Powering the Payment Stream | Street Fight

Powering the Payment Stream

Powering the Payment Stream

Local Stack infographic - BuyThis is the third of a five-part series on “The Local Stack” in local commerce that appears on Mondays. This piece focuses on consumers’ “buy” stage. Read an overview of the full stack, and check back next Monday for the fourth layer in the local stack. The full series is being underwritten by Yext.

groupon-payments-serviceFor years, local search has fed consumers to a technological black hole. The systems on which local businesses rely to manage day-to-day operations — services like payment processing, inventory management, scheduling, and the point of sale systems that tie it all together — have remained offline, relegated to legacy tools or silo-ed in digital products not built for the web.

But that’s changing. Thanks to a number of new companies that are reimagining the way consumers shop and reprovisioning the systems that business owners use to monitor and transact the exchange of goods locally, that “source code” is coming online, filling a critical gap in the local commerce stack.

From Food Truck To Point-of-Sale
In late 2011, Seth Priebatsch, a 22-year-old startup founder, outlined a potentially jarring scenario for the payments industry: the interchange, the long-held profit center for payment processors, would go to zero. The argument centered on the concept that money was information, and the web naturally undercuts industries which made their money moving information (like media).

Priebatsch, who runs LevelUp, a mobile payments startup in Boston, was right — to an extent. Industry interchange rates are not zero, but increasing competition in mobile payments has put a downward pressure on fees. In turn, companies have looked to package payments with other ancillary services, pitching payment processing as a loss leader to sell scheduling, inventory management, loyalty, and a host of other services that could build on top of the so-called “payment stream.”The Local Stack - callout

Payments are a crucial part of the “buy” layer of the Local Stack. They provide the linchpin between acquiring and retaining consumers, connecting the search and discovery experience with the re-engagement efforts that are critical for a business to grow. Forrester Research projects that mobile proximity payments — the kind of products powered by companies like Square – will grow to $90 in 2017, a 48% annual growth rate (CAGR) from the $12.8B spent in 2012.

Local Stack Infographic final2 (2)The first half of 2013 marked an important turning point. Early on, companies like Square, the celebrated payments startup headed by Twitter founder Jack Dorsey, focused on bringing payment technology to a largely underserved market of very small businesses (VSBs) — many of whom only accepted cash — in order to gin up adoption in a remarkably static and complex payment ecosystem where legacy systems haven’t evolved since they were introduced in the ‘90’s. The rapid adoption of smartphones by business owners, as well as the emergence of highly efficient software distribution frameworks in Apple and Google’s app stores, dramatically reduced the costs of selling and the requirements for adopting payment processing services. Suddenly, everyone from a food truck to an art dealer was a dongle away from processing credit cards.

But in the spring of 2013, both Square, and its largest rival eBay, introduced strategies to capture slightly larger businesses such as coffee shops, restaurants, and boutique retailers — many of whom already accept card payments. Square introduce Square Stand, an iPad dock with a credit card reader, while eBay announced partnerships with a number of the smaller POS startups such as Leaf, Erply, and ShopKeep, offering incentives for merchants to trade in their cash registers and adopt these new systems.

In moving from an underserved VSB market, which clamored for even the most basic of solutions, to a saturated one, bound by high switching costs and outdated technology, payment players now face a substantially more difficult task. Instead of creating a new market, these companies need to iteratively dismantle and reassemble a legacy industry, all the while making sure that key services like scheduling, inventory and employee management, bookkeeping and a host of vertical-specific services work seamlessly with their systems.

Finding Scale in Fragmentation
From a consumer perspective, the future of shopping locally is not hard to imagine. Each part of the buying experience, from making a reservation to engaging with staff to paying for a product or service, will work together, creating a seamless and personalized shopping experience that makes up the Local Stack. No need for a 20-something salesperson with an encyclopedic memory, the system will recognize a mobile device when we entering the store, alert the appropriate associate to help, remember your size, and ring you up without lifting a finger.

But the challenge in any disruptive innovation is often in bringing the service to market, not building the technology. Over the past year, two prevailing models have emerged to solve the problem: an open approach, championed by eBay and a host of smaller startups, in which each services is developed independently and threaded by APIs through a central platform, and an integrated model, largely espoused by Square, in which a host of services are bundled together and sold together by a single provider.

Today, that contest centers on the point-of-sale, and the accompanying software that serves as the operating system for most local businesses. Legacy systems built by public firms like Micros, which can sell for over $3,000, have started to feel pressure from Square and a host of smaller ePOS companies like Shopkeep and Revel that offer tablet-based solutions for penny’s on the dollar.

Don’t expect adoption to come quickly though; the POS is often the largest technology investment a business makes, making the switching costs higher, and the adoptions cycles longer. But when modern POS reaches a critical mass, expect innovation in brick-and-mortar technology to explode: the POS not only plays  traffic light, coordinating the intersection of a growing set of services, but also provides the much-needed distribution structure through which technology companies can deliver, and manage software for local businesses.

Retail Tomorrow, Local Services Today
The local retail market is massive, but it only accounts for a portion of local spending. There are a number of inherently-mobile local service categories — verticals like transportation and home improvement — in which consumers purchase outside of a store that present a unique opportunity for startups to avoid the congested retail world, and find immediate adoption for new technologies.

Without a counter, desktop technologies could never touch the front-end of these service business. But mobile devices have opened that market, creating new opportunities for companies to reinvent the way these businesses interact with customers without competing with entrenched legacy services. Uber, the poster child for the model, has created an entire marketplace for cabs, effectively undercutting the existing entities that controlled the taxi industry in major cities like San Francisco and New York. Meanwhile, ReachLocal has combined a customer relationship management system of sorts for home service providers with an accompanying consumer facing property to create an integrated tool for consumers to buy services from plumbers, electricians and the like.

With this “source code” opened to the web, the local marketplace becomes programmable. Just as we can find and order products from Amazon’s warehouses instantly, local consumers will soon be able to search the shelves of local businesses, reserve or buy products in advance, and then pick up those products in-store or have them delivered. One of Amazon’s traditional advantages over brick-and-mortar commerce — a coordinated technology stack — fades, and the benefits of a decentralized, local model start to emerge.

For five weeks, Street Fight will take a deep dive into each layer of the local stack, detailing the dynamics and key companies that will help to build the future of local commerce. This series, which is underwritten by Yext, is aimed at educating industry players new and old on the inner workings and ecosystem of the new local stack. Next week, discover new insights and the inner workings of the “Buy” level of the stack.Local Stack infographic - Yext

Steven Jacobs is Street Fight’s deputy editor.