Two decades ago, the world stood on the brink of a digital commerce inflection point — even though many didn’t quite know it yet. In 1995, the tech boom got underway — buoyed by enthusiasm over the transformative power of a newly emerging technology called the “internet.”
Although explosive enthusiasm for such primitive technology can be hard to fathom now, Yapstone Executive Vice President and Chief Technology Officer Sanjay Saraf noted in a recent conversation with Karen Webster that from the point of view of the time, the internet and early eCommerce looked absolutely miraculous. Suddenly, there was this incredibly powerful technological tool with which to launch all of these new online capabilities.
For those who remember the early web, the pains of the dial-up modem, and web pages that took forever to load, it can be hard to imagine now what drove investors to throw such vast sums of money at it. But excitement ruled the day, and they did.
There was so much excitement, Saraf noted, that valuations got out of hand, and when early investors came looking for a return on their investment, the market collapsed. Some players, like Amazon and eBay made it through to the other side. Others, like Pets.com and Webvan (the proto-grocery delivery) went up in rather spectacular flames when they couldn’t find a way to make their profits match their promises. And while the lesson is old, he said, and some of those same models are now the foundation of such great innovation, the moral of the story is relevant, even today.
“The marketplace model that has been so popular for the last 10 years is approaching the same inflection point,” Saraf told Webster. “Many of them have definitely solved for the customer experience side of the equation, but they have not solved for how to turn that into a sustainable and profitable business model.”
And when their investors come looking for profits and find there aren’t any, and that there is not an immediate path to produce them, they will cut off the money tap, Saraf noted. Many platforms find themselves with a marketplace with no sustainable means of making money — and no investors willing to keep filling in the cash flow gaps.
“This is a wake-up call for marketplace models,” Saraf said. “They can no longer have an attitude that if we build it, people will come and expect investors to go along for the ride for fear of missing out. Investors are more worried about losing money on a marketplace than they are about missing an opportunity.”
That, he noted, will be a challenge in 2020 and beyond. That’s the bad news. The good, or at least better news, is that while there is not a single clear path to guarantee success, there are three starting steps that every marketplace can and should take to make sure they have a future.
The Problem Has to Preexist the Solution
While there are many individual nuances that make some marketplaces thrive and others take a nose dive, the common element that unites the ones that work is that they find a problem that they can solve — and at scale.
The taxi industry was ripe for disruption because it has single-handedly managed to be terrible for all the parties involved — drivers and passengers. Uber, in a stroke, eliminated enormous frictions and miseries for everyone involved such that while there are a lot of conversations about how Uber ought to be regulated going forward, there are exactly zero people advocating for the return of the bad old days of taxi services.
You can see a similar phenomenon among the lending and micro-lending platforms that target consumers and small businesses, Saraf noted, because they are tackling cash flow issues that aren’t merely casually important to the people to whom the products are addressed.
“They’ve grown by fixing problems for the unbanked and underbanked and in seeing that, in some places, a $25 loan can make a massive difference in someone’s life,” Saraf said. “The industry has a real opportunity for continued innovation with the marketplace concept in this area.”
What increasingly doesn’t have a future is products that are too niche, too narrow and too much addressed to consumer needs within a certain time period of their lives and not well enough prepared to evolve along with them.
The first question every provider has to ask, he said, is are they solving a real, persistent problem that real people have — or are they hoping to build a solution first and then create a problem to match it to? And that, he said, is only a first step. There are still two more to go.
Perhaps because there has been something of a glorification of the “move fast and break things” ethos in the last 10 years, or the idea that real innovators ask forgiveness not permission, a bug in the system has been created that too many people mistake for a feature.
“I think people have a strong tendency to overlook regulation, particularly in financial services, and that is a bad idea, particularly when we are talking about things like AML/KYC,” Saraf said.
The problem is that regulators in the U.S. and around the world have gotten tired of dealing with the broken things innovators leave in their wake, and they have started ratcheting up their enforcement and oversight efforts. That, Saraf noted, is only going to intensify, which means businesses that want to survive need increasingly sophisticated efforts to make sure they’ve got sophisticated teams ready to manage that on day one — not on the backend someday because “someday” could end up being the day a regulator shuts them down.
“When we work with an emerging player, we make them go through a full underwriting process because we know these marketplace transactions are going to get a lot of scrutiny, and we only want to work with players that are up to withstanding it.”
And, once an emerging player is certain what they’ve built is scalable, useful and fully legal, he noted, they still have one big question left.
Where is the Added Value?
The basics of a marketplace — bringing two anonymous parties together to transact in an environment of trust — are enough to get a player into the game. But, Saraf noted, what he has increasingly worked to impart on emerging marketplace businesses, is that the basics won’t keep them in the game — how they are innovating overtop of those basics will.
Can a commerce marketplace offer their merchants early payments so they get access to their funds five days before a transaction fully settles instead of five days after? Can a gig marketplace offer payments to workers instantly via their debit card instead of making them wait a day or two for an ACH to their bank account?
Those types of services, he noted, offer two-fold benefits. They make the platform stickier for those on it by making it more useful. They also make the platform more fully monetizable because the operator can attach additional costs to those services.
“As a market comes to inflection point, we know the story,” Saraf said. “The merchants who are doing more things and more interesting things make it to the other side. The ones that try to turn in a minimum, they don’t make it out to the other side.”