The Payment Experience Manifesto
The New Fintech Revolution Won't Happen At Fintech Companies
Welcome to Money In Transit, the newsletter for founders who see the importance of payments, so their startups may sustain their ingenuity.
Some of you may recognize this post: it’s the Epilogue of my recently released book The Databases of Money: Designing Modern Payment Applications.
This piece ties up the whole book into one coherent manifesto: that the technology for building payment applications in-house is within reach, that integrating with a let-me-take-care-of-everything payment provider is a bad long term strategy, and that every successful online company out there has turned into a payments company under everyone’s nose.
Consider sharing this post with a founder who is complaining about the instability of their payment process. The first step of solving a problem is often admitting its existence.
Chess world champion Mikhail Tal once said that chess is about taking your opponent into a deep dark forest, where nothing makes sense, and where the way out is wide enough for only one.
Most people think that Uber and Airbnb have taken a page from Tal’s playbook. They think that if you endured losses long enough, you could shape the taxi and hotel industries into a business landscape where nobody could make money, so that you could crowd out incumbents until you were the last man standing.
You get disabused from that idea when you start designing payment applications. The most difficult part of a startup’s business isn’t to get you to call a cab, or to rent a room. After all, you were doing those things already. What’s hard is nudging enough people to accept that paying you online is the natural thing to do.
Uber and Airbnb’s business model was novel in the sense that it required people to pay online. And enticing customers to do so was so rewarding, if successful, that these companies were willing to burn millions selling taxi trips and hotel rooms almost for free so that you were less afraid to fill in your credit card details in an online form.
I, along with others, have a controversial take. We believe that many of the prominent Internet companies have built high-margin, highly defensible businesses, not by moving fast and breaking things, but by having an obsessive control over the payment experience, the moment when the customer goes from checkout to paid and the mindset that compels them to do so.
Today’s business owners hate the idea that you should spend time customizing the payment experience, as shown by the growth of payment platforms. Stripe, for instance, sells best-available-format checkout pages to e-commerce businesses, and yet it was valued at $95 billion in 2021, with an endless row of investors knocking at their doors screaming “IPO! IPO!”.
Too much of the conversation about what makes payment platforms successful revolves around their design and engineering, as opposed to the underlying monopolies that these new companies have created around them. My own theory is that we are witnessing a dramatic and broad shift: financial technology innovation is becoming merchant-driven, rather than provider-driven.
Since the early 2010s, more businesses than ever have migrated their operations to be run on software and be delivered as online services. What used to be proprietary and excruciating has in turn evolved to be open source and straightforward, especially activities that are common across the board, like payments. Over the next ten years, I expect many of those businesses to acquire the capabilities now in possession of the payment providers, and to control the payment experience without resorting to intermediaries.
Why is this happening now?
Decades into the so-called Web 2.0, which emphasized usability and interoperability, founders are waking up to the idea that owning the multiple steps of the payment experience is within reach of the small but technologically savvy startups, and not just big corporations. The technology required to accept payments online works, it’s cheap, and can be implemented in-house.
Besides, three years of semi reclusion in the early 2020s have trained billions of people into considering online their default way of buying. Offline commerce has been devoured by e-commerce, and cinemas can no longer compete with the attractiveness of the comfort of your living room combined with the content of streaming platforms.
Today, the world’s largest newspapers have embraced the paywall, offering free access only to a sample of their subscription-only catalog. Their expertise has turned technological, and have engineered the payment applications needed to sell newspapers online, no news stands necessary anymore. While Buzzfeed loses hundreds of millions every year, classics like The New York Times are now back into profitability.
On top of that, if you are interested in niche topics such as the business strategy of tech companies, there’s no better blog to read than Stratechery. But unlike the blogs in the era of Blogpost, Stratechery is a multi-million dollar business. That is wild if you consider that it wasn’t that long ago when it was globally accepted that no one could make a living writing online. Stratechery first, followed by prominent writers on Substack, have proven this to be wrong.
Today’s most common way to consume entertainment is through streaming platforms. Peer-to-peer allowed people to download what they wanted for free, and they did so for a while. But Spotify and Netflix showed that, if you provided a seamless way to subscribe, people were willing to ditch cranky Megaupload for high-quality, ultrafast downloads.
Traditional entertainment companies and record labels have also made a move. They no longer provide content to these tech companies, and have built their own payment applications so that they could accept card details themselves, and start billing.
Software is already here. You don’t hear about companies that aren’t online because they aren’t anywhere anymore. But technology has become a commodity. It is the payment experience where customers are still divinely discontent.
For a while, experts claimed that there was no other business model that could be valid online if it wasn’t for-free and ad-driven. But perhaps what happened is that people were OK with paying for things, and incumbents weren’t providing them with reliable ways to do it.
Isn’t it high time that we acknowledge that not only Uber and Airbnb, but also Substack, Spotify and Netflix, are payment companies?
However, we still face several challenges.
First, the financial industry has been transformed by software only cosmetically in the last decades. Practically every transaction is now mediated by computers, but that was innovative back in the 1970s. The only thing useful banks have invented since then is the ATM.
Regulatory capture has strangled financial innovation. Despite capturing one in five dollars out of the $621 billion in venture funding in 2021, fintech startups haven’t been able to circumvent the banking license as a requirement for providing good alternatives to traditional finance. Banking-as-a-Service, and an overreliance on the Durbin exemption, are testament to this. They are examples of incremental technology; there is nothing disruptive about partnering with incumbents.
Secondly, many startups lack the expertise required to provision a high-quality payment experience in-house. This is a tragedy, because every company I have worked with is driven insane by their payment providers. Engineers with deep experience and exposure to the payments industry could tackle this issue, but they are hard to come by. Most engineers jump from one domain to another, from accounting to human resources, from marketing to project management, applying generic best practices that produce generic software.
The problem is worse than it looks because many engineers will be stranded on the wrong side of AI, and may never be able to catch up to the acceleration of automatic software builders. There is no way through this other than specialization, and we have a long way to go.
Finally, startups need to prove their worth. Founders must create a culture of builders, rather than component pluggers, establishing control over their startup’s payment experience and, yes, paying the upfront costs of doing so. Building a high-value startup using what everyone else is using and doing what everyone else is doing is not hard, it’s impossible.
Right now, the most valuable thing founders can do for their startup’s customers is to reduce the work necessary to pay to the absolute minimum. Instead of offloading the responsibility for the payment experience to an external provider, founders should seek to understand it, to gain control of it, and to enhance it.
If founders live up to these expectations, they are going to become the owners of highly valuable cornerstones in the modern economy, conquering markets that no one thought possible to even put a dent on.
The future is so bright it’s blinding. Care to join us?