Commentary

Tempo, Take 2: Lessons the Payments Sector Can Learn From

The interview that I did with Mike Grossman, CEO of Tempo  Payments triggered several thoughts and reminded me of just how important the notion of critical mass is to success in two/multi-sided ecosystems. Here are my musings.

1. It’s really hard to get merchants and consumers on board with something new. No duh, you say. I was a little surprised to be reminded that Tempo, which started life as Debitman in 2003 and then hit the reset button as Tempo in 2005, was only able to convince 7-8 merchants and ~100,000 cardholders to sign on over that period of time. Tempo’s proposition was to offer merchants lower interchange fees in an effort to get them on board first, then hoping to lure consumers to shop ’til they dropped at those merchants, who presumably, would fund loyalty and other programs to both attract customers and persuade them to use their Tempo cards. I wonder if merchants really did plow the savings into programs in a meaningful enough way to make a persuasive case for consumers to pull out the Tempo card and not someone else’s. (Might be an interesting data point into what we can expect in a post-Durbin world…) Since Tempo wasn’t able to attract more merchants, it was inevitable that they would be limited on the number of consumers that they could ultimately attract too. I wonder – and I bet Mike and his team does, too – whether having 1.000 merchants and 1 million consumers would have helped them blunt what became their Durbin death knell.

2. Lower interchange fees didn’t turn out to be as  important as merchants said it was. I don’t have intimate knowledge of the Tempo business model, but Mike reiterated in the interview that lower fees was THE value proposition for this once promising payments network. Like many emerging networks of its time though, it banked (literally) on the fact that merchants would beat a path to their door if they dangled the prospect of lower fees in front of them. Again, I think it is a really interesting data point that over 8 years only 7-8 merchants found the business proposition by Tempo to be compelling enough to embrace. Sure, part of the struggle for Tempo in talking to merchants was not having a large consumer base to offer to them but believing that lower fees was the only calling card they needed to juice their network turned out to be  fatal. Obviously, merchants didn’t value that as much as they said they did. The interesting learning here, in spite of what we’ve all just lived through with Durbin, is that lower fees aren’t the only (or most important) criteria for new payment acceptance. If it was, there would have been more merchants knocking on (or down) Tempo’s doors (and more generally, merchants systematically refusing to take cards at all).

3. Time to ignition is important. We sound like broken records when we talk to our clients about this point, but there is truly a relevant window for getting something new to critical mass. Slogging along is always part of the path to ignition. But the longer that it takes for an innovation to slog through the slogging and reach critical mass, the more at risk the innovation becomes to something else – either a new innovation, or in this case, regulation that puts said innovation at risk. We’ve seen it in spades in the United States with contactless and NFC, and on the flip side, watching new things like Google+ take off, the latter creating a serious challenger in the social networking space at a time when no one thought it possible. And, like Tempo was, every single player in the payments space is being impacted by Durbin, one way or the other. The difference it seems is that pivoting to something new is possible for others, because critical mass exists and business models can be modified to address the revenue shortfall. It is much easier to do this when you have a market position to leverage or momentum that provides investors with some evidence that a course correction is worth funding, as we’re seeing with ISIS, for example.

4. Business models are disruptive -in good and bad ways. Our experience over a decade of work with clients in massively complex ecosystems is that business models are perhaps the most powerful driver of innovation, and as such, where you sit in the ecosystem really does matter. Technology is, in many cases, a means to an end, and can be more easily replicated and therefore, commoditized. Business models, on the other hand, have the ability to create switching costs, destabilize the competition and reshape the ecosystem in the process. Not to beat the NFC dead horse, but that is the intrigue of Google and mobile payments they have multiple revenue pockets and therefore the prospect of driving revenue from a variety of sources and thus the ability to eliminate the friction that has kept others from succeeding in this space. Tempo’s model was simple and singular, but in so doing, set itself up for huge risk if someone else came along with even lower fees, which is how and why their story ended the way it did.

It is never easy to for people to talk about things that didn’t turn out as planned. Mike was really gracious with his time and quite candid during our interview, and I really appreciated the fact that he was willing to talk so openly about Tempo and why it failed. I’ll tell you one thing – not many (any?) in similar circumstances would have had the guts to do it. Getting people to open about what didn’t work is nearly impossible – and the lessons from failures are probably more helpful to understand than the successes – which always look deceptively easy. We should all thank Mike for sharing his experiences so openly and vividly – we can all learn from them. I wish him the very best with his next adventure (and judging by the number of hits to his profile on PYMNTS.com since the interview ran, it probably won’t be long before the next chapter begins).


Karen Webster is the President of Market Platform Dynamics (MPD), a consulting firm that helps companies find, implement and monetize innovation. She serves as an advisor and member of the board for a number of companies operating in the payment, technology and digital media industries. More info here.


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