Payments Breakthrough, Beachheads And Sinkholes

Last week was quite the exciting week in payments as several big players really put their money where their mouths were and made a few strategic plays. ACI grabbed Official Payments to bolster its position in online bill payment, and WorldPay snagged one of its ISOs (Century Payments) to continue to build out its payments processing engine. But, perhaps the piece de resistance was eBay’s (well, therefore, PayPal’s) acquisition of Braintree, the commerce platform that came out of nowhere six years ago to payment-enable what was then considered a rag-tag bunch of niche applications with weird names: Posh, AirBnB, TaskRabbit, Groupon, Living Social and Uber – to name just a few.

Braintree bet its business on the notion that there was money to be made in unlocking the value of commerce for developers (aka entrepreneurs) that saw the potential of online + connected devices but needed help getting connected to the complex morass of payments plumbing critical for monetizing their idea. Many in the industry scratched their heads when Braintree came onto the scene, wondering why such a platform was needed, and then as it started to get traction, whether any of these one-off applications that flocked to it would ever amount to anything more than an interesting and expensive science experiment in the nascent world of mobile commerce.

As it turns out, Braintree’s founder, Bryan Johnson, was prescient in recognizing that a platform that removed the friction associated with payments would simply create more opportunities for more innovators to create new things and ultimately become very valuable. Braintree did for online innovators that wanted to accept card payments, what Square did for micro merchantswanting to do the same thing in the physical world.

But, this piece isn’t the 257th opinion piece on why eBay bought Braintree since enough has already been said on that score. What this acquisition, and the many moves throughout payments recently, prompted me to think about was the method to the madness of these players in charting the future of mobile commerce.

And, so I created a matrix that I thought might shed some light on the many moves being made in mobile commerce and where success can be found (or created). This matrix is less about deciding the value of any innovation or particular innovator, but merely a way to interpret and maybe even guide strategy related to innovation in payments. And, I even gave it a name – Webster’s Innovation Matrix and an acronym (WIM) – and yes, the double entendre of WIM being pronounced like “whim” is intentional.

I decided that the two axes had to measure two very critical attributes: value delivered to stakeholders and the ability to deliver that value, which I labeled capabilities. My scale is nothing fancy and ranges from – the same – meaning what exists today – to brand spanking new.

With that as a starting point, I then had some fun with defining the various quadrants and applying them to some of the things going on payments and commerce right now.

Here goes.

Same Capabilities/Same Value. I hope that it doesn’t take me to tell you that stuff happening here isn’t really about being innovative but pretty much maintaining the status quo. Now, using existing capabilities to deliver the same value doesn’t have to be all bad – at least for right now. One might even argue – and they’d be right – that players who live in this quadrant are what’s keeping the payments systems we know and use today alive and well – since most of us still whip out our plastic cards or cash or even the occasional check to pay for goods and services and will for a while. And, some players living comfortably in this quadrant can also find opportunities to grow and/or improve their margins by becoming a more stable and/or cheaper and/or higher quality and/or more convenient and/or easier to work with supplier for relevant parts of the ecosystem. But, getting too cozy here puts these players at the mercy of innovators who use their existing, more modern capabilities (which they can partner with and/or acquire) to deliver enough new value to stakeholders that they shift the adoption curve in their favor. It’s this quadrant, after all, that innovators are looking to disrupt. And, since we all know that it takes a very looooong time in payments to ignite new products and services, getting too comfortable here for too long may just make it harder (and even impossible at some point) to move into other quadrants and remain relevant in the future.

Same Value, New Capabilities.
This quadrant is all about innovating by delivering the same value to stakeholders today, but having to acquire new capabilities in order to do it. I have affectionately labeled this quadrant “The Sinkhole.” Think about it. Players here deliver the same value that exists today, but have to (or want to?) acquire new capabilities to execute on that value proposition. For example, I might put NFC players in this quadrant since lots of new capabilities had to be acquired and/or created to basically deliver the same value to stakeholders – payment at the physical point of sale. Yes, I know that NFC can deliver value beyond that and become a Breakthrough, but it was introduced as a replacement for card swipes at checkout and the value proposition to consumers and merchants wasn’t strong enough to stimulate their investment and adoption. And, unfortunately, the NFC sinkhole is only getting deeper and more expensive as cloud-based options flourish that add more value to those stakeholders. I suppose that players betting that will take eons before there is a wholesale shift to mobile commerce might want to convince themselves that investing in new capabilities to deliver the same value today is the thing to do, but that seems a pretty risky bet.

Same Capabilities, New Value. To borrow an old cliché, this is a pretty “sweet spot” to be in any industry but especially in payments. Being a Beachhead means that innovation is being created through finding new use cases for existing capabilities, with network effects and scale as the happy by-products. This is an especially powerful innovation enabler for platforms that can not only unlock value for themselves but enable others to do the same. Beachheads can make it tougher for others to enter too since they have a running head start in applying existing assets and scale to new (or newly created) white spaces and can probably do it in a more cost effective way. This is the M.O. behind Discover’s decision to rent its network to innovators, Square’s decision to leverage existing payments rails and form factors to deliver new value to small merchants, Mitek’s pivot to remote deposit capture technology for consumer mobile devices, Capital Access Network’s move to deliver merchant financing online and PayPal’s move off eBay to online and now to the online/offline physical commerce world, to take a few examples. In each case, having new places to deploy existing capabilities helped keep their innovation “Beachhead” from eroding, while enabling those players to more easily (and cost effectively) add new value, attract new customers and earn more revenue. To make this a bit more tangible, using these examples, PayPal could acquire more consumers with digital wallets, Capital Access Network could reach more merchants at a lower cost by going online, Mitek could build more volume by partnering with issuers to distribute its app, Discover could move more volume across its network, etc.

New Capabilities/New Value.
Consultants over the years have trained business executives to reach for the upper right-hand quadrant of any matrix, explaining it as industry’s version of winning the World Series. At least when it comes to this matrix, it’s also where innovators are hatched and where VC investments are highly concentrated – new players disrupting the status quo by entering with new capabilities that deliver new value to ecosystem stakeholders. And, so not surprisingly, this is where most of the conversation in payments and mobile and commerce is now focused. It’s where the big Breakthroughs in payments are expected to happen and where the efforts and the intensity in the industry is supposed to be focused. But as we know, for every big Breakthrough, there are hundreds of “Breakdowns” because innovators misjudge what value they should be creating and for whom, underestimate what it takes to deliver that new value and don’t know how long it will take to execute or what is required. Building a Breakthrough can also be pricey … rewarding if you are one of the lucky ones, but a tough slog for most.

So, as I’ve spent time playing around with this matrix, it occurs to me that maybe the end game with respect to successfully deploying innovation in payments isn’t solely about occupying the upper right quadrant, but becoming a very strong Beachhead that acquires and/or partners with (and/or maybe even copies) “the right” Breakthroughs, partners with other “Beachheads” and ultimately dominates both upper quadrants.

Now, before you tell me that one can never break the sacred rule of matrices and diss everyone’s aspiration to be in the upper right-hand quadrant, take a look at what’s happened in payments over the last few years. The “smart money” players move very nimbly between Breakthrough and Beachhead. In fact, it seems quite common that Breakthrough players look to the left when they want an exit or to scale, and Beachheads look to the right when they want to secure their position further by adding new value to their stakeholders and need new capabilities that to deliver that, over time, simply become part of the core offer.

So, take PayPal for instance. Like all cool new ideas, it started life as a Breakthrough player solving new problems (shopping online) with new capabilities (secure digital payment method). As we all know well, it ignited when eBay (Beachhead in online marketplaces) acquired it. As a part of eBay, it applied its capabilities to deliver new value for eBay customers, acquired a critical mass of digital wallets and customers along the way. It took its same capabilities off eBay where it could add value (a convenient and secure online experience) and acquired new assets along the way (consumers with digital wallets and merchants). Over the years, PayPal has acquired Breakthrough players – BillMeLater, Zong, Magento, Red Laser, Iron Pearl and now Braintree – and partnered with others – TSYS, Mercury Payments, Discover – to strengthen its Beachhead in payments and make it more valuable, sticker and harder for its consumers and stakeholders to abandon – and harder for others to establish their Beachheads.

Here are a few other “so what’s” that this matrix may inform.

1. Beachheads are well positioned to innovate in payments by finding or creating new use cases for their existing capabilities or acquiring or partner with others – Breakthroughs or other Beachheads” to add new value to existing stakeholders. They have a critical mass on one or both sides of the platform to leverage that makes scale more plausible.

2. Breakthoughs are the “shiny new objects” that catch everyone’s fascination but the industry’s version of a lottery ticket: few Powerball payoffs, some smaller jackpots and many losing tickets. Breakthroughs can improve their odds of success by identifying Beachheads that have an existing asset base that could benefit from their capabilities. That, however, requires being completely and totally ruthlessly realistic about what that Breakthrough value is and how it can benefit the Beachhead. Braintree’s value to eBay/PayPal is many things, not the least of which is a platform to enable a more streamlined onboarding process for new innovators, as well as a customer base that can be introduced to PayPal as a payment option down the road.

3. Speaking of value, value is the key determiner of whose innovation will be most successful in this matrix. Being able to step back and assess what value is being created and for whom, realistically and pragmatically, is job one. We’ve learned a lot over the last 3 or 4 years about the value that can be created at the intersection of connected devices and data and the cloud. Fortunately or unfortunately, the payment transaction is now to commerce what electricity is to utility companies – a commodity product and no longer a differentiator. Sinkholes are created when there is a lack of clarity or misjudgment about what creates value for consumers and merchants.

4. Status quos, by definition, aren’t innovating, but today it’s where a lot of the power resides – and let’s face it – they were the Breakthroughs and Beachheads once upon a time. That’s also their biggest blind spot. Breakthroughs have the status quo in their sights and want to keep them cozy and comfortable in their lower-left bunker. Beachheads do too. The strategic decision facing Status Quo is how to become a Beachhead – and not a Sinkhole.

So, there you have it. I’d love your feedback on what I’ve cooked up and your point of view on who’s moving and shaking their way around the matrix – who’s really got the WIM vibe going and who’s, well just approaching innovation in mobile as a whim. I’ll also add that this is one of the Frameworks we will be using as a way to talk about moves and strategic decisions facing the players in this space during the Mobile Commerce Insider Series which debuts on November 5th. I guarantee that we’ll have some very thoughtful discussions about what Sinkholes are getting deeper and Beachheads getting stronger – what Breakthroughs might Breakdown and how the Status Quo is responding. We’ll also talk about what outside of the industry might be influencing direction – regulation and new technologies have the ability to shake up this matrix overnight.

If you haven’t made a decision to join in the fun, please do now! I’d love to have your voice added to the discussion. And, of course, what you think of my namesake matrix!

Happy Monday everyone!



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