How to Become a Payments Network
Running a new payments company as fast (and as expensively) as possible toward escape velocity might be the only way to build a new payments network. But this is risky business.
Networks will, by design, consolidate into a monopoly or oligopoly state. Changing that state requires a considerable input of energy: money, platform shift, regulation, and changing geography. Some examples of successful payments networks in the US and the energy input that was required for them to survive/thrive:
Visa started by sending a pre-loaded card to every adult in Fresno, then, CA to jumpstart its liquidity in that market.
Discover Card was bootstrapped as the Sears store card. Allowed for enough density to break out as a standalone.
PayPal took advantage of a sea change–the internet–to address a demographic and use case that didn’t exist previously.
ACH required wars and gov’t mandate to electronically distribute veteran payments for its network to take off in the US.
ATM networks (STAR, PULSE) were regional until consolidated by VISA/MC.
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You can fly, but you can’t levitate
Breaking free of the laws of network effects is like breaking free from gravity. You’re able to fly, but you’re not levitating. The laws of network effects still apply, but now you can challenge the incumbent networks in a way that was impossible before you achieved critical mass. A great example is PayPal, which started off “just” doing electronic payments. Now PayPal issues credit to consumers in the US, is technically a bank in the EU (based in Luxembourg), and had enough leverage to negotiate card-present acceptance deals with Visa and MasterCard.
Rational Attempts at Success and Failure
Running a new payments company as fast (and as expensively) as possible toward escape velocity might be the only way to build a new payments network. But this is risky business. If your execution or product strategy is wrong or if the pieces on the board move, you will flame out spectacularly. A number of people who have asked me about Airbnb’s potential acquisition of Tilt judge the outcome for Tilt negatively. But how else should Tilt have run at the problem of building a new payments network? They poured money into it, they competed in geographies where the incumbent was weak, they focused on a valuable demographic (college students), and they bet on the psychological parameters of group payments being different enough from peer-to-peer payments to matter*. We tend to forget that Venmo itself would have likely bled to death while subsidizing their customers’ interchange fees and fighting fraud had it not been for the Braintree acquisition. Similarly, PayPal was hemorrhaging millions of dollars a week to fraud before they made it to an IPO.
There’s not much of a middle ground for closed-loop payments networks. You either flame out or become a huge success.
*Disclosure: I used to work at Tilt, but all this info is in the public domain.