Payments Innovation

Most Platforms Can’t Scale, Will Fail

Pay attention now because this is going to be absolutely, positively revolutionary. And it’s going to shake the payments industry by its ankles.

What is it you ask?

Well, it is “an innovative new payment platform created to transform the payments industry by drastically altering the economics through Internet-based technology, generating significant consumer benefits.” It’s secure, it’s cheap, it’s faster than a speeding bullet. It’s going to leapfrog those sleepy big giant payments networks.

Is it one those amazing blockchain things? Is it a stealth startup from Silicon Valley? Maybe it is the umpteenth attempt by Google to insert itself into payments.

Nope, it is Revolution Money, out of St. Petersburg, Florida. Started by the offspring of a former MasterCard CEO, and owned by Steve Case, the billionaire genius behind AOL, it is going to set the world of payments on fire.

Except, of course, it didn’t – and it is now in the crowded graveyard of payments innovations that sounded too good to be true.

But that was the buzz – and the quote above that started the media hype-meter going into overdrive is from September 24, 2007.

A couple of years later, Revolution Money sold itself to American Express for $300 million, which of course is chump change for technology that’s going to transform payments!

Then, in December 2015, Amex pretty much shut down what was left of the “Revolution” and sent the stragglers packing.


As this dream of “transformation” went, so does pretty much every other platform play in payments. And in most other industries. In fact, it’s not surprising at all that Revolution Money pretty much fizzled not long after the check cleared to the PR firm that wrote that September 2007 press release.

It’s normal. It’s what almost always happens almost every time an entrepreneur, or even an established company, tries to start a platform. Their odds of making it are about the same as the high school sports star making it to the big leagues.

Not so good.

We’ve been studying what makes platforms ignite, and why they often fail, for more than a decade. We profile innovators on every day. Webster talks to literally hundreds over the course of the year, and advises innovators large and small regularly. Evans, with his long-time colleague Dick Schmalensee, spent last year putting a lot of what we know in a new Harvard Business Review Press book, “Matchmakers: The New Economics of Multisided Platforms,” that’s going to be rolling off the presses in a few weeks.

Here’s a preview for why it is so hard for something that looks so easy – creating and igniting a platform — to scale.

And why most fail.

Platform Basics

Revolution Money called itself a “platform.” A lot of other companies do, too, and “platform” is become an increasingly popular term among VCs, entrepreneurs and the tech media. Economists have a more precise term and a lot of insights into what makes these businesses tick. They call them “multisided platforms,” have shown that these sorts of businesses have been around for millennia, and they are important in a lot of businesses, not just tech.

Many of the most dynamic public companies, from Alibaba to Visa, and many of the most valuable startups, like Uber, are multisided platforms. They connect one group of customers (like people looking for a ride) with another group of customers (like drivers). They provide physical or virtual platforms (like a shopping mall) for multiple groups (like retailers and shoppers) to get together.

When anyone talks about two-sided markets, two-sided networks, platforms or the sharing economy, they are really talking about multisided businesses. They all follow the same principles and face the same challenges.

Platforms’ Critical Success Factor: Crossing the Critical Mass Frontier

Getting critical mass is by far the biggest of those challenges.

Put yourselves in the shoes of the Revolution Money team back in 2007, pitching its platform to retailers and consumers.

You go to merchants and say, “hey, I have this revolutionary transformative payments method.” Their reaction is, “wow, that’s pretty cool. How many cardholders do you have?” The answer is “not many, well, none yet,” because think about the conversation with consumers.

“Hi, I’m Revolution Money, and I have this revolutionary transformative payments method.” Their reaction is, “wow, that’s amazing, where can I use it?” The answer is, “not many places, if any places, right now, but you just wait, it’s gonna be great.”

If you think about it, for a moment, this isn’t an easy problem to solve. It’s not like you get one merchant and all of a sudden consumers flock to your payment platform, or you get a few consumers and all of a sudden merchants start flocking to the payment platform.  The reality is consumers need to be able to use the payment method at a lot of merchants to get much value from it — even if it is “transformative” and “innovative”— and merchants need to have a lot of consumers walking into their stores wanting to pay with it. The same thing is true on the P2P side.

Platforms usually need to figure out a way to get a critical mass of participants from every group they serve to provide much value to any group they serve. Once they get to critical mass, they are off and running.

That usually takes time. Entrepreneurs don’t just snap their fingers and have enough participants line up. But it can’t take too much time. Eventually, investors lose patience, money runs out, and the early adopters that have signed on lose interest.

This isn’t just a problem in payments. Getting to critical mass is the existential challenge faced by most platform entrepreneurs.

Ask Google Video.

Fizzle or Sizzle?

Back around 2004, lots of entrepreneurs and big companies saw that video streaming was the next big thing. More than 40 companies jumped in — and that doesn’t even count the ones that didn’t get enough traction to pay for PR to get any virtual ink on the Web. It wasn’t just VC-backed entrepreneurs like Jeremy Allaire’s Bright House Networks. It included the Internet giants of the day like Google, which launched Google Video, and Yahoo with Yahoo Video. They were all platforms. Some pushed video sharing, others had traditional content and some had both.

And what did they all have in common? Almost every one of them failed. Some failed quickly, some failed slowly, most painfully and a few hung in with low levels of use like Yahoo Video.

Except, of course, YouTube.

Back in mid-2005, though, things looked pretty grim for YouTube. They had been at it for a few months. Hardly anyone had uploaded videos and most of them were really lame. And since there weren’t many videos to watch, they had trouble getting people to come to the site. Traffic was dismal. But then who would want to spend time uploading videos if hardly anyone was going to watch them.

The three guys who started YouTube quickly figured it out. Between early 2005 and early 2006 they did a bunch of things to get to critical mass. By early 2006, they had “ignited.” If you look at a graph of their traffic and video uploads over 2005 and 2006, you’ll see the classic hockey stick that every platform needs to aspire to. The curve is the hockey stick happens when platforms get critical mass — enough participants on each side to egg on demand from every other side.

We’re not going to tell you how the YouTube guys did it. “Matchmakers” gives a blow-by-blow description, with hard data on those critical 18 months, in a chapter titled Ignite or Fizzle?

Why Do Platforms Fizzle?

There are a lot of reasons platforms don’t make it.

To begin with, hardly any new business makes it, whether started by an entrepreneur or a big company. It’s not really that different than sports or music. Not many high school football stars are going to make the Patriots and not many Juilliard graduates are going to star at Carnegie Hall. (Some do — and below we talk about how to increase the odds that you, or the company you are investing in, are one of them.)

Platforms, though, face special challenges. “Matchmakers” provides the details, so we’ll just hit a couple of highlights.

In our experience, most everyone who starts a platform business grossly underestimates how difficult it is to get to critical mass. They see successful platforms grow exponentially and they figure they can do that, too. WhatsApp did it, why can’t I? Once they get it into it, they realize that figuring out the solution is really hard. It’s like being asked to figure out the solution to one of those unsolved math problems that mathematicians work on for years before they go insane.

Platform entrepreneurs also grossly overestimate how much time they have to get their act together. The problem is that platforms need early adopters from one of the groups they are courting to attract early adopters from the other group they are courting and they early adopters from both groups to attract later adopters from both groups. If the early adopters from one group get disappointed because they can’t find enough adopters from the other group, they will jump ship forever. That drags the platform down. Most of the platforms we’ve studied or advised have either pushed their way to critical mass and ignited in the first couple of years, or they’ve fizzled.

Probably the biggest reason platforms fail is because, no matter what they do, they won’t be able to get a critical mass of participants. Their platform just isn’t creating enough value — solving a big enough market friction — to get any momentum.

Think of it this way. There’s an extraordinary amount of inertia at the start of a platform business. All of the forces of gravity are really working against ignition. To get enough participants, for each group served by the platform, interested enough, early enough, they have to see a lot of value. Many platform entrepreneurs identify real problems — just not big enough ones to get enough people excited, quickly.

That’s really been the story in payments. Back in 1870, it took days to get cash from Boston to San Francisco through a combination of railroads and horseback. When Western Union introduced their telegraph based remittance service in 1870, they reduced that time to minutes for the transmittal and then maybe a few hours for filling out forms and pick up. They solved a massive friction by taking money movement from days to hours and maybe even minutes.

That’s transformative.

And Revolution Money was going to do what again?  We don’t say that to be critical. It might have been pretty good. But the fact of the matter is that it is really easy now for people to pay merchants — it takes a couple of seconds with a card — and it’s not that hard to pay people. When you want to ignite a platform though, pretty good — maybe even very good — is not enough. Of course, the same is true for pretty much every other payment platform that has been introduced over the last decade, including Apple Pay.

The new economics of multisided platforms provides tremendous insights into the fizzles waiting to happen. There’s a whole chapter (called Fizzle or Sizzle) on how to detect them in “Matchmakers.”

Here are two examples.

Why New Mobile and IoT Operating Systems Will Mainly Fizzle

Right now we have two really successful mobile operating systems. Apple’s iOS and Google’s Android. They have billions of users and millions of apps. They have thriving ecosystems, generating massive value. And Android is even free and easy to customize.

Of course, everybody would love to emulate this success. And, no doubt about it, controlling the operating system for an app ecosystem gives the owner a lot of power. Many companies worry that Apple or Google could pursue their own agendas, which would put their companies at risk, or, more likely, these companies have their own agendas they want to pursue and don’t want Apple or Google to get in their way.

A number of significant players, not to mention startups, are trying to create their own OSs — and app development platforms —often by taking the open source Android code and creating a new version that doesn’t play well with the version everyone else is using.

Our prediction – and write this one down: maybe someone will succeed in creating a third viable mobile OS, succeeding where Microsoft has failed — but everyone else, especially the ones with specialized OSs will flounder.

Amazon is the poster child for why it is so tough.

Amazon really wanted its own OS for the Fire mobile phones and tablets. After all, this is a company that has built its success on taking full control of its own destiny. So they created the Fire OS (this is a “fork” of Android; they used the open source Android code but then did things to it that made it incompatible with the version Google pushes and that most everyone else uses).

Talk about shooting yourself in the foot.

About a year after Jeff Bezos gave an enthusiastic pitch for a “better phone” you have a CNET article whose title says it all: “One year later why Amazon’s smartphone flamed out.” To be successful, the Fire OS phones had to be not just a bit better, but a lot better than what was out there. Fire OS needed to attract enough users to get developers to port apps to it — or even better use special features to write apps they people couldn’t get on Apple or Android phones — and enough apps to get users to want it.

They quickly faced the “early adopters bailing” problem that we mentioned above.  Here’s what happened to one user, according to CNET:

“Solomon learned first-hand the hazards of being an early adopter when she jumped at the chance to buy Amazon’s first-ever smartphone a year ago. Her excitement quickly turned to frustration after she realized the phone didn’t have many of her favorite apps — including Google Maps and Starbucks — and she was annoyed at how difficult it was to import her Apple iTunes library. On top of that, instead of marveling at her new gizmo, some people asked, “‘Why did you buy that?’ Three months after she got the device, it went back in its original box and was tucked away at Solomon’s home. She went right back to owning an Apple iPhone.”

Once Solomon was gone, she was gone for good. As were many other early adopters. Meanwhile, app developers didn’t see enough users to write apps. Other possible adopters, seeing that they were destined to a phone with few apps, decided not to take the plunge.


Yet, innovators still believe that this time will be different for them – that they have the magic formula, the Midas Touch, that everyone else didn’t. Alibaba introduced its Aliyun OS for phones a few years ago and is still at it. Samsung has introduced the Tizen operating system, initially for mobile phones, but then also for wearables. And Tizen is the operating system for its new Family Hub Refrigerator. And there are many more just like these.

These OSs won’t go anywhere for the simple reason that they won’t attract enough users to get developers interested — and with few apps, they will have trouble getting users interested. More importantly, competitors who use Android and the iOS will have a leg up because they can tap into a highly developed ecosystem of users, apps and app developers.

They also won’t go anywhere for the other simple reason that having a new operating system doesn’t solve a big enough problem to get anyone excited. If Samsung had an enormous friction that it was solving with its Tizen operating system, for its refrigerator, people and developers might flock to it.

But the big friction that requires a specialized OS is, what again? Far better to tap into a thriving ecosystem of developers and users and let people coordinate their refrigerators with the OSs they use for everything else. Think about where Nest would be if it tried to force people and developers to use a new OS.

Car consoles is the other place OS strategies are being played out. A number of car companies are going with Apple or Google platforms. That way, again, they tap into a rich existing ecosystem. But some automakers, like Ford, have created their own proprietary app-development platforms. Unfortunately, even a decent sized auto company doesn’t make enough sales each year to generate more than a fraction of the users that the iOS and Android operating systems have. Ford sold 6.5 million vehicles globally in 2015. That is 2.8% of the 231.2 million phones Apple sold in 2015.

Consider the deal Ford wants to strike with developers. They have to learn how to develop for a new OS. Then their application is only going to work for that OS.  Ford will get some developers to bite for sure for its App-Link platform. But when you are trying to get to critical mass, “some” doesn’t cut it.

Our guess is that people are going to be looking for ways to make their car environment as compatible with their mobile OS choice as their home environment and everything else. And developers are going to be focusing their efforts on mobile and IoT OSs that have already scaled massively or at least have the promise of doing so.

Sorry, these little OS players have F.I.Z.Z.L.E. written all over them. We’re not saying that no one could develop a new, successful mobile app development platform/operating system. They just need to make sure they are solving some big problem by doing it that they generate so much value that they can get momentum going.

Now, let’s drive back to payments.

The Next Big Fizzle: Blockchain Startups

A couple of years after Revolution Money announced its “transformative” and “innovative” payment system, “Satoshi Nakamoto” circulated a technical white paper that described bitcoin and put the code out into the ether. Bitcoin achieved critical mass and global use within a few years. In some ways, it was massively successful. The Silicon Valley crowd was quickly smitten. If we had $1,000 from everyone who said this was going to transform finance and was just like the Internet, we’d probably be able to buy a pretty decent Caribbean island and host next year’s Innovation Project there.

Unfortunately, its two main use cases are criminal activity, where bitcoin met an unmet demand for a hard-to-trace digital currency to pay for everything from stolen credit cards to guns to heroin, and bubble investing, where people bought bitcoin hoping they could cash in on its explosive growth in value.

Between that, the lack of any serious governance to guide its development and keep crazies under control, and the general seediness of the bitcoin community, the Silicon Valley crowd began to shift course.

It’s not about bitcoin, it’s about the BLOCKCHAIN! A cool grand for every statement like that and we’d have another Caribbean island.

The blockchain of course is the underlying technology behind bitcoin. One of the reasons the blockchain is innovative is because it uses a decentralized group of entities to process and maintain, a public ledger of transactions. Bitcoin uses entities called “miners” to process and, in effect, host the massive public ledger. It secured a critical mass of people motivated to buy the hardware and spend to time to process bitcoin transactions, and a critical mass people to make transactions to motivate the miners who make their living based on the volume of transactions they process. It was able to do that in part because it became a killer app for the underground economy and for speculation, as mentioned above.

The problem that all the blockchain startups have is that they would need to create a critical mass of processing capability and transactions to ignite their offerings. But it’s not clear that any of them are solving a big enough problem and creating enough value to motivate the large scale use needed to get decentralized processors (like bitcoin miners) to join their platforms.

Now, of course, there are lots of frictions with national and global financial systems, and there are certainly better ways of doing things. And maybe the blockchain is the best technical solution for solving those frictions. To be successful, though, it needs to be the best practical solution. There are lots of ways of reducing frictions in payments, and other financial services, that don’t face the hurdle to securing a critical mass of users and miners. Many startups, they aren’t getting the media hype of the blockchain babies, and are creating platforms that don’t require creating a decentralized processing industry or costly changes in existing systems.

The blockchain startups also have F.I.Z.Z.L.E. written all over them. Some entrepreneurs may take the blockchain technology and create their own closed proprietary process systems. That may work, but it ditches one of the parts of the innovative solution that helped ignite bitcoin.

Fizzle or Sizzle

Entrepreneurs, companies and investors can make better decisions if they learn the new economics of multisided platforms. They will improve their odds of success and waste less time on guaranteed failure. We’ve written “Matchmakers” to help show the way.

For payments, though, if we had to identify one factor that you should look to for deciding whether a new platform will sizzle or fizzle is it this: Is the platform solving a big problem for senders and receivers of payments? Yes, we know that you have heard this so many times from Webster that you are probably sick of hearing it.

But here’s the deal. Securing critical mass in payments is an incredibly hard problem. To get a critical mass of senders and receivers of money for a new payment platform, that platform has to solve a significant friction. In the developing world, sending and receiving money is extremely difficult and risky. That’s why mobile money platforms have taken off in Africa. Using a mobile phone to send money in a couple of seconds beats giving it to a bus driver who may get it to the receiver in a few days if he doesn’t get robbed or steal it himself. In developed countries like the U.S., it is pretty easy to send and receive money, and it’s a cinch for people to pay retailers.

It’s the most complicated simple premise in platforms. And ignoring it will break more platforms than it will make.

It’s also a premise that we promise that we’ll stop repeating it as soon as entrepreneurs, investors and the media stop flocking to the payment methods that, at best, only make a really good system just a little bit better.

Here’s another prediction that you can write down: We have a feeling you’ll be hearing it from us for a very long time.


New PYMNTS Report: Preventing Financial Crimes Playbook – July 2020 

Call it the great tug-of-war. Fraudsters are teaming up to form elaborate rings that work in sync to launch account takeovers. Chris Tremont, EVP at Radius Bank, tells PYMNTS that financial institutions (FIs) can beat such highly organized fraudsters at their own game. In the July 2020 Preventing Financial Crimes Playbook, Tremont lays out how.