By Jon Matonis
Monday, April 29, 2013
The payments industry has been ripe for disruption for as long as I
can remember. Historically conservative and non-experimental, banking
and financial services always appear to be the laggard for any new
technology. But none of that has stopped recent innovators from pursuing
things like Square, Stripe, Dwolla, FaceCash, ZooZ, Affirm, MangoPay,
and Balanced. The Internet and mobile payments gold rush is in full
swing and venture capitalists are lapping it up.
The amount of
money raised by a startup in the space can be staggering too, ranging
from $3.4 million to as much as $200 million in the case of Square. But
are venture capitalists truly funding disruptive "home runs" if licensed
banks and legacy credit card networks are required for their so-called
innovations? Also, most would agree that the states' money transmitter
licensing infrastructure acts more like a barrier of entry protecting
incumbents than providing any protection for consumers.
anyone notice the elephant in the room? Growth rates of over 10,000%
since inception, measured in transaction volume and amounts. Pervasive
international market penetration with full digital and mobile platforms.
A passionate and dedicated customer base.
course, I'm talking about the distributed payments network and
cryptocurrency Bitcoin, which plays a dual role as a transaction
confirmation network and independent floating unit of account.
easy to understand why certain venture capitalists might be timid about
pulling the trigger on a Bitcoin-related investment. Regulatory risk
(illustrated by the fallout from Fincen's recent guidelines
in the U.S.), on top of typical execution risk demands a greater return
from initial investment. While that return may ultimately be there, a
skittish board or a wary risk-averse management team might be unable to
navigate the onslaught of negative public relations and price volatility.
lesser technology with so many forces aligned against it would be
unlikely to survive. Bitcoin's persistence demonstrates that we are
witnessing something unique in money and payments. For those that do
invest and successfully navigate the potential traps, the reward is a
first-mover advantage for a new international monetary unit.
Here's the important part. Disruption in the unit of account is the way to disrupt the payments space.
currency units come with many strings attached and they reek of
favoritism and crony capitalism primarily benefiting the well-connected.
With a nonpolitical monetary unit, many new possibilities become
apparent structurally that would not have been contemplated before, such
as: peer-to-peer mobile applications that don't require permission from
legacy transaction carriers; global remittances that don't require
high-fee currency conversion; merchant categories that are no longer
disallowed due to fraud and chargeback risk; and merchant reach into
countries that are not even on the map for Visa, MasterCard or PayPal.
It's very telling that, when WordPress announced its plan to begin accepting bitcoin, the blogging platform provider noted, "PayPal
alone blocks access from over 60 countries, and many credit card
companies have similar restrictions. Some are blocked for political
reasons, some because of higher fraud rates, and some for other
Compared to conventional payments
startups, the largest private equity raise by a Bitcoin-related company
has been Atlanta-based BitPay Inc. which raised $510,000 in January to expand its lead in the bitcoin merchant processing space. Startup CoinLab also raised $500,000 in April 2012 and foreign exchange platform Coinsetter closed
a $500,000 investment round this month. Coinbase, a provider of
personal wallet storage and merchant processing services, raised
$600,000, although almost half of that was through crowdfunding.
Those are just some of the Bitcoin initiatives with external funding.
Many Bitcoin-related companies grow organically with a one- or
two-person team, because the technology offers the most open platform
for payments innovation in the world today.
The powerful Bitcoin
open-source development funnel will begin to suck in greater and greater
talent driving applications that will have the broadest overall impact
in the payments sphere. Creative talent naturally gravitates toward the
point where maximum societal impact intersects with maximum reward. This
alignment of incentives for early adopters and a global "workforce
army" cannot be matched with traditional employee stock option plans.
Legacy and closed systems cannot compete.
Just ask Kevin
McInturff, who recently left Global Payments – a processor of Visa and
MasterCard transactions with thousands of employees – to join BitPay,
where he is one of three full-timers. Bitcoin "offers the opportunity to
change the way business is done," McInturff told PaymentsSource.
wasn't spawned by the post office as a way to drive efficiency for the
U.S. Postal Service. File sharing technology didn't come out of a media
headquarters' lab to test improvements for distribution. Disruptive
innovation simply doesn't work that way.
Disruptive technology disrupts. That is its mission.
It annihilates any substandard process or product in its path and it
originates outside of the established paradigm. You don't see it coming.
I get a chuckle out of all these investors trying desperately to attach
themselves to something, anything, in the Internet and mobile payments
However, a payments startup that ignores Bitcoin in its
strategic plan is like a publisher ignoring the Web in 1999. Certainly,
innovators can design routes around Bitcoin and established players can
dismiss it as insignificant, but that won't make the elephant go away.
The savvy and true disruptors already know this.