Posts from Credit card

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

Payments Day

Yesterday was payments day at USV. Two pretty big things that our firm has been involved in for a while now were coincidentally announced on the same day.

First, our newest portfolio company Dwolla announced the closing of a round we led on their blog. Dwolla is building a large network of engaged users via a radically lower cost payment system. How much lower? Zero for transactions below $10 and a $0.25 flat fee for transactions over $10. If you move $10,000 over the Dwolla network, you or the recipient (your choice) will be charged $0.25. That's it.

Dwolla does this by avoiding credit cards. They see credit cards as the enemy. They want to build a system where the money moves directly from my bank to your bank as quickly and inexpensively as possible. They have big plans and we are bought into them.

Dwolla also offers "Instant" which is a way to instantly load your Dwolla account with funds via an immediate loan from a third party bank. The cost of the Instant service is $3/month and a $5 late fee if you don't pay down your instant loan to zero each month.

If you want to try Dwolla on the web, the iPhone, or the Android phone, go here, sign up, and start moving money less expensively.

Another major payments initiave was announced yesterday by our portfolio company Etsy. For a while now, Etsy has realized that checking out via PayPal was suboptimal for many buyers and also many sellers. But PayPal is deeply ingrained into the Etsy community and the company did not want to do a "rip and replace". So yesterday Etsy announced Direct Checkout. PayPal will remain a checkout option for sellers. But starting yesterday some sellers on Etsy will offer the option to checkout directly on Etsy. And Etsy will be gradually rolling Direct Checkout out to all of its sellers over time as they scale the service and the support system around it.

Both of these situations recognize something fundamental about payments. And that is that being in the payment flow allows you to do other more imporant things for your customers. In Etsy's case, that means things like gift cards, better shipping options, better marketing opportunities. In Dwolla's case that means making payments essentially free and making money on value added services like Instant and others to come.

Payments are one of those things that are fundamental to the online experience. And there are large networks that are being built with payments at the core of them. We are proud to be involved in companies like Etsy and Dwolla who are working at the intersection of networks and payments and we certainly would like to be meeting more companies like them.

#VC & Technology#Web/Tech

Syncing Up Your Credit Cards

Last week I posted about a service called BillGuard. BillGuard scans your credit card bills for questionable transactions so you don’t have to. It’s a great service. One of the things you do when you set up BillGuard is you connect your credit card(s) to the BillGuard web service. It’s straightforward and easy. Once you do that, the magic happens.

I did the same thing yesterday. I connected my Foursquare with my American Express card. Once you do that, when you check in at places that have Foursquare specials, you get automatic credit when you pay with American Express. Foursquare calls this “load to card“. You can do it here.

I really like the idea of syncing my credit cards with web services. I’m not so into the social value of sharing my transactions with everyone (where Blippy started), but I am very much into the personal value of leveraging my transaction history into various web services I use frequently. And I am also very into the idea of getting the benefit of offers and deals automatically credited to me via my credit card account.

I think we have just scratched the surface of what is possible when you sync up your transaction activity with other services in your life. There is great opportunity in this idea.

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I love it when entrepreneurs take a trick from one market and apply it to another. The founders of BillGuard have done that with credit card fraud. They took the lessons from the anti-virus and anti-spam markets and apply it to your credit cards.

I just signed up for BillGuard and put four credit cards on the service. They asked me for my credit card website logins, I provided them, and they took down all the transactions and showed me this screen:

Billguard screenshot

They list all the transactions that they think could be problematic. Clearly the $29.86 charge by Charlie O'Donnell is problematic. I'll have to look into that one!

But on a more serious note, I see this recurring $16 transaction for Been Verified. I am sure I signed up for that service at some point to check it out for some reason. But at this point, I'm not using it and I should turn it off.

BillGuard is great for exactly this kind of thing. And it may also help with truly fraudulent transactions. I haven't run into any of them yet on my four cards.

BillGuard is taking a number of tricks from the anti-virus and anti-spam markets and applying them to credit cards. They have a database of merchants and know which ones have a bad reputation. They also take all the data from the users interacting with the service and use it to build enhanced reputation data. That is exactly how they do it in the ant-spam market.

The more users BillGuard gets, the better their data gets, and the better the service gets. That's why I encouraged BillGuard's CEO Yaron Samid to make the service free for all the cards you put on the service onstage at TechCrunch Disrupt. Turns out they took that advice and will monetize the service in other ways. I think that's great for users and great for BillGuard too.

If you worry that you are paying recurring charges on your credit cards that you don't need and that you may have fraudelent charges on your cards you don't know about, then BillGuard is for you. Check it out.


The Credit Card Expiration Blues

I am sure this has happened to everyone. My work credit card expired and I was issued a new one. Sadly, I forgot to update that info in Google checkout. And so yesterday at 6:55am, the extra 20gigs of storage I was paying Google for in Gmail went away. Emails started bouncing, even on the forwarded ones which I was actually getting. Email has been a mess for 24 hours and Gmail is still not working right for me even though I fixed the credit card and repurchased the extra 20gigs yesterday morning.

I can deal with a messed up email situation. In fact it is a blessing for me. I got so much work done yesterday that I was able to leave the office early and take a yoga class in the late afternoon.

But this credit card expiration thing is a big issue when so much of our commerce goes through stored payment credentials on web services. I must have stored payment credentials on between fifty and a hundred web services at this point. And I have a number of credit cards, a VISA and an AMEX for personal, and AMEX for several of our business entities. So this creates a lot of complexity when my credentials change.

I've blogged about this problem before and people have pointed me to various services that were built to address these issues. I've looked at many of them and have not found one that really works for me. Frankly, I think the credit card issuers should solve this problem for us. Why can't all these payment systems auto update the credentials when a new card is issued? That would save us all a lot of problems.

If the credit card industry can't fix stuff like this, new payment methods are going to come along that are easier to use and work better on the web. There is no shortage of entrepreneurs working on payments ideas. So I expect problems like this one will be a thing of the past a decade from now. The only question is who will solve these problems first.