One way to start thinking about this is to go back one economic cycle and look at what kind of innovation in that cycle led to real change in payments. At conferences and seminars, people tend to use the example of Paypal as a success forged in the last recession that has moved on to become part of the mainstream.
At Ebay’s first analyst day in three years, the contrasts it gave between its core auction business and Paypal were black and white. The company expects its marketplace segment, which only grew revenues 1% last year, to grow slower than the online commerce market this year. By 2011, it may finally surpass industry growth rates again. On the other hand, Paypal grew its revenues by 26pc last year and could see them double over the next three years to $5bn, with margins of 20pc.[From Ebay’s future lies in payments not auctions – Telegraph]
Just by way of comparison, although it’s not a perfect comparison, look at the value of the newcomer Paypal compared to the value of a long-established player such as Visa.
Visa trades at 14 times 2011 estimated earnings. On that basis Paypal would be worth $14bn – or $2bn more than Ebay’s total enterprise value today. Moreover, Paypal is growing faster than Visa, so it arguably deserves to trade at a higher multiple of earnings.[From Ebay’s future lies in payments not auctions – Telegraph]
When you get transactions right, they become a thin but crucial layer between technology and the market, turning places into marketplaces, enabling growth and progress. But this thin layer must spread widely enough to make money as well and so any challengers to PayPal obviously need ecological niches big enough to expand into (although as the example of M-PESA shows, you only need one decent niche to get off of the ground).
So what does this mean? Well, I was thinking about this today because of a couple of customer meetings that I was involved in. In both cases, the customers are about to make some significant technology-based investments around the payment space and I was idly wondering — partially in the context of the CSFI Payments Fellowship — why some organisations invest and others don’t. This led me to mull over the PayPal example discussed above, and I think it means that recession delivers an opportunity to those able to take advantage of it. If the big players, such as banks and telecommunications operators, cut back on investments in the transactional infrastructure, there’s an opportunity for more flexible and nimble innovators (who don’t have a core to fall back to, so therefore have to change their propositions) to move into their markets. Now, clearly, some big players are placing these bets. As Chris Skinner noted at SIBOS
Citi were advertising the fact that they spent a billion dollars on global transaction services (GTS) in 2009.[From The Financial Services Club’s Blog: Citi spent $1 billion on transaction services]
So it’s not as simple as noting that big companies will drop the ball and smaller, nimbler competitors will pick it up. My sense of the moment is that a surprising amount of money is being invested into the previously dull business of payments.
These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public
[posted with ecto]