Why Payments Are Hard, Even For Apple And Google

Why Payments Are Hard, Even For Apple And Google

Samet is an expert in managing fraud and other risks in payments systems. He was previously a senior manager at PayPal and blogs at As Risky At It Gets.

We hear a lot of chatter about new payment services, and who’s competing in the space, and obviously who’ll win the space or own a big piece of it. Lately we’ve seen some movement when both Apple and Googleannounced new payment options for digital publishers and exchanged a few blows. So are the giants going to displace PayPal soon?

The problem with discussions about payments is that they are often times misinformed. Dominating payments requires much more than having the most users with credit cards or a huge take rate on digital content. The payments ecosystem is complex, but has a few archetypes of players (what I call wallets, networks, methods, and engagement drivers). Both Google and Apple are in the network realm—they own relationships with paying customers. Presumably, Apple wants to go beyond iTunes and applications and Google wants to go beyond advertisements—both high margin, digital segments—and break into general availability. All the more fun—the two companies are choosing similar strategies to this end.

In terms of core competence, both companies are facing some difficulties; interestingly enough, each company is strong where the other is weak. Google is weak on customer service, Apple is weak on technology-driven risk management.

Customer service is much needed in payments—because there’s movement of money back and forth that complicates matters and raises questions from buyers and sellers, because you limit accounts, fight fraud and losses, and more. Google has shown many times that whenever people and human interaction are involved it fails, and feedback from users of Google Checkout supports that. So growth will be limited by how well Google can serve its customers and scale customer support. This is something Google didn’t execute on well enough in the past.

Technology is the second point—as I like to say, risk assessment in payments is technology-driven and a core part of the product (together with fulfillment and experience). A company going into payments needs to be able to detect fraudulent behavior in realtime, track money movements to prevent money laundering, catch and limit hacked accounts and more. Apple is awesome with experience and customer service, but the hardcore software technology piece, especially on the payments side, seems lacking (and last year’s fraud cases in iTunes, involving account hacking and payment fraud, are a good example). There’s a reason why PayPal needed Max Levchin and a bunch of very intelligent people in an around-the-clock effort to work on stopping fraud and managing risk. It’s a tough job – and you need to get better at it than PayPal, which has been optimizing on risk for 10 years (and still faces a lot of problems). Creating this capability in a large corporation is not a trivial undertaking, and I’m not sure Apple has what it takes.

Cost is another issue. Sure, both companies have millions of users with credit cards linked to their accounts. But payments at a large scale based on credit cards do one thing—which is make the credit card associations richer due to all the fees involved. Soon enough, you’re going to want to move to something more cost effective, which is most times direct bank payments. Bank payments present multiple issues. Their infrastructure is clunky and there’s no standard verification process (services that tell you if a bank account can be used for direct debit are very challenging to work with and often offer very little to no international coverage). In addition, you only get the bank’s confirmation of the payment 3-5 days (in the US) to 3 weeks (in some EU countries) after the payment attempt. So actually using bank accounts for instant payments is a complex exercise in short-term credit backed by problematic infrastructure, which raises a whole other class of problems (debt collection being one of the larger ones).

The last major issue I’m concerned about here is maintaining a real ecosystem with both sellers and buyers. Until now, both companies were mostly the sellers or providers in the purchases their customers were making. Sure, there’s some kind of a relation both Apple and Google maintain with “providers” (of apps, of content or of website real estate for advertizing) but this is not a fully bi-directional, peer-to-peer flow of funds. Maintaining a fully-fledged, stored-value account system with small sellers who are a unique type of customer is a huge challenge that takes a lot of time to master. At a time when Alibaba’s CEO stepped down because of vendor fraud, it’s obvious that opening up to the world of sellers is a new problem domainnot many take on successfully. Neither Apple nor Google have solved that for themselves (charging 30% and funding losses this way while limiting your publishers isn’t “solving” the problem, and will not work for tangible goods and offline sales). This is a major problem that no company (including PayPal) has solved to an acceptable degree.

The bottom line is that it is much harder to compete in payments using the same path PayPal took 10 years ago. Creating yet another network based on existing methods is a “me too” strategy that doesn’t provide real incentive for merchants to switch beyond the very specific uses Google and Apple provide today (and, based on the response to Apple’s 30% take rate, even that is not promised). The only one who might have a chance with this kind of approach at the payments pie is Amazon who, too, has not dealt with third parties at a major scale. This is not real disruption. What is, then? I’m betting on two trends—payroll (becoming the wallet, getting people to keep their money with you) and short term credit (built from the ground up to be a robust system). This warrants a whole different discussion. Right now, however, it seems that Google and Apple are not going down those paths or presenting an alternative; and until they do so I believe they won’t be serious players in core payments.