eCom 302 Lesson 2: Emerging eCom Evolution

by Tim Attinger

eCOM 302: Emerging eCom Competition

Lesson 2 Discussion Board: How might a new online payments capability best ignite for growth? Through a great idea, a good merchant value proposition, or a strong relationship with a large established ecosystem? Click here to respond.

In our first class, we reviewed the basics of how emerging eCommerce payments competitors deliver compelling value to consumers and merchants by simplifying the online shopping experience. Creating multi-merchant single sign-on payments execution, eCommerce payments players deliver simplified transaction facilitation and execution in online storefronts. However, as these functions have grown merchant and consumer participants, they have begun to deliver closed-loop marketing benefits for both constituencies. In this class, we will delve into the evolution of the marketplace that has begun to see transaction facilitators grow into commerce creators.

Evolution: Walking Upright to Space Race in a Few Short Years. As the checkout services and their alias engines grow consumer participants and work to bring those participants to merchants, they create a network effect within the alias solution in two basic ways: 1) consumers gravitate to merchant value delivered through the engine, and 2) merchants are attracted to the consumer user population within the checkout solution. Checkout solutions integrate gateways, then merchant processing, then acquiring functions, becoming branded consumer payment systems with direct merchant relationships, using the base of registered users and merchants to create a virtual “closed loop” of users and acceptors on top of the existing payments networks and processes tied to the accounts that underpin them. These engines then use this virtual “closed loop” to drive promotions and sales in a way that the acquiring and issuing sides of traditional retail financial institutions have never quite accomplished.

Building a network effect in the initial deployment of a checkout solution has proven key to the growth of all the significant players in eCommerce payments solutions. The two of the most prominent solution providers have achieved this in different ways. Amazon grew its user base by providing an online account registration vehicle for, which provided a simplified “one click” checkout process for consumers within Amazon’s own site. As consumers adopted that checkout facility, and as Amazon’s base of registered users grew, the online merchant began to invite other merchants onto the Amazon site as providers of supplemental inventory with Amazon as the reseller intermediary, creating an online marketplace out of in the process. Amazon’s checkout processing capability has now become a full-fledged payments solution, with Amazon reselling its payments processing services and registered user base to merchants as an online acquirer sales organization.

Evolutionary Case Studies: In the case of PayPal, an online marketplace already existed with eBay, bringing buyers and sellers together in a hosted ecosystem. This environment needed an efficient payments service to facilitate transactions between buyers and sellers. Existing card networks systems — particularly traditional merchant acquirers — did not effectively serve the micro-merchants that were mostly eBay sellers at the time, so PayPal (originally conceived as a consumer-to-consumer P2P vehicle) provided an effective system of registering users, funding transactions with traditional card products, holding funds in escrow within the buyer account, and then settling those funds to the seller upon buyer approval. Over time, the unique value of that offering to small merchants came to be the speed and convenience with which an online retailer could establish card acceptance through PayPal rather quickly. For consumers, these incremental merchant acceptors of PayPal offered more places where they could take advantage of the speed and convenience of checkout with the PayPal solution, as well as access the implied security of having their account credentials managed by PayPal in the background rather than presented online to small merchants with whom they may be doing business for the first time.

Taking these network-building solutions as their example, a number of new network effect businesses with substantial populations of consumers and businesses are now investing in the addition of checkout and alias-engine payments solutions to complement and monetize their core businesses. One notable example is Facebook‘s investment in payment solutions to support a growing population of users seeking ways to settle between each other for digital goods. Chief among those users is Zynga, who has grown an online gaming community within the Facebook network, generating incredibly rapid participation in online games and demand for payments services to facilitate exchanges within those games. By making a payment and settlement facility available to an already burgeoning population of users and merchants, Facebook’s payment service has the potential to grow rapidly. Facebook’s user environment provides a network effect environment that has already organized buyers and sellers, as eBay did for PayPal in the early days of that service. The possible difference here is that Facebook’s total base of registered consumers already exceeds the total U.S. population.

In our last class, we’ll take a look at the implications of the evolutionary race in the checkout management business for the traditional payments card networks. For those of you who tuned in for class two weeks ago, you may remember our citation of Charlie Darwin’s evolutionary mantra. A reminder: In a race for the survival of the fittest, the term “fittest” doesn’t mean “biggest,” nor “strongest,” nor “most intelligent.” The most relevant definition is “most adaptive to change.” We’ll take a look tomorrow at how the major networks are trying to adapt to the commerce creation model. As a preview to where things may be headed, let’s ponder the question below.

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