The Stripe Problem: Why It's Time For A New Kind Of Payments Company.
By Christian Owens Forbes
The way payments companies are built has to change.
Some of the most successful companies of the moment are the fintechs that do payments: the likes of Stripe, Adyen, Braintree, Checkout.com. Businesses like these build light infrastructure on top of Visa and Mastercard, and take margins of between 10 and 50 basis points on transaction volume. It is a lucrative way of doing business, and combined with excellent customer service, makes for decent consumer-facing offerings–all the companies listed above are good companies with good products.
But the issue is that these companies are all competing with each other for the same volume. Is that sustainable? There are now half a dozen heavily-funded payments processor companies throwing money after each other’s customers. Yes, there are trillions of dollars of that volume out there, and yes, you can specialise a bit–building certain features that make them more attractive to certain merchants than others (like risk and fraud products for e-commerce merchants, or international payment options to help companies expand internationally), but the volume is finite, and the competition fierce.
Fundamentally, people need to start recognizing payments as the commodity it is. The service offerings are essentially interchangeable, so customers can only buy on price. But what if the way forward is to build companies that add value to one particular group of customers beyond the scope of payments? I call these sorts of companies (which are not really payments businesses at all, but payment-enabled software companies) “vertical payments companies.” These businesses create commerce infrastructure for very specific verticals, using the transaction as the anchor for building software that makes running those kinds of companies much easier.
There’s Squire, which has built a management system for barber shops, recently raising $8 million in Series A and operating in 28 cities with more than $100 million in transactions processed to date. Toast does the same for restaurants, Yapstone for travel, Flywire for education and Change Healthcare for, you’ve guessed it, healthcare. And these companies are not embryonic. When Mindbody was taken private at the end of 2018, the $1.9 billion takeover equated to a near-70 percent premium on shares.
What is the richest set of customer information you can have as a business? To my mind, it is not having a CRM for an email newsletter list, it is building a picture of your customers that emanates from the kind of relationship you have with them–and that begins with a transaction. This is how you build deep, powerful tools for customers; it is also how you build a business that doesn’t just grow, but endures—because you can extract more value.
Think about a company that provides software specifically to help restaurants.
Restaurants make food, not booking systems, not table allocation tools, not systems that send orders through to kitchens, not point of sale machines. It would make absolutely no sense for a restaurant to build any of this infrastructure for itself. If it uses a payments service, it pays that provider 30 basis points, but still had to spend 150 basis points on everything else it needs to do the above.
If you are the company that builds everything the restaurant needs, and you start off by just going after restaurants, you don’t just have the opportunity to charge more, but you can capture far more of what they are always going to spend on the problem. And your customers are spending more efficiently, with more guarantee that value will be delivered.
Software is adding more verticals to the economy all the time: AI, genomics, self-landing rockets. But it is also servicing more and more kinds of businesses that do not have software at their core, but need it to do what they do better. By building deep and narrow, these companies have the opportunity to deliver and capture more value for longer.