MBA Mondays: Revenue Models - Transaction Processing

Transaction Processing is not a "net native" business model. There have been businesses built up around processing transactions for a long time. But the Internet and Mobile present some challenges in processing transactions and therefore there are opportunities to build substantial businesses around helping companies process transactions.

If you look at the Revenue Model Hackpad, you will see that there are a number of different kinds of transaction processing businesses:

View Transaction processing on Hackpad.

The first four examples in the hackpad are related to credit card processing, the next three are related to banking transactions, then there is fulfillment which is physical logistics, then the next three relate to the world of telephony, and the last one is related to internet and mobile platforms.

So you can see that transaction processing is a business model that can be applied to a number of different types of transactions. And certainly our revenue model hackpad is not comprehensive. So I am sure there are many other forms of transaction processing businesses in the online world.

The thing that all of these forms of transaction processing have in common is the processor handles a transaction that was generated by another product or service and provides some form of completion service and charges a fee for doing so. That could be processing a credit card transaction, handling a banking transaction, shipping something to someone, completing a call originated on another network, or distributing a third party app on an internet or mobile platform.

For financial transactions, the fees are generally small, typically in the 2-4% range. For banking transactions, the fees are often much smaller than that because the credit and fraud risks are lower.  For logistics (shipping and handling), the fees vary but relate to the costs of providing the service. For telephony, the fees are generally expressed per minute or per message and are generally low but can be high in certain markets. Platform distribution fees are the outlier as they are often very significant, Apple charges a 30% cut in its app store.

For the most part, the transaction processing business model is all about scale. You process billions of transactions and take a few percent of the total transaction value. PayPal processed $145bn of transactions in 2012 and generated $5.6bn in revenue. Out of that $5.6bn, PayPal has to cover all its costs including processing fees to other transaction processors, customer service, fraud prevention, fraud losses, technology and development, and several others. I am certain that PayPal makes a very nice profit off of that $5.6bn of revenue but it is probably on the order of $1-2bn, which is in the range of 1% of the total transaction volume. This is a business model of pennies on the dollar, literally.

One of the challenges of this business model is that the fixed costs required to process transcations can be significant and you will operate a loss until you can get to scale. You can see that by looking at how much capital Square has raised to date. Crunchbase has it at $341mm. Now Square is one of the most exciting new companies created in the past five years and is executing incredibly well. But it has taken hundreds of millions of dollars to get where it is today. That's what I am talking about. You had better be prepared to fund the costs of ramping to scale if you want to be in this kind of business.

In general, I like these kinds of businesses a lot once they reach scale, but am cognizant of the costs of building them. They are not for the faint of heart.

#MBA Mondays

Comments (Archived):

  1. Carl Rahn Griffith

    “They are not for the faint of heart.”Indeed. Ergo, they have a pretty significant Barriers to Entry.Which is pretty attractive…

    1. fredwilson

      yes indeed

    2. Avi Deitcher

      Yep. Was talking to the founder of a hardware startup a few weeks back. He looked at me in exasperation (all of the capital costs, manufacturing headaches, logistics, etc.), and said, “next time, I am doing a software or cloud business.”My response was identical to yours, Carl. Easy for you to get into, means easy for competitors, too.

  2. takingpitches

    Square has the challenge of being a transaction processing model built on a transaction processing model (the credit card networks). So Square collects small fees, but these are almost entirely passed on to pay as pass-through interchange for the credit cards.If you are going to take on payments, at least take on the first order transaction processing issue. Perhaps that is where Square is headed now they have both the consumer and merchant market built up, but it is why Dwolla is exciting.

    1. Avi Deitcher

      You are saying Square is just another middleman layer in the credit card networks, removing some inefficiencies, but still fundamentally just another layer, whereas Dwolla is an alternate network, hence more likely to have a bigger cut?

      1. fredwilson

        i think dwolla will have a much lower cut, but they don’t share their cut with card processors

        1. Avi Deitcher

          So as a percent of the revenue (not tx value) that they take in, they will keep much more. The CC average cut is probably ~3%, Square will keep maybe 1/6-1/3 of that, grand total of 1%. Dwolla’s average is probably closer to 1% of less, but they will keep all of it. But, when the tx fee is 1%, much easier to get merchants on-board….

          1. fredwilson

            dwolla chares $0.25 per transactionmany of their transactions are thousands of dollarsas a percentage, it is tiny

          2. Avi Deitcher

            And nothing on tx under $10, IIRC. But it is the overall average that matters. Curious as to what their average tx size is, and therefore their average take as a %age.The issue is scale. To be a $1BN business, if they take, say, 0.5% (avg tx size of $50), then they need to process $200BN in tx on an annual basis. That is a *lot*. Investors get nervous about that?Mind you, as a merchant, I would love it.

          3. fredwilson

            i am not sure they will be a $1bn business in revenuescraigslist maybe does $200mm in revenues and $150mm in ebitdaebitda is what matters

          4. Avi Deitcher

            Heh, whatever happened to the old VC rule that a business that doesn’t do $1BN in revenue but is profitable is “viable, not valuable”? :-)Craigslist has 75% operating margins? Wow. Shouldn’t be much interest, depreciation or amortization there, I imagine their debt payments, if any, are small, so EBITDA has to be pretty close to pre-tax profits.

          5. fredwilson

            that is an educated guess on craigslist. they don’t publish financial results.the $1bn that matters is enterprise value not revenues$100 million in EBITDA will get you there

          6. Avi Deitcher

            Ah, right. Good point, and, I can see a $100MM EBITDA business having a 10x earnings multiple.Even so, man, that is a nice business.

          7. JamesHRH

            top line is vanity. bottom line is sanity.

          8. Carl Rahn Griffith

            Which makes it frictionless.

    2. fredwilson


    3. Barry Nolan

      I wonder if square isn’t about the cents, but the signal. Their recent prices changes certainly suggest this.Emailed receipts sound innocuous – a simply utility – but in reality are a unique signal into consumers based around spend/presence. Creating an enlightened connection between merchants and consumers based on spend-as-a-signal (as opposed to whimsical ‘likes’) sounds golden.

      1. takingpitches

        Yes — AmEx too has a model where because of their closed loop network (as opposed to Visa and Mastercard), unifying the merchant acquirer, payment network, and card issuer, is able to charge higher interchange to merchants and offer a great deal of analytics and data back to their retailers in exchange.Might be a partial model for Square.

  3. kidmercury

    some day the virtual currency model will put a lot of these out of business. it disrupts half the stuff on this list as it brings with it a whole new value chain involving a new banking system. but the political environment needs to be conducive to it and the company that brings it needs to have a corresponding awareness.i don’t think paypal is at risk until the virtual currency comes along. i think paypal is like and, in that they are established incumbents who can simply see what similar SaaS-oriented startups are doing, copy them, and sufficiently defend their position in doing so.

    1. Matt A. Myers

      Anyone wanting to disrupt this market has a high risk too of the status quo trying to shut them down – who will have billions of profit to use for such lobbying and/or bullying.

    2. Richard

      Profits = Fees + Interest Revenue + Commission Revenue – Variable Costs – Bad Debt – Capital Holding Costs – Fixed Costs

  4. awaldstein

    I’m not daunted by hard to do.But scale at the volume that these and most models need to reach in order to work is indeed daunting. All or nothing on mass market scale is a big bet with wackily long odds,

  5. jason wright

    why does there need to be a payments intermediary?

    1. Avi Deitcher

      There doesn’t. We have this thing called cash. But as soon as you want some form of non-cash, there has to be some intermediary.- checks: bank clearing and ACH- credit cards: CC- person-to-person: PayPal or Dwolla or whateverThere has to be some way for consumer to get money to merchant other than cash, doesn’t there?

      1. jason wright

        cash is tokens, based on a centralized promise of its value.the promise needs to be the moment the cash in my wallet isn’t really mine.

        1. Avi Deitcher

          So cash = legal physical bitcoin?How do you want it decentralized? What do you envision? Some sort of return to multiple currencies, like when each state and sometimes each bank had, and you chose your currency based on your belief in the credit of the issuer? Would make for a lot of instability, but on the other hand, would make inflationary expansion impossible and solve much of the governmental morass.

        2. Carl Rahn Griffith

          The whole fiat currency promissory note mechanism is increasingly arcane and open to question as it is largely based on debt rather than credit – the fact most of the ‘money’ we engage with is in digital form anyway detaches us more and more from it and opens up the possibility of radical change – which was hitherto beyond our comprehension – but, the banking system and government is doing a great (sic) job of making more and more people open to change.As Negroponte pointed out, long ago, using atoms to ship bits is a bad, bad business to be in…Money is increasingly no different to the CD/music industry.

          1. Avi Deitcher

            I’ll ask again: (a) what do you replace it with, and (b) how do you do so when govt monopoly outlaws alternatives?Even if I far more efficiently ship bits to you instead of giving you a $10 note, I have still shipped you $10, i.e. the amount that the US Govt declares $10 is worth. It can inflate it via monetary policy (it has in the past and is doing so now), it can inflate it via fiscal policy (ditto). Whether bits of paper, it is denominated in some currency. What alternative currency would you denominate transactions in?

          2. Carl Rahn Griffith

            Well, at its crudest form, I see increasing amounts of bartering – sadly I am not in a trade where I can participate in this, but payment for services/goods can take many forms. It’s not really an issue at a peer level. Money is just a necessary habit we’ve gotten ourselves into – and to excess over past few decades.

          3. Avi Deitcher

            “Crude” is a good term here. Bartering is not good for an economy, it is bad. Give you a real-life example: I consulted for a company that sold products online, products for which I had no use whatsoever. What are they supposed to pay me in, sweaters? I don’t need sweaters. But cash is neutral, I don’t have to care.The problem isn’t money, it is centralized fiat money. I don’t have a better solution, though. Perhaps, as Churchill said about democracy, fiat money is the worst system we have, except for all others?

          4. Carl Rahn Griffith

            Indeed. People like @kidmercury:disqus can write on the topic a lot better than I, but I increasingly feel we are approaching a tipping-point for radical change. Just imagine what Henry Ford would have said of the banking system now, based on his somewhat jaundiced views way back then, in much simpler times.

          5. Avi Deitcher

            But you don’t want to go back to Ford’s day, do you?Radical change is like war: you know how it starts, you never know how it will end and what price you will pay on the way. I far prefer to know what you want to change it into first.

          6. Carl Rahn Griffith

            As the saying goes, only the dead see the end of war.

          7. Avi Deitcher

            Too true. Painfully so.So radical change: OK, if we know where we are going…

          8. Carl Rahn Griffith

            Tricky one. Ideally, yes, of course. But with so many vested interests out there I can’t see the change necessary happening in an elegant and structured way. I suspect entropy in the current system/s will give life to whole new concepts and processes – ones which we can’t probably even imagine right now. After all, we’re a pretty dumb ensemble of consumers and producers in the overall scheme of things. Mass-market money and consumerism on the scales now are very recent and not aligning to legacy monetary systems as they currently exist. The whole system is fractured and dysfunctional – so, let’s see what happens next. Sometimes change as a result of our dumb behaviour as a species is inevitable – akin to global warming.

          9. Avi Deitcher

            I get that you see change as difficult – I agree – but I am interested in the vision. I have a hard time seeing what it is. Something is appealing about multiple currency issuers, but something unnerving as well.

          10. kidmercury

            here’s what i think will happen at some point (though i am worried it could be a while):1. online communities introduce virtual currencies as part of their experience and game play (already have lots of this going on)2. these currencies are organically traded in the community and increasingly adopt a value independent of any nation-state currency3. this is of course illegal, and the law must be disobeyed and the online government must be willing to disobey it. this is the big one that will cause almost everyone to run away from the idea. but, perhaps people will be of a different opinion should a global currency crisis emerge (something i regard as inevitable and already under way).4. the end result is that these virtual communities/currencies will adopt their own governments, perhaps to the extent that they will end up replacing the nation-state system altogether. at least that is my great hope for humanity 🙂

          11. Avi Deitcher

            I find it interesting, but the reality is that the gaming economy is miniscule compared to the physical, which is where real stuff has to happen. You can live without WoW, but not without milk.The only part I disagree with is the loss of nation-state. I don’t want to see that go away in the least. The alternative is either world government (Fourth Reich?) or anarchy.

          12. kidmercury

            i don’t think the alternative is world government or anarchy. i think the nation-state is already collapsing, and that world government will be the de facto next step unless online communities step up — fourth reich is already here. i think online communities allow for a return to tribalism. or, as sci-fi writer neal stephenson calls them, phyles. here is a longer article elaborating:…game economies are miniscule, but that is good — disruptions start with small markets too tiny to be of interest to incumbents. however, i don’t think gaming communities are the only way virtual currencies get introduced; rather, i think game play is going to become a part of virtually all online communities as it will serve as their means of community governance and status (i.e. badge distribution, certain badges allow for certain privileges, etc).

          13. Avi Deitcher

            Disagree, kidmercury. Nation-states causing their own demise, absolutely. Greece, Spain, Portugal, even France, to some extent the UK and even USA. Although Canada is doing quite nicely.But I don’t think the Fourth Reich is here yet by any stretch – the Third was such horror, we cannot compare – but we have no positive alternative to the nation-state, and, to be fair, it has brought an enormous amount of good to the world. Bad, too, yes, but overall, look at our world vs the one of 1,000 years ago, 200 years ago, or even 30 years ago. I grew up playing the “how far is your home from the nearest major Soviet target” game…

          14. Avi Deitcher

            Fred, I am in this community because the people are great and the discussion fascinating. But does it take away from the day of work….

          15. ShanaC

            you learn….

          16. Avi Deitcher

            = “you learn from community so it is worth the time”? OR= “you learn to balance it into your day”?

          17. Avi Deitcher

            BTW, have I said how much I *hate* how disqus works here? In private, I call it “disqusting”. In theory, it is great; in practice, it is a nightmare of navigation. Not going to dump on it here, if anyone in the community is involved and wants my issues for input to improve it, email me at avi [at] deitcher [dot] net

          18. Avi Deitcher

            And no, I won’t write a post about it; I want it to get better, not to publicly trash it.

          19. kidmercury

            there is a book called the rise of the fourth reich by jim marrs. one of my favorite books of all-time. patriot act, john warner defense authorization act, increasing usage of executive orders, banning guns, a charismatic leader inspiring the youth during a struggling economy, wars everywhere and appeasing an impoverished economy with promises of a socialist utopia…..all straight from the nazi playbook. once teh nation-states collapse, they’ll officially replace it with a world government as “the solution”. the UN/IMF/World Bank/World Health Organization/International Court of Justice/International Telecommunications Union/NAFTA/GATT and countless others are basically a world government already, they just need the right event to justify making it official and overt.

          20. Avi Deitcher

            I’ll pick it up, but, man, is that not depressing and negative?I agree that there are domestic elements that are authoritative, and they often defer to international ones. But we bounced back from some of the overcontrol and authoritarianism of the 30s and 40s, I would like to believe in the ability of human dignity, wisdom of democratic people and the strength of Constitutional government to overcome all of that. I am not naive; I am optimistic.

          21. kidmercury

            people always tell me it is depressing and negative, although i think it is depressing and negative to pretend the problem doesn’t exist as doing so implies a belief the problem cannot be solved. i prefer to think problems are opportunities and solving them will yield benefits that can barely be imagined.there is no more constitutional government, it has been eroded away (patriot act, national security act, the rise of the executive order as a means of legislation, congress offloading much of its responsibiility to bureaus under the executive branch, president declaring war without cognressional approval, etc)

          22. Ellie Kesselman

            Wow, you have a great blog!

          23. Avi Deitcher

            Thanks! But I am a rank amateur compared to our esteemed host here. He has really built something special.

          24. Ellie Kesselman

            Fred is exceptional. He even gives unsolicited good advice to strangers. (I propagated your Google article URL on Twitter tonight, to wide acclaim. Thank you ;o)

          25. LE

            “here’s what i think will happen at some point (though i am worried it could be a while):”As the saying goes you can name the price if I can name the terms.What percentage of the population by the way today are members of these online communities that form the basis for this?For example are you saying that Facebook members could form their own barter network?

          26. kidmercury

            1. these communities are widespread. avc is one such community that could easily have its own currency and i believe in the future blog-based communities are natural candidates.2. sure, fb members could form their own barter networks, although that’s not what i’m saying. what i’m saying is that commerce and currencies will spring from online communities. i have a strong bias towards this occuring in niche communities rather than something like fb, though. and perhaps this will start as bartering and evolve to a currency system.the real catalyst will be the point at which currency depreciation accelerates to a point where it can no longer be ignored. i think it will occur within 4 years, although i said the same thing in 2008, so we’ll see. in any event, though, in my opinion the underlying rationale for such an event to occur is only getting stronger.

          27. ShanaC

            so what if the currency depreciates?

          28. kidmercury

            Some probably will over time. It’s all relative though. And a question of what the alternatives are.

          29. Ellie Kesselman

            We did this once already. Recall Second Life, Linden dollars etc.? I still like SL, but the currency system was a mess.

          30. kidmercury

            The first search engines were a mess too. ..

          31. Ellie Kesselman

            Valid point! Second Life’s currency system worked reasonably well for awhile, when there was volume (and the integrity that often accompanies initial enthusiasm). No cynicism intended, as the same could be said for the experiment that was to be the U.S.A.

          32. ShanaC

            i don’t think are that many online communities at scale that can create a working money system

          33. jason wright

            is bitcoin illegal?

          34. kidmercury

            almost. if anyone tries to use it in any meaningful way, anything cool about it will be declared illegal.

          35. Carl Rahn Griffith

            Anything that succeeds in avoiding death and/or taxes is either going to be lauded and kept within the confines of the elite, else will cause utter anarchy.Guess which is most likely – ie, many of the rich have already managed to crack the avoidance of taxes so old-school money is fine by them.I’m sure they’re working on the Grim Reaper issue, also.

          36. Avi Deitcher

            Not clear. But using a currency other than the national currency is, I believe, a crime in most countries. Governments protect their exclusive fiefdom, uh, I mean, privilege, to control currency with fierceness. All for our own good, of course. 🙂

          37. Carl Rahn Griffith

            I’ve been involved in discussions where trying to explain ecommerce – let alone virtual goods – has caused cross-border regulators absolute melt-down in trying to understand the processes and movement of money/where taxes are levied, etc.

          38. Avi Deitcher

            I can only imagine! I am laughing just imagining their faces!

          39. Carl Rahn Griffith

            Many try and apply the same principles/controls as shipping electricity surplus’ from country to country.

          40. Barry Nolan

            Base yourself in Ireland. Home of the “double dutch irish sandwich”.

          41. Carl Rahn Griffith

            Lol. I am fully at ease with Max Keiser’s Austerity Sandwich 😉

          42. Avi Deitcher

            Now, if we went for the “double dutch chocolate sandwich served with Irish Whiskey,” we might have something…

          43. ShanaC

            what is a chocolate sandwich?

          44. Avi Deitcher

            I was trying to do something more enjoyable with “double dutch irish sandwich” than a tax-avoidance structure. But back in my army days, two slices of bread with chocolate spread were a favourite….

          45. ShanaC


          46. jason wright

            …of course 😉

          47. Ellie Kesselman

            It is definitely illegal to refuse to accept currency that is a sovereign nation’s official specie or script (or other appropriate arcane term). So if I am in the U.S.A., and I want to pay in U.S. dollars, I cannot be denied ;o) The law doesn’t prevent people from using other mediums of exchange, per se. There are some problems though.First is avoiding misrepresentation that it is legal tender. Seedy places like the Franklin Mint (in the past, maybe not seedy anymore, I don’t know) are/ were notorious for issuing coins that looked like U.S. currency and had names that sounded official, but weren’t. That still happens with gold coins, a lot! It isn’t just in the U.S.A. either. So people get defrauded, because they think they’re buying a gold coin issued by Germany’s central bank, for example, but it is actually Mr. So-and-so’s e-commerce business based out of Austria or a former Soviet Socialist republic that is near Germany geographically, and the coin isn’t all gold. Those things show up on E-bay on a regular basis.Second problem: No clearinghouse, ACH etc. which Avi Deitchner described in great detail, and accurately, from what I can tell.

      2. Sergio Nuñez

        Here in Mexico there’s this company called Dineromail (Born in Argentina), pretty much a Paypal clone, but the interesting part is that they have partenered with a massive convenience store chain called Oxxo (believe me, there’s an Oxxo in every corner) to receive cash payments from online shopping. This is removing a lot of the friction inherent to e-commerce payments, and is closing to gap with non-credit card holders.

      3. ShanaC

        I’m surprised by the sheer amont of different ways to process. A central system might be better (that being said, it would have huge market power)

        1. Avi Deitcher

          To some extent, as others here noted, we do have a central system. It is not a central clearing system, but it is a central valuation system: fiat money. All of these tx are denominated in US Dollars, whose value is controlled and determined by the central bank (Federal Reserve) and Treasury.It could be argued that we also have a central clearing system, in that in the end, all of the transactions end up going through the Automated Clearing House (ACH): checks use ACH to clear between banks; credit cards use ACH to settle your accounts and to pay cash into the merchant accounts; PayPal uses ACH to let you withdraw money; even Dwolla uses ACH – their whole business model is based on getting as close to the core centralized clearing system (ACH) as possible, as opposed to the next-layer networks (credit cards).You could argue that the credit card networks (including debit) are nothing more or less than the extension of the ACH system to individual merchants and consumers when many could not directly access the big and expensive system that was open only to large financial institutions.

    2. fredwilson

      it is complicated stuff

      1. Carl Rahn Griffith

        Sure is – hence the barriers to entry factor. Just the legal/compliance aspects, licensing with regulatory authorities and then governance and AML/KYC are huge commitments – and that’s before you develop/position your app/service.

        1. Barry Nolan

          Part of the reason why Stripe is killing it. It solves a huge Clusterf**K for merchants/apps.

          1. Carl Rahn Griffith

            Will check it out, thanks.

        2. Avi Deitcher

          Those are barriers to successfully doing it, but not reasons why it is necessary. You need it so that two entities not in the bank business (you and your local store) can exchange non-cash funds.

          1. Carl Rahn Griffith

            Yes. There seems a number of compelling factors/market types driving growth in this sector and all its variants – one main one being the emerging markets, with large numbers of unbanked people/merchants and somewhat differently those who wish to easily make many small-size impulse purchases – eg, gamers for virtual goods, often via direct carier billing.

          2. Avi Deitcher

            Is it the unbanked? If you look at Stripe, Dwolla, Square, they all rely on the underlying financial system in one manner or another (credit cards, ACH to banks, etc.). How can they serve the unbanked? And is it even relevant to discuss the unbanked in the context of the Net? How many unbanked actually have laptops/tablets/smartphones and net connectivity? I don’t know any of the numbers, but my gut says very few.My take is that it is a sector that is expensive, painful and inefficient, and ripe for solutions.

          3. Carl Rahn Griffith

            Just look at India. A vast market and largely online via mobile – feature-phones are more than enough.

          4. Avi Deitcher

            Good point, although I don’t know if any of these are targeting these emerging countries.

          5. Carl Rahn Griffith

            Plenty of others are, as the complexity of a rather alien culture/etc means it’s another layer of barriers to entry – which is good for specialist players who are willing to focus on that space.

          6. kidmercury


          7. kidmercury

            the unbanked is a huge opportunity, and how i think all this stuff really gets disrupted. especially in africa we are already seeing mobile payments create a de facto banking solution in an environment void of physical banks. as this gains momentum i think it will eventually come to the west.

          8. ShanaC

            I think the unbanked in the US are an even bigger opportunity. If you can find a way to find better systems of making loans, it would mean the end of the pay day loan system

          9. ShanaC

            I wouldn’t be surprised if the emerging market becomes the clear leader of upcoming mobile digital behavior here. They are positioned to bring better technologies because they don’t have the barriers of existing behaviors towards technology to overcome. Could be really interesting to watch

      2. LE

        The way that game is always won is with FUD. The people who are in a position to make or approve change don’t have the expertise and seat of the pants feel to understand any of the gambles involved in changing some status quo. So they do the safe thing by sticking with the incumbent structure, because there is so much to loose vs. to gain for them personally. Human nature wise it actually makes much sense.Back in the day I remember stories of how a company was going to change from IBM hardware to some other competitor and the CEO of IBM would simply call the wayward company CEO (who perhaps he even golfed with) and effectively killed the sale. May be true, or an urban legend, or in between. But the concept makes sense and I’ve see it applied enough times to know how it works. (Verisign did this in order to maintain exclusive rights to .com and .net registry as one example).

        1. ShanaC

          I feel like this issue of status quo is behind why it is hard to get content industries to move to primary digital. Too much to lose.

  6. CliffElam

    So I linked over to Hackpad and it asked me to sign in with my Google or Facebook id. Coolio, click google, and it says it wants my email and access to my contacts. I’m sure I could poke around and would eventually find out it was a purely benign access to my contact or just a granularity issue. But why would I bother to do that?I hate it when I can’t play in something without a ton of research or risk.Oh, yeah, and loved the transaction article.-XC

    1. fredwilson

      you can just click the x to readyou only need to sign in to edit

      1. CliffElam

        Thanks, I did that. But the clumsy signin/signup process stopped me from contributing or contemplating it for use in a seamless way. Probably I need another glass of iced tea…..-XC

        1. FAKE GRIMLOCK


          1. CliffElam


          2. ShanaC

            I would say that is the price of the internet more than the price of google

      2. ShanaC

        hackpad shouldn’t be forcing automatic taking in of data. The x isn’t obvious. *sigh*

  7. CliffElam

    I just read the comments and re-read the article and one thing that strikes me is that payment processing is becoming un-sticky.I’ve run both physical and virtual stores and the payment part used to be HARD to setup. Then it was merely complex. Then it got easy. And when we setup card processing at my wife’s biotech startup it was, I dunno, a 10 minute solution. And if they switched it might take them two minutes. Heck, the process documentation change is harder than the card processing change.I’m thinking that square/dwolla might take out the intermediaries but also completely commoditize themselves at the same time.-XC

  8. awaldstein

    Fred–do you like models that try to normalize the mess underneath? Like Shopify which is neither gateway nor marketplace but to some degree makes it easy for volumes of stores to transact without wading too much into the mud of the transactional piece?

    1. fredwilson

      i like shopify but it is a utility from what i can telli prefer a network like etsy that brings buyers in addition to letting you have a store

      1. awaldstein

        Agree.They don’t fill the funnel with customers, just a store template with the major piece being the transactional workflow.It works, although better for mailing and really poor for in city pickup/delivery type of businesses. You have to hack it a bit and learn Liquid their language.

  9. William Mougayar

    Square innovated with the POS part. It made it more exciting to pay by pulling your iPhone or giving your email instead of your wallet. That’s an innovative way to disrupt a very old system.Aside from Dwolla or Bitcoin, what are other disruption oriented solutions out there? They are more exciting to watch.

    1. Can

      What makes them more valuable I believe, is their target market. There weren’t any player that’s targeting these small businesses before them. They’re targeting the right market with right (sexy) tool.Also being the first mover so far, is always more exciting to watch. Payeleven, Samwer Brothers startup is better positioned in Europe with their chip reader (in Europe most credit cards have chips/passwords for security reasons), but it’s still boring.

    2. awaldstein

      Agree…But consumer POS hand to hand is over time limited unless it ties to inventory.Square is great for the very inexpensive or if your credit allows it, the very expensive transactions. Once transactions need to map to inventory and real POS systems it breaks and is widget not a system.

    3. Rocky Agrawal

      Exciting for technophiles. Ordinary consumers don’t care.

    4. ShanaC

      NFC as wallet?

  10. Can

    But isn’t this similar for the marketplace businesses? Etsy is getting small % commission, and they’re financially meaningful only after it scaled.

    1. fredwilson

      they are two sides of the same coin for sure

  11. William Mougayar

    “PayPal processed $145bn of transactions in 2012 and generated $5.6bn in revenue. “That’s close to a 4% average which is high. I once accepted a customer invoice payment via Paypal, and before I knew it, I received 7% less as they tacked on other fees related to trans-border or currency exchange.You can say that again but replace “generated” by “stole” $5.6 billion.

    1. awaldstein

      Never liked them. Go out of my not to use them.They to me fit in the same slice of ‘be gone as soon as we can replace them’ like phone and cable companies.Ever try to negotiate a dispute with them!

      1. William Mougayar

        Exactly. They are “mean” and they know it. I keep hearing “they’ll be gone as soon as we can replace them”, but in the meantime their sales are supposed to double to $7 billion in 2013…, and this from them shows their competitive advantage: “its early lead, fraud management, and relationships with more than 15,000 banking partners and networks globally put it ahead of challengers.”

        1. awaldstein

          Well put.Hey, personally I start with me. Don’t use them and decided not to add them as a payment option to our raw food biz. I’m loosing nothing by sticking to cc’s online and either COD (with cash or Square) for in person deliveries.

          1. Richard

            what raw food biz do you have?

          2. awaldstein

            http://www.lulitonix.comJust started.Lianna is the brains, nutritionist, face of, and chief smoothie maker.Just started. All orders online. Delivery & pickup in Manhattan, Brooklyn soon along with some retail outlets and countrywide for the cleanses.First verticals are spinning (Soul Cycle huge) and Bikram Yoga. Other’s coming as Lianna designs nutritionally for each one.A good start–deemed the ‘best green smoothie in NYC’.

          3. Richard

            Cool. Are you using High Pressure Pasturization? I am a quasi raw foodist, and was active in this space in 2011. I did a line of Organic Juice Bars in Whole Foods Market Mid Atlantic. Could of been a nice exit but for Whole Foods not being able to share the $ and the “lime” light. NIce Exit recently for Blue Print.

          4. awaldstein

            Nope, no HPP as yet.We are just raw and a three-four day life for the goods. Super fresh and short lived. Fine for now but if you have any contact in the HPP world I’d be very interested in an intro or any info you’d be willing to share.Yup…space is red hot. The Juice Press raised a war chest from a bunch of athletes and is everywhere and going national.We shall see. These are the best green smoothies anywhere. Lianna has strong beliefs, a lot of nutritional knowledge and a vision for where this is going.

          5. ShanaC

            Definitely interesting – at the same time, soda sales are down.

          6. ShanaC

            Is it just me or are Soul Cycle prices outrageous?

          7. awaldstein

            Hi ShanaThey just raised their prices. Doubled the number of studios in NYC and for the best instructors, the classes sell out within minutes.I’m not a user but to those that are it’s what works.For the smoothie and raw food biz, the audience are those that have already decided this is where they are spending their expendable income on.Avg customer orders10+ drinks a week.

        2. LE

          Meanwhile, to the press, the founders of Paypal are like the Kennedy’s.They just can’t enough of them.The other day I read where Musk tweeted that he thought he could help Boeing with their battery problem on the 787’s. Imagine that.Here’s a fawning summary of what happened by a The Next Web writer:

          1. ShanaC

            i think the founders really are that level of good, but i think the company lacking those founders are going downhill

    2. Ed Freyfogle

      This is why the door is wide open to disruptors. See this related piece today from a founder here in the UK:…”In the past I would have used PayPal as a default, but for now I’d steer clear and only use them as a payments provider of last resort.”Ouch.Regarding currency exchange I and others have posted it here before, but you really should check out the model is just genius.Dislosure: the transferwise link is an “invite your friends” link, If you sign up via it you’ll get your first transfer free, and I’ll get a free transfer as well. Beyond that I’m in no way affiliated with the company, just in love with the idea and their execution of it.

      1. ShanaC

        thank you

    3. Richard

      One thing that stands out about companies with business models that based on transaction processing is 1) they enjoy the lifts of inflation; and 2) net margins can vary widely.Visa quarterly revenue is about 2.67 B with net margins of 40%. (One heck of a technology company.)United Healthcare quarterly revenue is about 28 B with net margins around 5% (Wow, do they ever benefit from medical inflation.)

      1. William Mougayar

        So profits have nothing to do with societal benefits

      2. ShanaC

        Maybe healthcare shouldn’t be a transactional model. It screams wrong – you get benefits on all sides of the coin, and the consumers and doctors pay in worse care. Why is it this way?

        1. Ellie Kesselman

          Shana, he isn’t making a fair comparison. Visa’s core business is transactions processing. United Healthcare processes transactions as part of the cost of doing business i.e. delivering health care services. Claims processing is big and messy, but it is a necessary evil that is more than payments.An encounter record for a healthcare type transaction (I used to work for Office for Children with Special Health Care Needs for State of Arizona before they furloughed us due to budget cuts) can have 1000+ fields e.g. medical diagnostic codes, patient info, and huge data dictionaries. Consumer payment systems aren’t so complex, even with fraud prevention measures in place.I agree with you. Healthcare shouldn’t be based on a transactional model for purposes of revenue, even though it is an inherently transactional business. United Healthcare may or may not be ethical in how it generates revenue, but that needn’t be driven by how it processes encounters (transactions for service).

  12. Martin otyeka

    I like transaction processing models. Seeing cash-flow on day one is a good motivator. But i’d like to have an advertising model along side it (could always come later once you scale) not just for advertising purposes but as a value added tool to both buyers and sellers in a marketplace setting like etsy.

    1. fredwilson

      yup. they work well together

      1. AndrewsProject

        Agree, about running multiple revenue streams. You could also include ‘insights’ as a third revenue stream. What PayPal has over Facebook is they know what I’ve bought. Sales data is more valuable the likes.

  13. MartinEdic

    This hackpad thing is doing some strange things to my browser (safari osx)

    1. jason wright

      it’s allowing facebook a chance on chrome, but i’ve batted it awayzucking annoying

    2. Carl Rahn Griffith

      Disqus has gone bonkers on all of my Safari instances of late – Chrome is fine. Pretty tired of Safari, all in all – going more to Chrome usage of late.

      1. MartinEdic

        It’s disqus, it’s the HackPad embed I’m having issues with.

      2. panterosa,

        Disqus typed a reply backwards recently. So freaky.

      3. ShanaC

        i’m finding that chrome is more prone to crashing for me.

        1. Carl Rahn Griffith

          Safari has suddenly started working OK with Disqus, after several days refusing to load – phew – I quite like Chrome but somehow it feels a bit odd – maybe it’s time to try FireFox or IE again!? 😉

    3. fredwilson

      this is the first time i’ve embedded a hackpad. i didn’t render well on my nexus 4 running chrome either.

    4. ShanaC

      I was having that problem too. Claimed I couldn’t take cookies. Then disqus also crashed for me. *sigh*

  14. Jackie Modeste

    Informative. Insightful. Relevant to a current project, so thanks.http://www.theglobalroundho…@GlobalJackie

  15. Rocky Agrawal

    No mention of Twilio, Fred? I would consider it a transaction processing business. Same with AWS. Or do you see a distinction?

    1. fredwilson

      i didn’t build the hackpad. the community did. but twilio certainly fits here

  16. Rocky Agrawal

    Business like Square also face an adverse selection problem if they strive for simplicity. The economically optimal way to use Square (if you’re a merchant of scale) is to process all Visa/MC credit transactions over >$15 and debit transactions with your regular processor. Use Square for all of your Amex and low dollar value transactions.This would result in Square taking a loss on every transaction. It’s a little early to see this play out, but it is the behavior that the price plan encourages.

    1. David Petersen

      I imagine they’d be able to change pricing if this happened.

    2. ShanaC

      This becomes a training problem. One of the reason transaction as a revenue model work is that is is easier to pay the tax of the transaction than to find a way around it.

    3. whisper #

      they’re creative with pricing; dont forget that….

  17. Guest

    Are any businesses out there going after Visa/Mastercard and trying to bring the cost of a purchase below 1%, or are they all building on top of them and just factoring their 2% fees into the cost equation?The 2-3% merchant services tax we pay anytime we purchase something is a serious drag on us all. Just look at the fighting over the Bush tax cuts, which were for a similar amount.

  18. Brad Lindenberg

    Fred what do you think of the pricing models of platforms that enable commerce on top of existing networks eg Gumroad, Shoplocket, Chirpify, BuyReply – these are all new types of ecommerce platforms that are not payment gateways (they ride on top of PayPal, Stripe etc) but charge up to 5% before gateway fees. They are ecommerce and marketing platforms and some of the cost is justified in that you don’t have to set up a store in order to well etc…

  19. Eric Candino

    Seems like the apple app store would fall more into a marketplace. I see the relation but the apple app store behaves a lot more similar to etsy than square. The reason for the higher percentage being the overhead of their review process and the proprietary platform.

  20. patrick

    When developing our model, we wrestled with whether to go the transactional processing or subscription route and ultimately decided on a little bit of both because of disparity in the customers we serve (having a WePay integration provided great insight in to their transaction behaviors). And while i agree with you re: the cash it takes to build a transaction based company (square/wepay/stripe), I think certain database companies might be an outlier to the “all about scale” point. They’re fortunate in that they provide baseline functionality the customer is willing to subscribe to and pay for AND many of their customers will use them to run their finances/donations/payments, giving them the added benefit of going for transactional scale. Blackbaud would be an example of one such company, albeit they’ve been around for ~30 years and their reputation is subpar, but the model is solid nonetheless. To your point however… if your model is ONLY relying on trans volume, you best have the stomach for it.

  21. ShanaC

    I keep thinking that a transaction processing model is effectively a tax on behavior. It is essentially a tax on a problem you can’t solve yourself but can be solves with a scaled up community.

  22. markslater

    Veriphone is the web 1.0 example here. They deployed millions of devices to small businesses, taxi’s etc with the goal of owning the transaction toll booth.You are now seeing a new class of companies that are leveraging the mobile platform explosion to disrupt these toll boothes and build their own. Hailo is trying to do this to the taxi’s -square is doing this to small retail merchants. What veriphone is missing is a consumer front end. they have the largest installed base of processors to small businesses worldwide – but no front end that explicitly brings the consumer in to the transaction. But they are well positioned to fight this if they so chose.Some of these new classes of folks are what i would call next-gen processor point solutions. they attempt to capture a transaction fee by providing a tool that allows the consumer to do one thing really well. Example: Cabs. example: food ordering. But if i were to think about this long-term i would argue that these point solutions are not strong enough to maintain a position against platform plays, and are very expensive to deploy. then again – i am biased.

  23. Merchant Services

    The economically optimal way to use Square (if you’re a merchant of scale) is to process all Visa/MC credit transactions and debit transactions with your regular processor. Use Square for all of your Amex and low dollar value transactions.