Over at DailyLit (my wife’s company), some books are free and others require payment. Right now, DailyLit accepts credit card and PayPal. From that I have some good first hand experience with online payments. Based on that here are some of reasons why the existing solutions are painful and ready for disruption:
1. The fees are outrageous. Not only do the card companies take a cut but you also pay for a gateway fee. With PayPal you just pay them, but again it’s a hefty fee. Now it is well known that if you have volume you can negotiate down these fees, so a lot of it has to do with margin not with credit risk. A disruptor would drive down fees for everyone based on observed behavior of participants. There is so much data sloshing around (both on customers and merchants) to help assess actual risk in real time and the cost of moving a few bytes around should be near zero.
2. The APIs are horrendous. OK, implementing PayPal is a cinch, but you wind up sending people off your own site over to PayPal. That’s not the use experience anyone wants. For most credit card gateways the APIs have a lot of different calls with a ton of parameters and return values that require a lot of additional logic to figure out what just happened. There tend to literally be dozens of possible return codes that the application logic has to figure out how to handle.
3. Chargeback processing is manual. Yes manual. It is 2009 and when someone questions the charge on their card, you receive a letter asking for information on the purchase, such as whether you received positive address verification and whether the good was actually delivered. For online payments at least up to some amount, this should be entirely automated. A single additional API call would suffice.
4. For small amounts it should be easy and affordable to charge someone’s phone. It is easy today using Zong, but the carriers take up to a 30% cut. That may work for virtual goods which have 100% gross margin, but it doesn’t work if you are trying to sell anything else. Even for a digital good, such as a book on DailyLit, where you have to pay royalties to others it is hard if not impossible to make the Zong economics work.
If someone were to come along and offer a clean API, with reasonable fees that allowed people to pay via credit card and cell phone (and made it easy to keep a card on file for repeat customers) they could rapidly grab a large share of online payments.
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