
Why Payments Are Hard, Even For Apple And Google - solipsist
http://techcrunch.com/2011/03/06/payments-apple-google/
======
mjfern
_> In addition, you only get the bank’s confirmation of the payment 3-5 days
(in the US) to 3 weeks (in some EU countries) after the payment attempt._

I find it surprising that it's been 15 years since the commercialization of
the Internet and (near) instant global data communication and it still takes
banks 3-5 days to confirm payment (e.g., the time it takes to send a physical
letter, coast-to-coast, via the USPS). This is the timeframe of a standard
Electronics Fund Transfer (ETF) for bill pay, bank-to-bank transfers, etc. The
only alternative, as far as I know, is a wire transfer, which is a tedious and
expensive option.

Does anyone know what's preventing the U.S. banking system from improving its
electronic transfer capabilities? Given the importance of the free flow of
money and goods (and liquidity) to our economy, it seems like the quick
movement of funds would be a significant priority for our overall banking
system.

(Note that if banks could confirm electronic transfers within a few seconds
(and if we added an extra layer of security beyond simple passwords, such as a
challenge/response system), we could significantly reduce the occurrence of
fraud. Near instant confirmation would also alleviate, or eliminate, the issue
of short-term credit mentioned in this article.)

~~~
saturnine
_if banks could confirm electronic transfers within a few seconds_

Banks do this millions of times each day on the global ATM network. I can
swipe my bank card at most any ATM in the world and within seconds the funds
are removed from my account and dispensed into my hand.

In that case, the card is indirectly linked to my bank account. It's only when
you know the exact bank account and routing number from which you want to
remove the funds that you're forced to use the archaic ACH system.

Clearly the technology for instantaneous confirmation of funds transfers
already exists, but it has yet to be expanded beyond its original purpose.

~~~
andymurd
I have been a banking programmer for some large European banks, so whilst I
can't speak for the US system I can describe the way ATM transactions work in
the UK, Germany & Switzerland.

Making a withdrawal from an ATM/ePOS does not debit your bank account
immediately, but it does reduce the limit (i.e. available funds) on your card
immediately. Checking your "balance" at an ATM shows the card's total
available funds, not your bank account balance.

ATM operators are often not the same as your bank, even though they may show
your bank's logo at the top. There are fees at every stage of the transaction
so ATM operators and ePOS transaction acquirers can decide whether to ask your
bank/VISA etc whether you have the funds. For small, low risk transactions
they will often wait, preferring to batch a bunch of debits to a single
institution at a quiet (cheaper) time of day.

Your card is reconciled with your bank account daily (usually daily). A
payment to a third party takes longer - the payee's bank needs to complete
reconciliation too and, as other commenters have pointed out, the network
breaks sometimes.

Banks can improve the time it takes to transfer funds to third parties and
have done so in many countries but it has taken government intervention. The
float does play a part, but getting competing banks to agree to a standard is
almost impossible.

Side note: Your card has many, many limits most of which you will never
encounter. Examples: total cash per ATM per day; number of cardholder-not-
present transactions per day; total spent in gambling establishments per
month.

------
ghshephard
The author suggests that Amazon hasn't dealt with third parties at major
scale. That seems counter to my experience, where almost 50% of my purchases
on Amazon are fulfilled by a third party. For companies at the scale of
Google, Amazon, and Apple - I'd suggest that hiring the talent and developing
the risk management processes aren't as large a hurdle as he would suggest.

The major challenge is convincing people (vendors and sellers) as to why they
should use your system.

~~~
lsc
>The major challenge is convincing people (vendors and sellers) as to why they
should use your system.

See, that is the /first/ challenge; but as you start overcoming that barrier,
you start hitting the problem the author starts talking about. E-gold, for
instance, did pretty well solving the "convince people to use us" problem, but
choosing to ignore the fraud issue killed them (and almost landed them in
jail)

~~~
ghshephard
I'm going to (respectfully) take issue with your claim here, though I would
happy to be proven wrong. I am clearly an early adopter (as pretty much 95% of
people on HN likely are) when it comes to technology, particularly online
technology. I routinely use paypal (+bump), buy almost everything online,
haven't touched a paper book or newspaper in over two years. I even have a
SquareUp dongle and use it from time to time. I have over 200 transactions in
Paypal and over 500 purchases from Amazon.com. I won't even try to calculate
the number of iTunes purchases (content+Apps) I've made.

I've heard of E-Gold, and may have created an account- but I've never used
them. I just IM'd three of my friends - one had heard of it, two hadn't. None
had ever used it. They all frequently use both Paypal and Amazon (one is a
prime member).

I realize that anecdote is not the singular of data, but, a quick glance at
Wikipedia, shows that at their peak, E-gold only had 5 million accounts - 2.5%
of what Apple has today. (And, in Apple's case, these accounts are connected
to an actual Credit Card customer)

So - two things to be aware of:

o E-Gold was relatively small. When you are small, you can't afford to hire
the high-level risk management talent. These people are rare, and very
expensive. Therefore, one of the critical tasks of _small_ payment processors
(not the large ones, Apple/Google/Amazon can afford their salaries and
departmental budgets) is to survive long enough and not get shut down by
making these mistakes. I'm certain Paypal, when it was smaller, also came
close to the abyss several times before they got to scale.

o Of course, the way you get to scale is you make yourself attractive, _or_
you subsidized your payment processing with the rest of your business. (Think
about Microsoft buying their way into Console Entertainment)

I'll agree that fraud and risk management are important, but I do not believe
that they are barriers to success for the companies the author had identified,
they are more important to the smaller players (E-Gold).

For the larger players the question they have to answer for sellers is "Why
should we use you? Which consumers are using your system that would make it
worthwhile to going to the hassle to adding you as a payment option?" For the
consumers it is "What do you do better than my existing Credit Card/Paypal
Account which has served me well as a consumer?"

~~~
SoftwareMaven
PayPal spent $300M learning how to deal with fraud[0]. This money is in terms
of investment in development and outright monetary losses. The problem is you
can't get a large number of users while you are also being taken apart by
fraud. When dealing with payments, finding users is not your hardest problem.

[0] Source: One of the investors in my company was involved fairly early in
PayPal. We've had many conversations about this matter, especially regarding
another company I was working with at the time that was building an
"anonymous" wallet.

~~~
jules
And all of this because the credit card model is fundamentally flawed. When
buying something it's like sending the seller a trivially copyable key to your
vault and letting him get the money he wants.

~~~
lsc
While I agree that credit cards could be a whole lot more secure (using the
same token for identification and authentication is just plain stupid) fixing
that still leaves you a long ways away from solving the fraud problem.

E-gold used username/password pairs and seemed to be making pretty good
progress towards solving the 'using someone else's account' kind of fraud.

The kind of fraud that killed e-gold (and I think, the harder kind of fraud to
solve) is "he sold me a defective whatsit" or "after I paid him, he never sent
my thingamajig"

If you don't solve that harder problem, you quickly become known as the
payment method of choice for criminals.

~~~
jules
That isn't a harder problem. It's a much much easier problem. YOU can decide
where to buy from. It's a much saner system from both the customer and the
seller's perspective.

And it works right now. In the Netherlands there is a system called iDEAL that
works like this:

1\. You go to a seller's site e.g. bol.com (which is like amazon). 2\. You
fill your cart and click checkout. 3\. You get sent to your bank's site with a
page that displays the amount and a button "pay". 4\. The bank then transfers
the money to bol.com.

~~~
lsc
That's almost exactly what e-gold did.

They stated as a design goal that you shouldn't be able to back out of a
transaction once it's gone through. The problem was that the system became
popular with sellers of fraudulent goods, and this does, eventually, start to
cause problems.

I suspect that iDEAL has some way of letting you report fraud and get a refund
from your bank if you get ripped off. they probably have some form of
chargbacks, etc.

~~~
jules
It works like wire transferring money to the seller, you get the same rights
and protections. In fact it _is_ wire transferring money to the seller.

Charging back is not easy, but it is not a problem in the least. It's only a
problem when you buy from people you don't trust (but then I wouldn't want to
give them my credit card number at all!). This does happen on sites like ebay.
The risk is moved from the seller to the buyer. For sites like ebay you need a
middle man to be safe, only now you need it as a buyer instead of as a seller.

------
bigiain
I wonder if Google's smartphone Google Authenticator app and three factor auth
will prove to be a competitive advantage for them in the payments space?

Given the choice between a Paypal and a Google Checkout option, I think I'd be
significantly more likely to choose to use a 3 factor authorised Google
service over an emailaddress/password authorised Paypal one (especially if I
was using an untrusted network)

I'm not sure Apple would be able to ramp up a cross platform 3 factor auth
system particularly quickly... (seeing iTunes on Windows makes me suspect
market takeup of "iThirdPartyAuth on Android app(tm)" isn't going to be world-
changingly rapid...)

------
perlgeek
I wonder if technically a bank wouldn't be a in a better position than a tech
company to disrupt the online payment scene.

Sure, banks are not universally known for their innovative powers, but they
usually have the infrastructure and the customer support necessary for such a
system (so they are more where the author sees Apple)

------
thinkcomp
Ohad knows his stuff, but he didn't cover everything here. There are other
reasons payments are hard for everyone. You can't really have this discussion
without talking about point of sale systems. The existing retail point of sale
infrastructure in the United States is unbelievably fragmented and old. Apple
and Google are in a good position to make devices that replace registers, but
adoption is still just as much an issue for them as for everyone else.

This is good for payment startups (such as mine), but you have to have a lot
of tenacity to untangle such a giant knot.

~~~
lisper
What do you think of Square?

~~~
thinkcomp
I think it's the most gorgeous eight-track player ever made. They have enough
money to shift, so for their sake, I hope they shift soon. For my sake I hope
they don't.

~~~
jaskerr
I'll bite ... what is it about their reader / product line that makes it
equivalent to a "gorgeous eight-track"?

I've thought the reader looked a bit fragile (and wouldn't hold up to heavy
use), but that doesn't make it obsolete right out of the gate.

~~~
thinkcomp
The next generation of payment technology will not be plastic card-based or
involve a magnetic strip. They've created a really nice magnetic strip reader
for plastic cards. It's kind of making the most amazing tape deck ever right
before the mass distribution of Audio CD. Certainly it's an impressive feat of
engineering and design, but it's not what I would pour my time into as an
entrepreneur or my money into as an investor.

Personally I think my company's technology does make Square's obsolete right
out of the gate. We just face a much different adoption hurdle because we
replace the entire system from end to end.

~~~
ryanwaggoner
And that's probably why they'll win. This generation of payment technology
isn't going away in the next 12-18 months. I bet we won't see the next
generation surpass this generation (in usage) for at least five years. During
that time, someone like Square can build tremendous momentum and relationships
that will allow it to much more easily transition to the next generation,
because it has a strong brand, strong relationships with the marketplace, and
corporate competency in the space.

For a fantastic example of what I'm talking about in another space, see
Netflix.

~~~
thinkcomp
Maybe. But relationships with whom? Why would a large retailer want to use
Square? Why would a competing point of sale vendor with an enormous installed
base want to work with Square?

Netflix isn't a very good analogy. The retail payment space involves a three-
sided market: consumers, merchants and POS vendors. Netflix didn't even have
to struggle with the complexity of a two-sided market. Though it's done well
for itself, it also hasn't completed rendered the previous standard useless.
Plenty of people use DVD and Blu-Ray today.

I think your view is possible but I'm not sure I understand the details. In
contrast, I can answer both of those questions given the model for my
company's technology.

~~~
rdl
I agree, Square has the best possible strategy -- they catch the laggard
businesses who still don't have merchant accounts, individual people who have
never had merchant accounts (i.e. everyone) and let them get away from PayPal,
AND get a platform deployed which can handle NFC or some new payment/loyalty
credential for early adopters on the merchant side.

On top of that, Keith Rabois is one of the top operating executives anywhere,
and has extensive paypal experience.

NFC has been "the next thing" for years. I worked for an NFC reader company in
... 2003, which had been around for years. (ViVoTech). We don't even use chip
and pin cards in the USA -- the magstripe is going to remain a major part of
the market for the rest of the decade.

------
sprash
Time for Bitcoin to take over the world.

------
cletus
It's worth pointing articles like this whenever the Apple haters berate
Apple's "greedy" 30% cut. Particularly when you only spend, say, $1-3 at a
time, the fees take up most of that.

The only way you could have a more efficient system without cutting the credit
card companies entirely (which is a huge proposition with enormous barrier to
entry) is to buy prepaid credit in larger blocks (say $20 minimum) rather than
charging each transaction (or day's transactions) in one small lump.

Apple partially has this with it's retail cards but they probably lose 20% of
that to the retailer.

Payments seems to me to be one of those areas like music (and really all
digital content) where there are players that have cooperate who basically
have no interest in cooperating. In music and digital content it's the labels,
publishers and studios, all of whom are investing heavily into turning the
clock back to 1997 (thank you, 30 Rock). In payments, it's banks and other
financial institutions (including credit card companies).

One player that has huge potential in this space in coming years are the
mobile telecommunication providers. They have the network for POS system,
mobile payments is an area growing in leaps and bounds and they have a
payments infrastructure already.

Carriers seem intent on fighting progress too (as really does any large
incumbent). Apple totally changed this industry with one product release [1],
something the Apple haters seem to conveniently forget. If it wasn't for the
iPhone, none of what we currently take for granted (even on other platforms)
would be possible.

Carriers (and other distributors like cable companies) are terrified of
becoming dumb data pipes for which the only differentiators are price and
service area. But that is (IMHO) their inescapable fate. What carriers could
be however is the infrastructure for mobile payments, which has enormous
potential.

But currently they're ceding that market to Apple and Google.

EDIT: let me be clear, I'm not advocating Apple's position on mandatory use of
their system. Far from it. I think the move is arrogant and short-sighted
beyond belief. But criticisms of them being "greedy" predate that move by
years. Personally I think Apple's payment infrastructure makes sense if you're
small and not if you're large (much like hosting actually). As such it should
be voluntary. Let it stand on it's own merits. I for one am going to be
extremely pissed off if Kindle disappears from my iPad.

[1]: [http://cdixon.org/2010/06/06/steve-jobs-single-handedly-
rest...](http://cdixon.org/2010/06/06/steve-jobs-single-handedly-restructured-
the-mobile-industry/)

~~~
jonknee
> It's worth pointing articles like this whenever the Apple haters berate
> Apple's "greedy" 30% cut. Particularly when you only spend, say, $1-3 at a
> time, the fees take up most of that.

I think the greedy part is more based on Apple's requirement that you use
their system (and thus pay their 30% vig). If it was voluntary I don't think
people would care too much about how big of a cut they took because you could
always try and do better on your own.

~~~
ekidd
At least for me, this is absolutely the case. I'm perfectly hapy to pay 30% to
a payment processor for small-ticket items, and consider it a good deal.

But the problem comes in when I don't have a choice to run big-ticket items
through Braintree, and there's no way for another company to provide a
competing small-ticket gateway. In the long-run, that looks too much like a
distributor model, which never worked out well for musicians.

