing in the long-term. At the same time, due to the network effects and multi-homing costs, I would not expect more than 3–4 players competing in the long run.

Strategies to succeed

Given the above drivers of the extent to which this market is winner-takes-all, both large incumbents and new entrants can follow different strategies to succeed. A few of the strategies (certainly not exhaustive) are very briefly discussed below:

  1. Reduce ‘friction’ in signing up and using the functionality for the first time

    This is especially important for new entrants so that they reduce multi-homing costs, but this is not easy. Companies like Apple may have an advantage on this front: If P2P payment is added to Apple Pay, existing Apple Pay users are signed up by default. Companies like Facebook and Google are also making it relatively simpler by adding ‘$’ buttons to Facebook Messenger and Gmail respectively which already have large user bases.

  2. Provide a superior user experience when making transactions

    This is one of the definite ways to differentiate the product. For example, Apple Pay can have a mechanism where the user double-taps the home button, scans the fingerprint and pays/requests another iPhone nearby, all this without even unlocking the phone! Of course, not all better user experiences are necessarily appreciated by the users. Careful attention should be paid to user experiences that actually solve a pain point. For example, is the ability to pay/request a nearby iPhone without unlocking the phone actually valuable to users?

  3. Develop a differentiated and valuable offering, perhaps for a specific niche in the market

    One of the differentiating factors of these products is cost. For example, some of the big incumbents may not necessarily aim to make money through this ‘feature’ and hence have a lower charge. Their aim may be to increase usage and engagement of their products and monetize through exisiting or other means. New entrants may also start by serving specific niches and developing a differentiated offering for them. For example, one specific niche could be an offering optimized for payments and settlement between users in a large group.

Finding good strategies and executing them is easier said than done, but it would be fun to see how this market plays out.

What do you think?

By: Shankar Vellal

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The international money transfer industry is about to be re-disrupted but the jury as to which innovation will disrupt it is still out there. Not long ago (in the early 2000’s) Xoom disrupted the industry by creating a platform to send money online, removing the large costs of operation derived from having a network of physical locations to collect the money to be sent. In the past year we have seen two new types of startups emerge in the international money transfer industry that aim to disrupt this industry once again.

One of the models is peer to peer. This model is designed to avoid incurring one of the largest costs of money transfer which is sending money across international borders.  The way it works is that once a customer sets an order to send money abroad the company finds someone that wishes to send money the other way around. By doing this they can transfer the money without it actually moving across the border because they just do a local transfer (e.g. someone sending from the US to Europe and another one sending from Europe to the US get paired up so that the money sent doesn’t leave Europe nor the US). Another key advantage to this model is that since the company doesn’t hold foreign currency they don’t need to manage its risk and therefore are able to offer a better foreign exchange rate.

Of course, getting this model off the ground will not be easy since one big challenge with this model is building a large enough network so that every time a user wants to send money the company can find a counterparty to complete the transaction.  Some of the most important players using this model are TransferWise and CurrencyFair.

The second model that has been launched is the one that uses bitcoin as the tool to send remittances abroad. An example in this sector is Bitpesa which sends money to Kenya using Bitcoin and allows users to withdraw the money through mobile banking platforms already pretty popular in Kenya or the recipient’s bank account. The way it works is that customers buy bitcoin through one of the available bitcoin vendors, they send Bitcoin to Bitpesa and then Bitpesa delivers it in Kenyan Shillings. Since bitcoin is a virtual currency that can travel internationally without any additional charges there are large savings to be created in the remittance market. However bitcoin has not yet taken off and there are two key things holding back its adoption: first the regulation that will continue being imposed on it and second the large volatility that it still has which makes exchanging fiat money for bitcoin a highly risky activity by itself.

Because of this it would seem that the peer to peer model should be adopted much more quickly causing it to be the clear winner, right? Well in this case I think that the two innovations will coexist but eventually bitcoin will end up being the main technology to send remittances.

The reason is that while peer to peer is a great idea and the technology is already out there working there is one huge flaw in it which is that for it to work there needs to be a balance in the amount of money transferred between countries and unfortunately the majority of remittances are sent between countries that are not balanced. Take for example the US to Mexico market. Mexico is one of the largest recipients of remittances (about 25 billion USD are sent every year from the US to Mexico); however Mexican immigrants can’t use a peer to peer service because there are very few people sending money from Mexico to the US. This is the case for other key markets such as India and the Philippines.

For this reason I think that the peer to peer services will be interesting players for some markets but will not end up being the dominant technology and they will only survive until bitcoin takes off (by reducing its volatility and getting through regulatory hurdles). Once bitcoin takes off and uses its scale to provide even larger savings than the ones offered by peer to peer models maybe we’ll see bitcoin emerge as the winner. For now nothing is set in stone.

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Over the summer I had the opportunity to work for both a booming start up – Airbnb – fighting its German copycat – Wimdu – and the dark side of the force in Rocket Internet’s version of Zappos in Brazil: Dafiti.

 I was therefore able to observe first hand how well the Samwer brother’s cloning method (basically pouring marketing dollars into the business) was effective when 18 months after it’s launch, JP Morgan invested 45M$ in Dafiti’s e-commerce business1.

 Simultaneously, barely a year after raising a huge initial round of funding (90M$)2, rumours of Wimdu closing its London and Paris offices reached my ears (the information has not yet been confirmed by RI). I couldn’t help meditate about the reasons why a similar method worked in the case of Dafiti and not Wimdu.

On paper, Wimdu had everything  to become a long-lasting competitor to Airbnb:

·      Platform is exactly the same

·      Marketing message is identical to Airbnb’s (“Travel like a human” vs. “Travel like a local”)

·      Value proposition to both guests and hosts are extremely similar (free listings and 3% commission for the host, 6-12% commission for the guests on Airbnb vs. 15% on Wimdu)

·      Wimdu had local offices in most major markets before Airbnb (Paris, London)

·      Both Wimdu and Airbnb’s pockets were as deep (90M$ vs. 120M$ funding)

Therefore what can explain this first-round knock-out?

1. The nature of the market called for a clear winner

It seems as though Rocket Internet bet big on this one. Indeed, the peer-to-peer industry for rooms / apartments has all the criteria to be a “winner-takes-all” market:

·      High positive network effects: the value of being a part of the “community” increases with the number of users for both hosts (increased demand / revenue) and travellers (competition driven prices on a given location, wider range of destinations). In addition, due to the trust factor involved in peer-to-peer transactions, the incumbent (Airbnb in this case) benefits from the higher number of past transactions (reviews of hosts and guests) thus strengthening these network effects.

·      High complexity to manage a listing on several marketplaces: although travellers are only one click away from another marketplace, hosts have extremely high multi-homing costs from managing a listing on two platforms (i.e. complexity to sync calendars and track bookings, etc…).

It is therefore not surprising to see one of the two emerge as the clear winner but what triggered such a quick victory?

2. Love mattered more than size

The two companies chose very different strategies when allocating their resources. Wimdu spent millions on “recruiting” listings3 via their sales force and travellers via online marketing to make up for being the underdog. In the meanwhile, Airbnb focused on its customer service and its community of users.

Unfortunately for Wimdu, in this industry, the viral coefficient is probably higher than anywhere else:

·      Every new host is a potential future traveller and every happy traveller is a potential new host

·      Additionally, the highly social nature of travelling (who likes to travel alone? who can refrain from “telling all about their vacation” the day they get home?) increases the importance of generating positive word-of-mouth

By focusing on customer service (24/7 customer service, 17 languages served, 90% of calls answered in 90 seconds,), Airbnb grew its community organically (in France, Airbnb had 4,000 listings before even having an office and a French website!). On the other hand, Wimdu let multiple incidents occur without reacting4=;

Additionally, Airbnb understood early on that with such a huge part of their business relying on “trust”, reaching out to their community of hosts was a key component of their success. By organizing offline events where hosts could “put a face on Airbnb” and enabling them to interact between each other, they created an offline community that powered their growth (in France, the number of listings doubled in the 4 months following the first offline meetups).  

Ironically, Airbnb could almost have been called a Zappos culture copycat for embracing Tony Hsieh’s perspective on customer service.

For all those romantics out there, it is a great story to think that in this day and age, “doing business like a human” can still overcome the aggressive strength of marketing dollars.  The question is: will Rocket Internet learn the lessons from this as they launch a Pinterest copycat (called “Pinspire”) in Asia5 ?





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The notion of sharing isn’t new to us.  From carpooling to soccer practice to enjoying your week at a timeshare vacation home, we’ve seen informal and formal sharing mechanisms for a long time.  A recent wave of startups has taken old-fashioned sharing to new levels.

Valued at $1 billion in July of this year, Airbnb seems to be the biggest success so far.  A marketplace to list and rent homes to and from others, Airbnb was launched in 2008 and has since grown to over 100,000 unique listings across 13,000 cities in a bid against the more traditional hotel model.  But people are finding ways to share and monetize every underutilized asset they own.  Beyond homes, there are recent consumer-to-consumer startups facilitating sharing of cars (Relay Rides, GetAround, HiGear), boats, bikes, planes, and RVs (Qraft), and parking spots (Parking Panda); at least one business-to-consumer site that rents unused office space (Kodesk); and another bevy of business-to-consumer sites that rent their own inventory: handbags (Bag Borrow or Steal), designer dresses (Rent-the-Runway), and even children’s toys (Toygaroo).

So what’s driving this trend?  For one, consumer preferences are as fickle as ever today.  Is it a sailboat or skiboat day, Porsche or Ferrari tonight?  Gone are the days of committing to one leisure good.  Sharing sites allow indecisive, hard-to-please consumers to spread their spending over a diverse variety of indulgences that might change from day to day.  What’s more, rental sites give everyday Joes access to a higher-end luxury than they otherwise couldn’t afford.  To be sure, though, these sites facilitate sharing of non-luxury goods as well (parking spots?); and so some of it just comes down to simple economics: sharing sites offer an easy way for lenders to monetize their underutilized assets, and they allow borrowers a much more sensible way to consume.  Why buy a full-time parking spot that I’ll only use when friends drive in from out of town?  These more frugal spending behaviors were born out of necessity for some during the financial crisis, and bolstered more recently by inspired movements against waste, extravagance, and reckless spending.

What’s the next step in the evolution of these sites?  Well, perhaps not surprisingly, an aggregator already exists, though largely for B2C sites.  Rentcycle, founded in early 2009, pools inventory from stores renting everything from power tools to office furniture to rock climbing gear.  They raised a $1.4M seed round in August of this year from a group including Andreessen Horowitz and Max Levchin.  But as consumers become more comfortable with the concept of borrowing and sharing, look for more peer- to-peer sites to grab the headlines in the future.  Consumers will continue to find new ways to monetize underutilized assets, and they’ll demand equal innovation in the peer review systems that facilitate trust on sharing sites today.

So what’s your take?  What will define the next growth phase of this promising category of startups?

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