Payment Standards and Competition

We are often asked why Digital Bazaar is creating a standard for Universal Payments on the Web, called PaySwarm. Visa and Mastercard exist. PayPal is widely known and used. Google Checkout and Amazon Payments also cover retailers willing to hitch their store to yet another proprietary checkout mechanism. Many competitors are good for the marketplace, right?

Not Always. Just because you have brands and choice in the marketplace does not mean that the choice is helping the market grow. That is, sometimes polar choices pushed by competitors can lead to imperfect competition and thus, market stagnation.

Choice in the marketplace is good when you have a commodity. When sellers are providing the same product, or are using the same mechanism to accomplish a goal, it allows many sellers to compete on price and services. However, choice in the marketplace is bad when you have multiple competing products that perform the same task, but are not inter-operable or lock their customers into the product.

Payments on the Web lock you into a payment protocol, are not easy to use, and are not inter-operable. When you choose a credit card gateway, the payment protocol is proprietary. When you choose PayPal, Google or Amazon – the payment protocol is proprietary.

There’s nothing inherently immoral about businesses that provide payment systems using proprietary protocols – sometimes the proprietary protocols involve an innovation of some kind. However, payment protocols have long stopped innovating over the past decade. A desired effect of proprietary protocols is to make it non-trivial to switch systems. Interoperability is, by definition, not a concern for proprietary payment protocols and the companies that provide them.

So, while proprietary payment protocols don’t hurt the financial service providers, they do cause their markets to stagnate. The effect on the people that use these proprietary protocols, however, is far more harmful.

True Choice

Think of it this way – if you are using Google Checkout one day and want to process payments using PayPal the next day, the software that you use is not inter-changeable. A payment request in Google Checkout is completely different from a payment request in PayPal. If you own a small Web business and cannot program, you have to hire someone else to write the code to support yet another type of payment protocol. Writing or acquiring this software can cost thousands of dollars. If you want to process amounts less than $1, the vast majority of the charge goes to the payment provider in the form of processing fees.

For a good example of how much fees can damage a small to medium-sized business, try sliding the average purchase to $1 in the Fee Fighters calculator. For a merchant that processes roughly $20,000 in transactions per month at $1 per transaction, $6,380 are devoured in PayPal fees. $5,105 are devoured if a credit or debit card is used. Fees that high for transferring money are a clear sign of market stagnation – of when the best choices are still bad choices in the market.

In other words, if you chose a proprietary payment protocol, fees can become a burden for certain businesses and changing providers is almost always a non-trivial undertaking. We know this is true because our company has had to integrate with a number of payment processing gateways – each with their own quirky, half-broken payment protocol. This isn’t true choice. The only choice that you have is between non-inter-operable payment protocols and then you’re stuck unless you want to pay the development cost to switch providers.

True choice is being able to switch providers without having to switch payment protocols. True choice is being able to pick a payment provider that won’t take 25% of your revenue in fees.

Standards and Competition

This is where standards are helpful. Standards increase competition because they give people true choice. Standards made it so that the construction industry could manufacture standardized lumber, screws, drywall, steel beams and bolts. Costs plummeted because builders could choose from a number of different lumber and drywall suppliers.

The same is true for how the Web works. You have a choice when it comes to Web browsers and websites because the underlying protocols of the Web and the way pages are displayed on the Web are based on open, patent and royalty-free standards. Every web browser is supposed to render pages for you in roughly the same way because of standards. That’s why over 2 billion people have the choice of their favorite web browser to access Google, Facebook, Twitter, YouTube, and any other website of their choosing.

So, why isn’t there a universal way to pay someone on the Web? Why do you have to use your credit card to pay websites and PayPal to pay your friends? Why are the costs to switch providers so expensive for website owners?

Quite simply, because it is not in the best interest of the financial institutions and services providing proprietary payment protocols to offer a solution that would increase competition. There isn’t a universal payment standard for the Web because many payment companies do not want to see one cut into their business.

However, we think that having a universal payment solution for the Web would be a rising tide for these financial institutions. We are merely talking about a protocol to accept payment on the Web – if it were built into websites and web browsers, more people would be willing to buy things via the Web – especially if all of their credit card and account details were protected.

If there were a universal payment standard, websites could stop worrying about how they’re going to receive payment from their customers and focus on the more important things: writing amazing content and applications for the Web. Financial institutions would benefit by an increase in transaction processing. Simply put, everyone would benefit because the standard would make the marketplace bigger, increase competition, and thus drive innovation for products and services that are layered on top of the payment standard.

There is currently no open, patent and royalty-free standard for payments on the Web. We think that is a sad state of affairs and that PaySwarm is going to correct this market error. Lowering costs and increasing competition is just the tip of the iceberg. PaySwarm will also enable websites to start accepting payments as small as a few cents, using open Web standards, without eating up the transaction with high fees. PaySwarm will enable new markets that depend on micropayments far smaller than $1. This will lead to bold new innovations for the 2 billion people that already use the Web today – that is something worth getting excited over.