Commentary

Weird Stuff In Payments

“The path to any success is lined with disasters.”

Adam Davidson wrote a pretty thought-provoking article on failure that was published in The New York Times a couple of weeks ago. This quote from his piece sums up his assertion that innovation today is a series of great ideas quickly displaced by innovators who use new technologies and tools to create something even greater, bigger and more desirable. Those innovators are, in turn, quickly displaced by a whole new crop of innovators who sort of return the favor and do the same thing to them.

Davidson characterizes this as the “failure loop” – more or less the dark side of innovation. Davidson even found a place that one might even consider the failure loop depot, a huge warehouse called Weird Stuff where many of the old products, office furniture, software, computer parts and other artifacts no longer considered “innovative” end up. Weird Stuff, ironically, is headquartered in Cupertino, the home of a certain tech giant that, if you buy Davidson’s theory of the case, is feeding the failure loop of some pretty important ecosystems – mobile, payments, music, and retail, to name just a few.

Ironically, it’s often, quite literally, a very short trip from success to Weird Stuff.

Davidson’s article made me think about what we might ship to a Weird Stuff warehouse if one existed just for payments and retail. We could probably fill a pretty big warehouse since there’ve certainly been a lot of disasters on the road to success, or, maybe more appropriately, just on the road.

Here are a few candidates that come to mind.

Social Commerce Sites
It wasn’t that long ago, November 2011 in fact, that social commerce was the rage – the “biggest thing in commerce” many suggested. It was easy to be persuaded. Facebook had 500M users then and was growing like a weed. One in every 14 people in the world was said to be on the social network at that time, about half of whom said they visited it every single day. People also not only visited Facebook a lot, they spent hours a week stalking friends (and others) and posting, collectively, billions of updates. With such a captive audience, selling stuff to them would be the retail equivalent of shooting fish in a barrel.

Not exactly.

Just ask Payvment, a company that was the first to jump into the social commerce space with both feet. They launched in 2009 and raised about $8 million (seems like a pittance now doesn’t it?) to establish a Facebook storefront that aggregated a bunch of merchants and merchandise. The idea was that the consumers who were spending hours on Facebook every day would pop over to the Payvment mall to shop. Lots of other innovators were lured by this siren song, too. But Payvment was the big dog and in marketing materials called themselves the #1 social commerce site on Facebook.

That was pretty short lived. Two years later it closed up shop, selling its customer assets to Intuit for an undisclosed amount (which is PR speak for not much).

What Payvment and Payvment-wannabes learned the hard and expensive way was that consumers didn’t really want to shop on Facebook. They didn’t go to Facebook to shop and they weren’t entirely sure that if they saw something they wanted to buy it would remain private. Facebook’s Beacon (a much different “beacon” than we have now) experiment a few years earlier – which broadcast the transaction details of its few early adopters in their news feed – was hard for consumers to shake.

More importantly, Facebook’s news feed algorithm made the economics of driving business to merchant storefronts page upside down. Since only 14 percent of posts were ever seen by any Facebook fan – fans merchants spent millions getting – the only way for a merchant to guarantee that anyone would see a post, never mind click, was to advertise. That became far too expensive for aggregators like Payvment to do on behalf of its merchants, or for small merchants with small fan bases to do themselves.

The combination of consumers not being interested and merchants not able to justify the economics killed social commerce on Facebook. Whether Facebook killed social commerce, or social commerce died at its own hands, is a topic that many still debate.

Virtual Money
Remember Flooz and Beenz? I had a good chuckle the other day when talking to an innovator about the two virtual currencies that emerged in the late 1990s as the “essential tools” of commerce in a digital age. Flooz managed to recruit Whoopi Goldberg as its spokesperson and Beenz raised over $100M from investors like Larry Ellison.

Both died within a year or two after they were born.

Flooz died because it became the criminals’ tool of choice in defrauding merchants. They figured out a way to game the Flooz system and buy prepaid cards so that they could spend real money at real merchants. Beenz had a hard time persuading regulators that it was okay to have an unregulated currency that ran alongside their own fiat money supply.

Sound familiar?

Fast forward a few years from those failures and we have Facebook Credits. Credits launched in 2009 and was thought of by many as a new currency for buying things on Facebook. One dollar was worth 10 Facebook Credits and Credits was used mostly to buy cows and goats for Farmville farms. In fact, Credits was the only currency accepted in the Zynga games played on Facebook.

Credits died in 2012 after Zynga bailed from Facebook and there just weren’t enough places to use them.

A year later Amazon Coins launched as a virtual currency to be used in the Amazon Kindle ecosystem. Coins launched with a slight twist: the more Coins one bought, the greater the discount on certain digital purchases. There’s been little fanfare about Coins since its launch although it remains something that Amazon promotes actively on its site.

Since then, of course, there’s been an explosion of interest and investment in the darling of virtual currencies – bitcoin. Of course, bitcoin’s been around since 2009, but has only recently captured the interest of the venture community. Last year some $350 million was invested in bitcoin and bitcoin-related currencies as a way to enable transacting via a global currency anywhere in the world. Meanwhile, the volume of transactions done in bitcoin at merchants doesn’t really need that many decimal points and zeros to count.

As Yogi Berra would say, it’s like déjà vu all over again as bitcoin’s biggest use case is buying illegal substances, and regulators around the world push back hard on the notion having an unregulated global currency that makes money laundering, tax evasion and sundry crimes easier.

Biometrics At The Point Of Sale
The “road to success is paved with disasters” couldn’t be more perfectly suited here.

PayByTouch (PBT) was the payments industry $350 million biometric payments darling-turned-disaster. Founded in 2002, PBT was touted as a new payments scheme that would reduce fraud, reduce merchant fees and allow consumers the convenience of paying with the touch of their thumb print anywhere. It’s initial target was grocery stores (where margins are thin) with a product linked to consumers checking accounts, once consumers established an account at an in store kiosk using their thumbprint as their unique identifier.

In 2006, marketing materials produced by one of PBT’s suppliers said it had 4 million consumers who were using it at more than 2600 locations, including Albertsons and Piggly Wiggly grocery chains. PBT’s parent company even bought the old S&H Green Stamps franchise as a way to bundle loyalty with payment. A year later, PBT filed for bankruptcy after having lost $137 million on $600,000 in total revenues.

The Monday morning quarterbacking about its massively expensive and public failure continues to this day.

Consumers, it was reported, hated the idea of using biometrics to pay in lane because they were turned off by the idea of putting their thumbprint on a device that the yucky looking consumer ahead of them had just used. (Yes, these are the same consumers who handle dirty paper currency and punch in their PIN numbers on devices behind those same people.) The system was also slow and couldn’t scale. Consumers also didn’t really want to give up their personal information to establish a new account with a company they didn’t know just to pay for stuff in a store where they had to wait in line anyway to pay for their groceries and have them bagged. Oh, and the real scuttlebutt was that the founder and owner was allegedly a criminal who mismanaged the company.

All-In-One Payments Cards
Two, two, two payments cards in one!

That was the promise of dual function cards, the all-in-one plastic card that consumers could use one minute as a debit card and the next minute as a credit card. The value prop to consumers was that they could carry one card that offered both functionalities – giving the consumer maximum choice and minimal bulk in their leather wallets. Some variants on this theme even gave consumers the option of deciding how to allocate charges after they made them – allowing consumers to switch something they had initially selected as debit at the point of sale to credit or vice versa.

When Fifth Third launched its Duo card in 2011, one of the first such products, The New York Times wrote, “It’s one of those things that make you wonder why it wasn’t available before.” Unfortunately for Duo, consumers felt differently.

What product managers thought was a brilliant stroke of innovation (and a product that could even steer consumers to the more lucrative credit choice at checkout) turned out to be confusing. Consumers often had credit and debit products from different banks so they had to carry multiple cards anyway. Using one card and making the selection at checkout or after the fact sounded easy but ended up being too complicated and not something consumers wanted to or did do. And while the changing of the payment method after the fact sounds like a great idea, few consumers actually did it. Few issuers ended up getting on the all-in-one card bandwagon.

But that didn’t stop innovators from trying to one-up the all-in-one concept.

Dynamics introduced its version of an all-in-one card in 2012 with a digital front that let consumers touch a button and turn on debit or credit before swiping it. One-upping that concept a year later was Coin and the ability to store 8 cards. Coin got started via a Kickstarter campaign that raised a bunch of money but also a lot of customer ire – more than a year later, the product still hasn’t shipped. Plastc, undaunted by the lack of mainstream consumer interest, launched yet another version earlier this year (2014) with a product that can store as many as 20 cards and be used at all places that mag stripe cards are used today.

Even though these products are still active and in market, Coin, Plastc and Dynamics all face three incredibly strong headwinds.

One. Using existing plastic payments cards isn’t broken for 99.9999 percent of consumers. Making an all-in-one card electronic or black or fancy looking won’t change that. Besides, EMV is coming and all-in-one cards with a mag stripe may have sounded logical last year was EMV was on the ropes, but that fat lady has already sung.

Two. Aside from the early adopter geeky people living in the East and West Coast tech bubbles, who’s going to pay for a card – all-in-one notwithstanding? Consumers didn’t like all-in-one cards when they were free. It’s not clear they’ll like them more if they have to buy them.

Three. There’s this thing called mobile commerce which I hear is really going to catch on. With mobile apps, consumers will be able to use as many (and any) cards as they want from the device they like using easily and conveniently.

Of course we all know that cards will be around for a long while to come, but the future is about moving from dumb cards that can only do payment to digital and apps that do more for merchants and consumers – not dumb cards that can only do payments to slightly smarter and fancier looking cards that can only do payments without enough of a compelling value proposition for merchants and consumers to care.

NFC Stickers
The year was 2009. The “excitement” that had the payments industry buzzing was the launch of NFC stickers for payment.

The NFC sticker’s first use case was one that functioned as an AT&T prepaid account funded by a consumer’s existing credit or debit account. First Data managed the program and processed the transactions and Visa provided additional services like rewards and couponing. The AT&T/Visa/First Data sticker roadmap included lots of other sticker use cases like network branded credit/debit accounts and even specific merchant loyalty plays. Stickers were seen as a solution to the “problem” that few handsets in 2009 had integrated NFC capabilities but consumers really wanted the convenience of using their phones to pay at merchants.

That didn’t turn out so well. Consumers really didn’t want to junk up their phones with a sticker, much less the prospect of having multiple stickers to enable payment from multiple issuers. Consumers also didn’t want to advertise via a sticker on the back that their phones could be used for payment. And, in 2009, there weren’t very many places to use NFC anything, so consumers had no incentive to go to the trouble of getting a sticker and funding the account that was attached to it. The merchant resistance to NFC terminals in 2009 is a story I’ve told and you know all too well.

Of course, almost everything NFC has failed historically when it comes to payments. Apple Pay is the latest savior.

Group Buying/Daily Deals
Most people associate the birth of group buying with Groupon. Not the case. Group buying actually got its start in 2000 by a company called Mercata. Billed as “We Commerce,” Mercata was all about getting a ton of consumers to commit to buying electronics (mostly) online. The more people who bought, the cheaper the item got. A year later, Mercata shut down, saying that it couldn’t compete with Amazon. More practically, Mercata had a business model problem since it was buying from manufacturers directly in bulk and then and sending to consumers individually. That supply chain and logistical process was as cumbersome as getting enough consumers to opt into the deal.

But, six years later in 2007, Andrew Mason gave the concept a new and much hipper lease on life. The Point (which later became Groupon) launched with the same sort of idea – showing a “daily” deal, and getting that deal to “tip” to the deeply discounted price if enough consumers opted in. Groupon was the first, but certainly not the last to build a business around that concept. Group buying sites popped up all over the place. Even Walmart got in on the act when it launched its CrowdSaver product on Facebook – the more fans that liked a product, the cheaper it got.

Group buying innovators were inspired by a cheap and easy way to acquire consumers. The operating assumption was since everyone had an incentive to get a cheaper price, people would share the deal with their social networks. There was only one problem. Consumers only had so many friends, and it got too annoying to send a bunch of deals to the same friends day in and day out. And, those friends all had different tastes, budgets and buying needs. Having to recruit friends also made it too much work and created too much uncertainty for consumers who never really knew if enough people were going to “tip” the deal.

That, in turn, created a bunch of problems for group buying sites. If they didn’t require consumers who said they wanted to buy the item if it tipped to put in their credit card to reserve the item, the site operator never really knew whether those who said they’d buy would actually convert. And, consumers didn’t want to plunk down their credit cards and have an open to buy created unless they knew for sure they were getting a deal at the discounted price.

The result was too much work and uncertainty for consumers and too much risk for the group buying sites. Most either cratered completely or morphed into daily deal/flash sale sites (most of which have also collapsed).

Daily Deals/Flash Sales Sites
Woot gave daily deals life and a personality. Launched in 2004, Woot made its reputation on having one product a day that was quirky, unpredictable and presented in a funny and engaging style. Woot was acquired by Amazon in 2010 and is still going strong today. (Check out the T-shirt for the fake razor company. No idea who’d buy it but it’s only $15.00).

Most of its successor sites have gone on to the daily deal graveyard. Deals and deal sites became too plentiful, indistinguishable and irrelevant. Merchants also wised up to the fact that consumers only pledged their loyalty to the deal and not them, since there were dozens and dozens of deals on similar products they could choose from, daily.

Flash sale sites met a similar fate. Gilt Group really made its mark on the flash sale world when it launched in 2007. Every day at 11:45 EST women would wait for the tease announcing that day’s merchandise. Back then , those goodies were items from some of the most desirable designers in the world in very limited sizes and quantities. Gilt’s future took flight with the financial crisis’ tailwinds. 2008 saw the stock market crash, consumers lose their jobs and retailers get stuck with gobs of excess inventory. Gilt Group turned that inventory into sales and a customer base – some 6 million loyal members who knew they could buy the same great stuff on Gilt that they seen at Neiman’s or Saks for twice the price.

That worked well for Gilt for a couple of years as retailers worked to get out from under bad buying and an even worse economy. But things changed as retailers bought for the demand that they had (not as much) making excess inventory carried in their stores not as plentiful. Flash sale players, including Gilt, had to pivot. Many began offering private label merchandise or selling merchandise made exclusively for their flash sale outlets. This merchandise carried a designer label but none of the bragging rights of having snagged a $2500 jacket for $1200 that was hanging in the Bergdorf couture salon three months prior.

Consumers got smart to this new version of the flash sale. While some of these sites are still active, Gilt included, their appeal is different and to a much different group of consumers. The affluent woman who lived and died by her 11:45 EST calendar alerts in search of couture sold cheap is now being drawn to a different sort of site. High end consignment sites which sell once- or twice-worn merchandise by the super-rich socialites who would rather die than be seen in the same thing twice are now their daily habit.

New Payments Systems
It’s been about 30 years since we saw the last successful general purpose payments network launch and scale – The Discover Network. But in 2007, Revolution Money set out to change that. This cloud-based payments platform started life as the Gratis Card with a unique business model and consumer and merchant value proposition. Gratis/Revolution Money enabled PIN-based credit transactions via a plastic mag stripe card that had no identifier on it – no name, signature or account number. If lost or stolen, it was useless to a criminal. It charged merchants no interchange and only a .50 percent processing fee for each transaction. At its peak it was accepted at 150k merchant locations and did deals with a variety of credit issuers so that it could route 80 percent of the consumers that wanted one to an issuer that would give it a credit limit. Revolution Money also worked with merchants to invest their interchange savings into rewards for the consumer which would incent usage.

Except that most of the merchants really didn’t do that. Funny how that works. And consumers didn’t really know why they needed a Revolution Money card since they had a perfectly nice credit and debit card already in their wallets that they could use everywhere.

Revolution Money’s early idea to basically leave stacks of cards in stores and restaurants and malls for consumers to pick up and activate were quickly abandoned given the adverse selection process that this would enable – only the least credit worthy consumers would opt in – not to mention the fact that it was against bank regs to do it. But perhaps most damaging to Revolution Money was the backlash from existing payments ecosystem players who didn’t understand why they needed to work with a new entrant that was out to displace and disintermediate them.

In spite of its innovative business model and clever use of existing payments rails, Revolution Money never got off the ground. It was sold to American Express in January 2010 for $300 million and was said to become the backbone of the Serve product. Revolution Money was completely shut down in March of 2011 but lives on as the technology behind Amex Serve.

There were other schemes that emerged over the last decade that were intended to appeal to merchants interested in reducing the cost of payment acceptance. Perhaps the most famous, Debitman, aka Tempo, launched in 2000. This ACH-based merchant network created a new payment method linked to consumer checking accounts. It would work with merchants to incent consumers to use those new accounts at gas stations, convenience, and grocery stores.

By 2004, Debitman had 50k merchant locations, including Walgreens, Walmart, and Bed Bath & Beyond, but only 3k cardholders. In an effort to acquire more consumers, Debitman revamped its pricing scheme to give retailers more of an incentive to issue the cards. But merchants were pursuing their own strategy for reducing the cost of acceptance of payment methods that consumers already had and were using more and more at their stores – debit – via the Durbin amendment. Seven years later, Tempo shut down after Durbin reduced merchant fees on debit products by 40 percent and its value proposition to consumers and merchants failed to resonate.

Personal Financial Management Tools
Budgeting and personal financial management solutions are the financial services equivalent of dieting. It’s the right thing to do but most people don’t. Those who start rarely stick with it. Yet that hasn’t stopped a bunch of innovators from trying to change that behavior. There’ve been a boat load of highly interactive, social, visual and/or gamified financial management and savings apps over the years that have gotten little traction.

The proof is in the data.

Forrester’s report on digital money management released in August of 2014 suggested that less than a quarter of all customers in the US and Europe used any money management apps at all in the three month period they surveyed. It’s hard to monetize a product that consumers don’t want or don’t use.

Banks once thought of these programs as onramps to making mobile banking stickier for those who use the service today, and bait for those don’t. That hasn’t made much of a difference either. The latest Fed study tells us that only a third of all mobile phone users are also mobile banking users (up from 28 percent the year prior) and those who use the service do so overwhelmingly to check balances and monitor transactions. And the two thirds who don’t use mobile banking don’t feel that they need it.

What to Make From All that Weird Stuff

As you can see, some Weird Stuff morphs. PayByTouch and biometrics bombed but seven years later, paying with your thumb using Apple Pay is talked about as the greatest thing since sliced bread. All-in-one cards are DOA as a single plastic card but when made digital and accessed via a mobile app they are what consumers want and want to use. Buying on Facebook is a no-no, yet social networks drive about a third of all ecommerce traffic. Random daily deals are a big blur yet curated and personalized offers to consumers based on preferences and past purchases convert.

Some Weird Stuff just deservedly dies – NFC stickers, group buying, malls on Facebook. And, some Weird Stuff, like kudzu, just keeps coming back, in spite of all prior efforts to kill it off – virtual currencies, and dare I say, ACH merchant run networks?

So, what Weird Stuff did I miss? What’s morphed? And, what should die that hasn’t?

Can’t wait to hear what you have to say!

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Latest Insights: 

The Payments 2022 Study: Building A High-Performance Payments Team For Fraud Detection, a PYMNTS collaboration with Stripe, examines how digital platforms of all sectors and sizes plan to develop their anti-fraud teams as part of their their broader growth and development strategies. Drawing from an extensive survey from approximately 250 payments heads at digital platforms in the U.S. and abroad, our study analyzes how poor anti-fraud capabilities can harm platforms’ long-term growth strategies, and how they can build high-performing teams to tackle these challenges.

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