Sean Park Portrait
Quote of The Day Title
Be so good they can't ignore you.
- Steve Martin, Comedian (on how to succeed)

Turkeys don’t vote for Christmas

In case you hadn’t seen it, there is an excellent article in this month’s Wired on PayPal and “The Future of Money”:

Now, though it maybe hard to predict what innovations PayPal’s platform will enable, it’s safe to say that the payment industry is going to change dramatically. As money becomes completely digitised, infinitely transferable, and friction-free, it will again revolutionise how we think about our economy.

The author talks excitedly about PayPal’s new open platform X.com and how it is poised to change the current payments landscape which continues to be dominated by the credit card companies. PayPal launched this new approach late last year with their first developers conference Innovate09. Here’s what PayPal President Scott Thompson had to say about the conference:

As you might imagine, given my views on both the enormous opportunity that exists to disrupt an increasingly anachronistic financial services industry and my enthusiasm for “platform-based” business models, it is quite satisfying to see someone like PayPal take on this opportunity in such an aggressive manner. Not only do they help to validate the opportunity – bringing both human and financial capital to bear – but they can capture the attention and imagination of a generation of engineers and entrepreneurs in a way that we simply could not (at least not yet), even if we had a very large amount of capital to deploy. And that can only be good news, except perhaps for the management and shareholders of dominant incumbents like Visa:

“What we witnessed was truly a perverse form of competition,” said Ronald Congemi, the former chief executive of Star Systems, one of the regional PIN-based networks that has struggled to compete with Visa. “They competed on the basis of raising prices. What other industry do you know that gets away with that?”

Of course payment networks are classic “two-sided” markets, with strong natural tendencies towards monopoly providers (due to strong network effects and high barriers to entry. Further the structure of these markets allows providers to levy charges on only one side of the market (merchants) while seemingly offering the other side a free or inexpensive service. Last fall The Economist explained why, in such a market, regulation is often ineffective and can often actually produce worse outcomes in some cases:

The case for tight regulation seems strong, at first glance. In rich countries, where paying by plastic is now commonplace, the firms that run card-payment systems look like other utilities, which have long been subject to price caps. Visa and MasterCard are associations run on behalf of their member banks. Competition officials are usually wary of such shared ventures but accept that it is more efficient for rival banks to band together in one network in order to process payments and settle accounts. A common fee structure stops members from abusing the rule that retailers must take all cards issued with the association’s brand. It also obviates the need for countless bilateral deals between thousands of banks. Even so, regulators still fret that banks might use their combined heft to overcharge.

They need to tread carefully. Judging how much credit-card firms ought to charge for their services is trickier even than setting the right price for water or energy supplies. That is because the payment-card system is a “two-sided” market. What sets this type of enterprise apart is that it caters to two distinct groups of customers and each sort benefits the more custom there is from the other sort. Consumers will sign up for a credit-card brand if it is widely accepted as a means of payment. Merchants will more willingly accept a card if lots of consumers use it.

In my opinion, the best way to ensure good value to all the participants in the payments value chain is to encourage and facilitate competition: new approaches, new ideas, new entrants. PayPal has long been the poster-child for “start-up” innovation in financial services, but had seemed to have lost its way in stuck in the corporate bureaucracy of eBay. It’s great to see them breaking free of that and striving to re-ignite their creative and entrepreneurial juices. (Although I still think they would probably be better off independent of eBay…even better, how about a merger of an independent PayPal and an independent AWS: now that is a stock I would love to own!)

For several years now, it has been dead obvious to me that new and exponentially improving information and communications technologies would create the foundation upon which bright, ambitious entrepreneurs would build new companies and business models that will disrupt the moribund incumbents and their 20th century business models. And that’s why I started Nauiokas Park. We’ve made some good decisions along the way, and we’ve learned a lot. But one thing we got spectacularly wrong was our naive belief that leading incumbents in the financial services sector would embrace our vision and our proposition as an opportunity to hedge the strategic risk of continuing to rely (exclusively) on their existing business models. That they would look at the management failures and massive value destruction suffered by the traditional media and telecommunications companies and look to deploy multiple strategies to mitigate the risk of being caught unawares in the same way. But it would seem that they are uninterested. A toxic cocktail of hubris, myopia, inertia and institutional politics seems too often to blind them to the risks posed to their continued hegemony. As if admitting Christmas exists – let alone voting for it – would make it’s inevitable arrival more likely.

Gobble gobble.

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    Permalink||Comments|Filed under 'FaaS, Financial Services, Web X.0'
    • Do you have any thoughts on "open source" money?

      I've thought for a while that the ultimate destination for digital money is in letting individuals (including businesses) issue their own debt. I think there's a huge opportunity there in setting up exchanges that convert from one currency to another and operate as sort of central banks for eliminating trust issues between parties who don't know each other.

      Slightly off-topic but I'd love to hear your thoughts on it.
    • I also think there is a big opportunity and it really revolves around trust and p2p/distributed systems. In the past, a highly centralized, hub and spoke monetary infrastructure was clearly the best way - given the means available - to create and maintain a virtual unit of account (money.) Today - or more precisely - tomorrow, it is not at all clear to me that this will continue to be the case.

      However given the importance of money to the functioning of modern economies, and the enormous vested interests that would be displaced by any such shift in paradigm, I don't think the new paradigm will emerge in the western industrial economies but will grow out of the vast opportunities that exist in underserved and previously underdeveloped emerging and frontier markets. "Open source" money to use your term will emerge from east Africa or the Indian sub-continent first and spread from there.

      Definitely an interesting subject to keep an eye on. A fantastic resource if you are interested in developing world financial solutions is the CGAP microfinance blog. Highly recommend.
    • I too enjoyed the Wired article, but felt that by focussing on PayPal as a source of innovation it failed to capture much of the energy and vitality in the payments space. My own somewhat jaundiced view is that PayPal has become as much part of the problem as Visa/MC/Amex (in part because it relies on them so heavily, and thus has a cost structure that absorbs their fees).

      PayPal clearly won the web payments 1.0 war, but it seems that the time is right for some 2.0 stuff to make an appearance (and properly leverage and pass on to both sides the economies of scale and scope that can be achieved with a web architecture rather than a 50s style mainframe approach).

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