Tuesday, September 18, 2012

Stripe, Balanced, WePay for Payments: Not big enough to #fail

When Amazon Payments first told us they wouldn't allow our crowd-funding business to continue using their system, we thought it was a phishing attack. That's because a robot sent it, and what does a robot know? But it turned out they were serious, they had to cut us off, because what if we destroyed civilization as we know it? Would they be on the hook for it?

Having dealt with Amazon Payments and Paypal, I dreaded what we'd have to go through. But now, after learning more than I ever wanted to know about the online payments industry, I feel that getting booted by Amazon was the best thing that could have happened to unglue.it. There's a new generation of payments companies out there, and when the big payments companies have their Lehmann-Bear-Stearns-Brothers moment, you'll be happy if you escaped in time.

To understand what makes payments companies tick, you have to understand something about the risks they take on, and the ways they try to mitigate risk. For a merchant, taking a credit card means you don't have to worry about whether someone's credit is good. For a consumer, paying with a credit card means you have some recourse if a merchant tries to cheat you. Credit card fraud is probably older than credit cards, and credit card companies have decades of experience detecting fraud and reducing its cost.

Internet commerce introduced entirely new categories of risks, and conventional payments providers were not eager to change. To address the needs of a new era, a number of payments companies came into existence, most notably, Paypal. As Paypal took off, companies like Amazon, Apple, Ebay and Google did not stand idly by.

But anyone who's used Paypal, Amazon Payments, or Google Wallet recently can't help but notice that these services have calcified. Even worse is that they've metastasized as impersonal, unresponsive machines. In the payments biz, calcification has advantages. Consumers have learned to trust these companies and their brands, and the companies have in turn done their best to turn into rocks of calcite stability.

But if you want to change the world with your fantastic start-up, you're screwed. If you're doing something new, the big guys can't evaluate your risk profile. Because they're machines. For changing the world, you need people, or at least cyborgs. You need high-powered big-data risk analysis supplementing the judgments of seriously smart people. And over the last month, I've found some of this at three different companies.

First, let me tell you about some companies we didn't pursue. Dwolla is really interesting, but we thought it would be hard to sell Dwolla and its requirement for direct bank account access to our core demographic. If our users were high-involvement, high frequency users, we might feel differently. Similarly, the marketing barriers to using things like bitcoin are prohibitive at this time. Mobile payments solutions such as Square aren't so relevant for our application.

Another company we were interested in was Braintree Payments. We reached out to them, but they told us that three weeks prior to our request, their banking networks had told them to stop supporting crowdfunding businesses.

So we looked at WePay, Balanced, and Stripe. Three breaths of fresh air.

Of these three the company that most closely replicates the Amazon/Paypal model is WePay. Like Amazon/Paypal, WePay allows users to create a WePay account. As WePay becomes more and more accepted, consumers who might be hesitant to give credit card info to an unfamiliar service like Unglue.it will recognize the WePay brand and grant access to their WePay account, if they already have one, via OAuth. If the user doesn't have a WePay account, the the marketplace can create one on their behalf. When everything works, friction in the transaction drops dramatically.

Wepay's API (which was not available when we were looking for a payments provider a year ago) allows all the key functions Gluejar would need to build a crowdfunding application. These include conditional and delayed payments. For example, WePay is the payments provider for GoFundMe. The biggest downside for us is that Wepay is quite specific about only allowing payees who are US citizens. Still, we were able to identify a work-around for our non-US rights-holders. Balanced and Stripe had similar issues and work arounds.

Balanced, the smallest of the three companies we talked to, is in many ways the most exciting. They're focused on providing solutions specifically tailored to markets. They've baked the concepts of multiple buyers and multiple sellers into their well-documented API, and offer features such as the ability to escrow payments into the marketplace account. If you so much as browse their website you'll be given an API key and be offered the chance to do a test transaction.

Markets present rather different risk profiles to a payment provider than do simple merchants. The diversity of participants and flow of payments makes it harder to detect fraud. But if you have smart, experienced people involved, the risks can be assessed and mitigated. Fraud detection algorithms can be optimized for markets. The possibilities of markets enabled by the internet are unfathomable. For example, last week I learned of a company, VoiceBunny, that has built a marketplace for voice talents. Crowdvoicing! You feed some text into an API and soon, someone with a great voice will speak it for you. They're using Paypal now, but they would be smart to look at Balanced.

GitTip IS using balanced, after a fiasco with FeeFighters and finding their business model incompatible with Stripe's underwriters. Gittip's founder, Chad Whitacre, had to "understand and mitigate the risks of running a marketplace", and Balanced is helping him do that.

Stripe was the most "boring" payments company we looked at. I use the word "boring" with much admiration, because they're focusing on the relatively boring old problem of enabling internet merchants to take credit cards and just doing a better job of it. On the implementation side, they've succeeded brilliantly, with an API and developer support that just makes you want to throw your Paypal code into the trash and drink some good bubbly to celebrate its demise.

The folks at Stripe took the time to understand the issues of payment risk inherent in our business model, and what we're doing to address it. To be able to use Stripe for our marketplace, we would need to take some responsibility for delivering the Creative-Commons Licensed eBooks that our crowd is funding. It means that we can't work like Kickstarter, which disclaims any and all responsibility for completion and delivery of the projects on its website. Since that quality control and delivery assurance is a big part of the extra value we provide over Kickstarter, Stripe is a viable option for us. As are Balanced and WePay.

In deciding among these three great companies, the questions we asked ourselves were more about what we want to be than anything else. Do we require the scaling characteristics of a marketplace or are we just a merchant that wants to take creditcards? Do we want a payment network or can we stand on our own? As the world of internet payments develops, which company will develop solutions aligned with our particular needs?

I'm not going to say which company we've settled on until we make sure that everything works, but I've very sure that whether it's that one or one of the others, we'll be in a much happier space than we were with Amazon or Paypal. If you are considering a switch from a payments company that is too big to care about your success, or if you are deciding on a provider for a new application, you should really look at the new companies. A healthy internet economy needs a diversity of payments providers who employ more than just algorithms, who support businesses rather than accounts.

9 comments:

  1. I can't stand paypal or amazon either. I haven't used kickstarter. I've been using www.merchantinc.com and they have been awesome!

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  2. I love stripe. I use them for just about everything! I've even started using Stripe for one off payments. There's a sweet little addon to stripe called easybill (www.easybill.co) that lets you create quick payment forms connected to your Stripe account with oauth

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  3. so which one did you decide to go with in the end, how is it working out so far?

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    1. We're using Stripe. We will not be going back to Paypal or Amazon Payments. Ever.

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  4. Oh, and never touch wepay with a ten foot pole

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  5. Is there a company that pays out internationally? All these seem to pay out to US bank account holders only.

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    1. With respect to Stripe:

      "In order to accept payments with Stripe, however, you or your business must be based in the United States, Canada, the UK or Ireland. We're also available in private beta for businesses in Australia, Belgium, France, Finland, Germany, Luxembourg, The Netherlands and Spain."

      For Balanced:

      "However, at this time, Balanced can only pay out to U.S. bank accounts. There is currently no official timeline for international payout support."

      For Wepay:

      "At this time, WePay only supports US-based users. You need to have a social security number and US billing address in order to get money out of WePay. If you are in the US, you can collect money from people using international credit cards. We do have plans to be international one day, but we don't have an exact timeline yet. "

      My understanding is that international is an expensive and complicated proposition.

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  6. Eric, I would love to know what your WePay workaround was. We have a lot of international interest in PodFund but are currently limited to WePay.

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    1. Robert,

      The one sentence version is that if you can take responsibility for payee performance yourself with respect to the card networks, then you can have the networks pay you instead of the international payee. Depending on your specific model, that can be a BIG if. In our case, we just had to be prepared to deliver an ebook ourselves if the international payee went bad. But YMMV.

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