Investments

Investment Tracker, October 29

Click here to see this week’s breakdown of investments

Interview

One might be tempted to look at bitcoin as so 2013. It started the year strong – but a string of scandals, run-ins with regulators and now Apple Pay seems to have knocked bitcoin, and the topic of virtual currency, a bit out of the collective payments players’ consciousness.

But while the fad chasers are fleeing some very serious minds are taking bitcoin and the blockchain very seriously.

Bitnet CEO John McDonnell is one of those serious minds – and one who has a track record as a successful mainstream payments player.

And that begged the obvious question: “What’s a nice traditional payments guy like you – you were an executive at Visa, CyberSource to be specific – doing in the world of bitcoin? Asked MPD CEO Karen Webster when she caught up with McDonnell to get the scoop on Bitnet’s latest $14.2 million Series A funding.

McDonnell’s response may surprise you. He says it’s because enabling safe, efficient and cost effective transacting in the digital world was exactly the problem that he and his colleagues at CyberSource solved when they started the company.

“It’s a natural evolution. Most of our work at CyberSource since its founding in the mid 90’s was to solve for most of the issues merchants had to deal with taking credit cards online.”

Because, McDonnell went on to explain, credit cards weren’t meant to be taken online, what he and the CyberSource team had to do was not only do that, but do it safely and in accordance with payments industry regulations and compliance standards.

But as successful as they were, CyberSource was acquired by Visa in 2010 for roughly $2B, card payments, according to McDonnell, have to be “reverse engineered to work online,” and as a result doesn’t work that well.

“Digital currency,” he says, “solves a lot of those issues.”

And it is a solution that Bitnet has been able to sell to investors.

The merchant services company just picked up a $14.5 million Series A round led by Highland Capital Partners. This round also saw investment participation from Rakuten – Japan’s largest e-commerce site – which McDonnell says, going forward, will also use Bitnet’s services.

Their interest, according to McDonnell, stems from the big potential that the bitcoin protocol has to literally, he says, to become the standard that allows the entire internet to enable payment from anyone to anyone anywhere. Bitnet’s contribution is to help merchants easily accept bitcoin payments for goods and services.  “The internet is a global network and anybody with access to the internet is a potential consumer for merchants.”

But not just any merchant – but the enterprise level merchants who routinely conduct business on a global basis- and who want to do that faster, cheaper and safer.

Cheaper? How is this cheaper? Webster asked. “There are no banks, there is no interchange,” McDonnell noted. “We’re starting from a cost basis of zero and building services on that.”

But, cheaper, McDonnell noted is not the biggest selling point to either investors or merchants. What is, is the lack of fraud and chargebacks. And, in the year of the breach, with major retailer’s systems coughing up card data over and over, this is resonating.

“Bitcoin is the functional equivalent of cash, it’s like taking cash over the internet and before bitcoin that wasn’t possible.”

But, as Webster pointed out, Bitnet isn’t the only bitcoin processor on the market today. Bitpay provides similar services and has publicly vowed to sign-on 1 million merchants by the end of 2016. And, for all the investment, Webster pointed out that actual bitcoin transaction growth has been slow, even flat, and that actual consumers don’t seem to be all that interested in paying with bitcoin, but rather buying it as a commodity in the hopes that the price will increase.

While McDonnell noted that bitcoin payments haven’t taken off, he offered that it is difficult to separate the investors from those who want to use it to make purchases. Bitcoin transactions, McDonnell, noted, spiked on Black Friday last year.

“It’s unlikely that on Black Friday a lot of speculators were buying themselves bitcoin.”

However, to the broader point, McDonnell notes that the Bitnet team brings something a little different to the party than the other bitcoin processors that have come before them.

“We come from payments, we know what it takes to get into backend ERP and commerce platforms. We know how to integrate commerce systems for e -commerce retailers. “

Though McDonnell respects his competition, he notes that not having the background into what is a highly regulated and interconnected world can really be a disadvantage, particularly when trying to introduce both merchants and consumers to something that’s new and mission critical. After all, merchants want to be paid for their goods and services and are used to a system that works at a “five nine’s” standard.

“[The competitors] are not from the payments industry. They’re entrepreneurs and very smart and hardworking people but they come from different backgrounds, from software or bitcoin or technology.”

It’s the Bitnet team’s payments background and deep expertise that McDonnell thinks will, at the end of the day, be among their biggest differentiators. That expertise allowed Bitnet to build a platform that comprehensively addresses a retailers’ needs when accepting bitcoin payments..

“[Things like] anti-money laundering, know your customer are hardwired into the platform from the ground up. “

Not surprisingly, McDonnell thinks bitcoin has great potential. He likens the evolution of bitcoin as an internet-based payment method to another highly successful internet-based payment method – PayPal. After all, McDonnell said, today PayPal has over 160 million users, but in its first five years it had about the same number of transactions as bitcoin does, with one big difference: Bitcoin transactions, McDonnell says, are worth about double at the same point in their histories as what PayPal’s were. .

McDonnell said that as more and larger internationally recognized retailers accept bitcoin more users will come around to spending with it, especially in nations where banking infrastructure is not as fully developed.

“You could see faster adoption in developing economies than in developed ones because bitcoin offers the best way to jump into global commerce by doing things like buying airline tickets that we take for granted.”

There are no sure things in payments of course, but Bitnet has a vision. And, with backing and one big international retailer behind them, they believe that they are well positioned in the very early days of helping bitcoin become just another way to shop online.

Weekly Breakdown

Last week, in the FinTech world, both VCs and Private Equity firms made some big moves. For example, Sirirs Capital made an$840 million bid to acquire e-commerce processor Digital River while mobile money platform Mozido raised $185 million from a variety of VCs, strategics and private investors.
Not surprisingly, the bulk of last week’s funding was directed to the retail payments , totaling some $1.2 billion overall in FinTech bets. On the commercial side of payments, Tipalti Solutions snagged the biggest round of funding, raising  $13 million from Wicklow Capital Inc.
One of the benefactors of last week’s VC largesse was one of the newest players to enter the bitcoin merchant services business, Bitnet. MPD CEO Karen Webster, sat down with John McDonnell, their CEO to get more details about what investors saw in Bitnet and its team that motivated them to extend $14.5 million from investors including Highland Capital and Japanese marketplace Rakuten. You can listen to their chat and read more here.

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