Just a couple of years ago, when loans were easily available, unemployment was lower, and rising home values made many feel affluent, Americans didn’t hesitate to use credit cards.
Now that their personal finances have been strained, they are more likely to spend what’s actually in their bank accounts.
This trend isn’t so good for credit card companies, but it’s a boon for startups, such as
Bling is one of more than a dozen payment-related startups that have collectively raised more than $200 million since the start of the year, as venture capitalists see an opportunity for innovative businesses to carve out a niche in a period of unprecedented turmoil for established financial services players.
While consumer spending is down, payments processing remains a growth market. In 2008, the automated clearing house network, which processes electronic credit and debit card transactions in the United States, handled 18.2 billion transactions, an increase of 1.2 billion in 2007, according to NACHA, an industry trade group.
Meanwhile, so-called alternative payments, broadly defined as anything that doesn’t use a credit or debit card, are also growing at a fast clip. In 2009 alternative payments will account for 20% of online transactions, according to
“There really hasn’t been a better time for attacking some of these markets,” says Eric O’Brien, a managing director at
Over the last couple of years, O’Brien has looked at close to 20 companies in the payment sector. He considers it one of the U.S. industries most ripe for disruption, attributing that to a confluence of factors, including the shakeup in the financial marketplace, cost-cutting pressures from merchants, and the increasing willingness of consumers, particularly younger generations, to adopt new payment technologies.
Lightspeed, which also counts online and wireless transaction platform 99Bill Corp. in its portfolio, is one of several venture firms that have been particularly active in the sector. Others include:
Several concurrent market trends are boosting demand for alternative payment services, says Bruce Cundiff, director of payment research at Javelin.
The most dramatic shift in consumer behavior, Cundiff says, is a move from “pay later” to “pay now” transactions. The result, says Cundiff, is that “other than credit cards, every other single method of payment is showing increased numbers of consumers using it.”
Besides Bling, other startups focusing on “pay now” transactions include Acculynk, enStage and FSV Payment Systems.
Acculynk, which develops software that allows consumers to use debit cards to pay for online purchases, has raised $10.4 million in venture funding since last year; enStage, a provider of electronic payment services, raised a $1.5 million round in May from
Last week, startup Bill.com launched what it hopes will be a new option that takes off. Bill.com, which raised $8.5 million from
Mobile is another big driver of payment innovation. With smartphone adoption on the rise, more consumers are carrying around the equivalent of a powerful computer in their pocket. That’s fueling demand for tools to handle purchases of mobile apps, do online buying and carry out transactions at brick-and-mortar merchants.
In addition to Obopay, which secured the largest recent round of any company in that sector this year, mobile players include Bling and Boku, a payment service for buying digital and virtual goods via mobile phones. Boku raised $13 million in June from
Rising demand for micropayment transaction capability has provided a third catalyst for payment industry disruption. Sales of digital goods—particularly items used in virtual worlds and social games—are growing at double-digit rates. But the infrastructure to handle these typically small-scale transactions remains underdeveloped.
A key problem, says Cundiff, is that the current credit card and debit card pricing model doesn’t really fit with small transactions. And because such purchases account for such a small portion of total volume, “it hasn’t necessarily been something the large card networks have really wanted to figure out,” he notes.
However, VCs have a history of overly optimistic bets in the alternative payment space. During the dot-com heyday, firms invested more than $150 million in three startups developing online points-based currencies and rewards platforms: Beenz, CyberGold and Flooz. Despite costly advertising campaigns, the companies never managed to generate a large and loyal enough following, and all either shuttered or sold at fire-sale prices by 2001.
There is yet another reason for VCs to be cautious: The VCs and entrepreneurs in the payment space “rarely” have a background in the payment industry, says Lewis Gersh, managing partner at
Successfully launching a startup is hindered by the fact that upstarts have to contend with Visa, MasterCard and “all the complexities of an existing infrastructure that’s been tried and tested.”
A longer version of this story previously appeared in VCJ, an affiliated publication of PE Week.