Monday, December 3, 2012

Payments Startup Balanced Innovates In Wrong Direction

By Jon Matonis
Forbes
Monday, November 26, 2012

http://www.forbes.com/sites/jonmatonis/2012/11/26/payments-startup-balanced-innovates-in-wrong-direction/

Under the maxim that there's no such thing as bad publicity, only publicity, the Balanced startup team will not mind this analysis of their uninspired approach to payments innovation. The explosion in collaborative consumption is indeed transformative, but Y Combinator-backed Balanced is a step in the wrong direction precisely because it extends and supports the legacy infrastructure rather than offering a true peer-to-peer payment solution.

Receiving an investment of $1.4 million from celebrity Ashton Kutcher, SV Angel, Airbnb CEO Brian Chesky, Reddit CEO Yishan Wong, and others, Balanced aims to empower the P2P marketplace movement by providing a two-sided payment platform for online marketplaces.

Balanced and Stripe both rely on the credit card giants for source of buyer funds; however, the target customer for Balanced is the marketplace whereas the target customer for Stripe is the merchant. Primarily, all other differences stem from that difference. Their main innovation appears to be the notion of offering disparate existing functionality on a locked-in platform.

In managing the funds collection and funds transfer, Balanced will maintain funds in an escrow account for the marketplace to settle with merchants and the marketplace will be responsible for any chargebacks and collecting information from merchants. To facilitate large-value transactions and to assist in returns and merchant chargebacks, Balanced intends to add an option for bank ACH credits and debits as a payment choice in the near future.

Available only to US-based marketplaces and sellers, Balanced charges 2.9% plus $.30 per transaction. They also charge $.25 per next-day ACH deposit to the seller.

Just imagine if this extraordinary flood of software development talent could be deployed in the decentralized digital currency space where it would lead to reduced transactional friction, shorter clearing times, massively lower processing fees, optional buyer anonymity, and finality of merchant payment.

Yann Rachere, the Finance Director of Anthemis Group in Geneva, Switzerland, thinks that the "current frenzy is temporary" because ultimately "P2P marketplaces need scale to succeed." He also emphasizes that controlling payments is a key component of the strategic plan for achieving scale as eBay and Etsy demonstrate. Control of the payment infrastructure and individual payment choices allows for competitive differentiation among online marketplaces. This is valuable.

On the positive side, I like that Balanced considers themselves an escrow agent in an agora setting. This is the lynchpin area for peer-to-peer marketplaces because it deals with trust -- either your real identity trust or your avatar identity trust. If one can learn anything from futuristic and successful peer-to-peer marketplaces like Fancy, Silk Road and bitcoin-OTC, the lesson is that reputations matter and exploiting the reputational component opens up breathtaking advancements in payments and P2P exchange.

On a reddit post, Stephen Gornick hints at the possible redundancy of the Balanced offering and the potential for bitcoin solution integrators:
"Each of Balanced's customers is a potential Bitcoin merchant. Zaarly is using Balanced to provide payments handling for its peer-to-peer task market. Instead of Zaarly having to build its own, it can used Balanced's API. With Bitcoin there is a little different flow. You can't pull funds from a Bitcoin user. Bitcoin is push only. But Balanced also handles the payout component. And that is a push transaction. Balanced could just as easily offer Bitcoin payments as it could ACH.
But Balanced shows what is needed by the marketplace -- a path that a Bitcoin variant could follow. Balanced is offered in the U.S. only. A bitcoin-variant could operate globally."
Bitcoin, without an intermediary, already solves P2P marketplace payment issues with a decentralized P2P digital currency that is both fair to buyers with optional anonymity and fair to sellers with finality of payment. What a global online marketplace operator needs more is reputation management APIs and bitcoin payment modules for a broad range of e-commerce shopping cart platforms. Certainly, that is functionality that a payments handling platform could provide. Reputation is how you decide who to business with -- Bitcoin is how you pay and get paid.

For example, leading marketplace and shopping cart software that is open source includes Magento, OpenCart, osCommerceSpree, and Zen Cart. Extensions for multi-vendor support are usually available so building a proprietary marketplace platform for both buyers and sellers is not always necessary. Companies that are advancing the integration of the bitcoin payment choice into these popular e-commerce platforms are WalletBit, Paysius, and BitPay. Also, newcomer BitWasp is an open source anonymous marketplace built to leverage the features of bitcoin and lower the barrier to entry for launching an agorism-based marketplace on Tor or I2P. All could easily incorporate the escrow and reputation functionality.

Sadly, even though Balanced see themselves in an escrow role for buyers and sellers, that is where it ends because they still depend on transactions and chargebacks flowing through the monopolistic credit card networks. Balanced is merely a pass-through for the money. They do not leverage their potential as a reputation aggregator for buyers or sellers in an online marketplace and unlike Wordpress they ignore a vast swath of the world where banks and credit cards are simply unavailable.

I would like to conclude by saying that I wish Balanced much luck in their success, but I can't. I really hope that I never see any of these types of startups again. Overall they are detrimental to global payments innovation and they reinforce the paradigm of declining transaction anonymity coupled with increasing bank fees and restricted merchant segments. At best, they point out the ridiculous pricing and chargeback structure of the quasi-government credit card systems. At worst, they suck investment capital away from more promising projects and distract mind share from where it is most needed.

Update: Balanced has opened a github discussion on the topic "Support Bitcoin as a Payment Method."

1 comment:

  1. Hey Jon,
    Please consider adding a postscript pointing to this Github issue on Balanced's API project, where the public, Balanced devs, and Coinbase devs are discussing this topic.

    https://github.com/balanced/balanced-api/issues/204

    ReplyDelete