In December 2011, Seth Priebatsch laid out a dire vision for the future of the payments industry. In a post in Inc., the founder of LevelUp argued that the Internet would eventually drive the cost of moving money, the interchange, to zero, hollowing out a $50 billion payment processing industry in the same way that the web had broken apart the music, news, and media businesses the decade prior.
Three years later, and the payments revolt he foresaw is clearly underway — and yet, it remains more of a revolution than an evolution. A host of technology companies now find themselves battling over an industry which they admittedly seek to destroy, without a proven revenue model to fill the void left by falling interchange rates: Square continues to bleed cash, Clinkle has had a host of problems, and Google has thrown in the towel, for now.
Today, Priebatsch remains optimistic. LevelUp, has reduced the interchange it charges to merchants to under 2%, largely by bundling payments into batches and avoiding the flat fee paid on each transaction. Street Fight caught up with Priebatsch recently to talk about the state of the payments revolution, and why he thinks transaction data is the foundation of the next big wave of innovation in the marketing industry.
Without interchange, the revenue stream in the payments industry will be alienated from its product. Any concerns?
We are a payments company in exactly the same way that Google is a search engine, and Facebook is a social network. Facebook is an ad network masquerading as social network that is using social networking tools to build what they believe is the best form of advertising: socially-contextual advertising. Google is an advertising network that uses search to get intent data to build what they believe is the best advertising. And LevelUp is an ad network that gives away payments as cheap as possible so we can get transaction data, which we believe is the best form of advertising.
What impact do you see this uncoupling of product and revenue model having on the way the industry will grow?
When I look at payments as an ad-supported business, I think it’s the best place [the payments industry] could end up. That means it can be free. That means everyone can ride on the rails for free. And its important to realize that it’s not a new form of advertising in the world: coupons already exist, loyalty programs already exist, Groupons already exist. What we’re doing is making that more efficient, and, as a side benefit, simplifying the advertising infrastructure so that payment components can be given away for free.
There’s been concern among some that the concept of a marketing-subsidized technology industry is dangerous and unstable. Do you worry about the same thing with payments?
I don’t think it poses a long-term risk to society — payments is already fairly ad-supported as it stands, and advertising does not necessarily corrupt a product. Google, for example, hasn’t corrupted search because it has an ad-influence. Sure, there’s lots of conspiratorial theories but it works well. Facebook, for all its flaws, has created a better way for humanity to connect with each other. If social networking was a paid service, I do not think any single service would have hit the scale to bring the 1.5 billion people together digitally. That’s the same with payments.
A lot of folks in the technology industry pointed to American Express as an example of the type of model that could work in the future. What’s good about American Express, and where have they gone awry?
One thing American Express has done well is that they have build a robust app network. But they have failed at bringing any value to the merchants. There’s this idea that because you’re accepting AmEx, you’re getting access to a new customer base — but that’s not really true. If, as a consumer, you show up to a business that doesn’t take American Express, it’s not going to deter you from buying there.
I just don’t believe that that is a viable value proposition anymore. I feel like American Express lost their way. Initially, they drove value to merchants. By centralizing their rewards structure, and allowing points accrued at one merchant to be spent on another, it stopped being valuable to the merchant. But if you decentralized that structure, and allow each merchant to control its own rewards, it starts to look like a next-generation payments network.
It’s been a crazy last three years in payments. What do the next few years have in store?
It appears to be thinning out quite a bit. Google Wallet has faded away and that was really our nightmare scenario: they’ve got some of the brightest engineers in the world; they’re an advertising company; and they get how it all fits together. Then there’s Isis, which in addition to the branding issues, its core product isn’t working. Square Wallet got shut down. PayPal is still doing some good work. Clickle turned out to be a bust. Then Belly and Fivestars sort of faded away. The market is a lot more open than it was a year-and-a-half ago.
Steven Jacobs is Street Fight’s deputy editor.