The Fundamentals Still Apply
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ENDPOINT Enthusiasm for swing-for-the- fences, exotic payments startups has waned. The Fundamentals Still Apply Want to start—or bet on—the next big thing in payments? Forget glitz and glamor and focus on startups that address pressing problems with substantial and realistic solutions, argues Eric Grover. uccessful payments fintechs such as Closer to terra firma, a handful of interesting Adyen, Ant Financial, Klarna, Stripe, early-stage payments ventures worth watching Sand Square have generated enormous are Modo, Marqeta, Beyond, RS2 North America, excitement. With the arguable exception of Ant and Veem. All address big opportunities or prob- Eric Grover is Financial, they all employ traditional business lems, and rely on proven business models. principal at Intrepid models, and enhance, and in places stress but None, however, proposes to fundamentally Ventures, Minden, don’t disrupt, the existing payments ecosystem. upend the current ecosystem. If one could genu- Nev. Reach him There have also been notable fintech disap- inely disrupt the status quo, that could be huge. at eric.grover@ pointments. Hyped mobile-payments venture But regnant systems work well and enjoy enor- intrepidventures.com. Powa Technologies went belly up. In 2014 mous network effects. Mozido’s seductive mobile-commerce story was valued at $2.4 billion in a round in which Sleepy Oligopoly Master card, Wellington Management, and Julian Modo is a payments-and-value hub headed by Robertson participated. Former Mastercard chief payments savant Bruce Parker. The secret sauce executive Bob Selander sat on its board. Now is its transaction and intelligent-gateway ledger it’s on a life-support from Brevet Capital. And and its abiding interoperating philosophy. the SEC is suing Mozido’s founder, Michael Modo is being used by Fidelity National Liberty, for defrauding investors. Ballyhooed Information Services (FIS), Deutsche Bank, Softcard and MCX both folded. Klarna, Verifone, and Etihad Airlines to connect Nonetheless, capital continues to be put to to and transact with a web of interconnecting tra- work in fintech. In the first half of 2018, $58 billion ditional payment networks, alternative-payments was invested globally across 875 deals. systems, and proprietary rewards programs, Enthusiasm for swing-for-the-fences, exotic taking the burden off of banks, merchants, and payments startups, however, has waned. And processors. In November, 2018 Modo closed a the euphoria stemming from the belief that $13 million A round led by Deutsche Bank. cryptocurrencies and distributed digital ledgers Marqeta is a self-described new-age card- would upend the reigning payments ecosystem issuer processor. Taking a page from Stripe, it has ebbed. Ripple XRP at 33 cents, Bitcoin at styles itself as developer-friendly, intimating tradi- $3,659.82, and Ethereum at $127.16 are down tional processing behemoths aren’t as agile or flex- 88%, 79%, and 91%, respectively, from their ible and are, therefore, not best-suited for develop- January 2018 peaks. ing nontraditional payment-card applications. February 2019 • digitaltransactions • 31 Entry barriers in issuer processing, Carr brings his philosophy of With globalization, cross-border which is dominated by First Data, owning the sales channel, transpar- retail, commercial, and money-transfer FIS, and Total Systems, are signifi- ent pricing, and supplying additional payments are growing at a robust clip. cant. There haven’t been new entrants services around payments, making for Delivery is more challenging, fees in decades. Building delivery systems stickier merchant relationships and richer, competition less, and entry bar- requires time and resources. Even more sustainable economics. Beyond riers higher, than in domestic markets. then, no large bank will outsource acquired software enterprise Peach- Most cross-border commercial credit-card processing to a challenger Works to bolster its integrated-pay- payments are made directly or indi- unless and until it has scale clients. ments offer for restaurants. rectly through correspondent banks and The potential market is immense RS2 is a card-management software the near-monopoly global interbank- and growing. There are 1.3 trillion and processing company headquartered payments network Swift, over which U.S.-issued general-purpose payment in Malta. It’s been around for decades, 3.5 billion payment messages were cards. Marqeta enables new use cases strongest in emerging markets. In 2018, sent in 2018 through November, up and, consequently, more virtual and it launched a North American ven- 10.5% year-over-year. physical cards, like debit cards for ture headed by Daniela Mielke, a Visa, spending Square Cash. It isn’t, how- PayPal, and Worldpay veteran. Traditional Model ever, fit for purpose for traditional Historically, RS2 underperformed Focused on helping SMEs with cross- credit-card programs end-to-end, yet. against its worldwide opportunity, border payments, Veem started out pub- Whether the upstart can move partly because of its tumultuous early licly embracing blockchain. That, com- upmarket to challenge incumbents years. Charismatic entrepreneur and bined with a big market problem, was a remains to be seen. At a minimum, founder Reinhold Schaeffter got tan- good theme off which to raise venture Marqeta promises to give the sleepy gled up selling and buying back RS2, capital. It has sensibly pivoted, how- issuer-processing oligopoly a jolt. and the enterprise was starved of ever, broadening the payments systems capital. Now it seems to have found employed, including Swift. Veem’s busi- Stickier Merchants its footing. ness model is traditional, taking account, Heartland Payment Systems founder RS2 North America is focused transaction and foreign-exchange fees. and CEO and philanthropist Bob Carr on merchant processing for smaller A host of firms including Swift launched merchant acquirer Beyond acquirers for which speed and flex- and correspondent banks, Payoneer, in 2017. The acquiring industry con- ibility matter, but which may have CurrencyCloud, Earthport (Visa), tinues to consolidate. In 2016, Global misgivings buying processing from Western Union, Ripple, Flywire, Payments acquired Heartland. competing fully integrated acquirers. Mastercard, and PayPal address cross- But entry barriers and regulation There should also be opportunities border payments. There won’t be one are relatively modest. Small enhance- to serve smaller credit-card issuers or even several winners. Interoper- ments can be enormously valuable. looking to better compete with giants ability is vital. For Veem, channels to While processing for gargantuan retail- like Citi and Capital One. That’s a originate small merchants and compli- ers like Walmart and Carrefour pro- longer sell, and demonstrating regula- ance, at scale, are critical. vides razor-thin margins, the opportu- tory compliance is a big deal. If RS2 The fundamentals still apply. Pay- nity to provide services on top of and gets traction, it should spur incum- ments ventures need to serve real needs around payments to SMEs is immense. bents to better performance. and earn fees from someone. 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