Today, consumers have an abundance of choice when deciding how to buy, when to pay, and how to optimize rewards. We believe the industry is approaching a tipping point where large scale investment is driving innovation in a single direction: a diminished customer<>merchant experience and higher costs. Imagine’s mission is to offer a platform for all financial transactions delivered at the lowest possible cost.
Let’s use the example of Carol who loves a bargain and isn’t afraid of searching for better deals whenever she shops. Carol wants to buy a new TV online. From the latest credit card offering points or cash back, to browser plugins and affiliate programs, she’s able to pay less than the next person. However, the increased value she gets is countered by the time it takes to get it, and the fragmented purchase experience increasingly distracts from the enjoyment of buying that TV. When paying, does she type in her credit card number directly, use Apple Pay, use the merchant’s wallet app, or PayPal? Does she look for that cash back coupon or use a plugin that finds it for her? Does she take the latest merchant promotion on offer that day, or maybe an installment loan? At the end of the day, the merchant is able to deliver the best, most relevant, experience possible and there is no need for a multitude of intermediaries.
The payments world has become so fragmented that innovation aimed at improving the process of paying, has done the opposite:
- Added complexity for consumers with new banks, credit cards, loans, reward points, and wallets constantly being advertised with their own niche; and
- Added cost for merchants with third parties providing an ever-fragmented list of products, from chargeback services to fraud protection, that a payment platform should be providing, or solving problems that shouldn’t exist.
The last 18 months have seen some of the largest M&A and private financing transaction in financial services: FIS acquired Worldpay ($35B), Fiserv acquired First Data ($22B), Visa acquired Plaid ($5B), and PayPal acquired Honey ($4B). Consolidation usually brings less innovation to a market, however, an explosion of FinTech startups are entering the market at a rapid pace and these companies give us a glimpse into future innovation. There’s a worrying trend happening for merchants across the US.
Investors pumped over $24B into FinTech startups in 2019. More startups are entering the market but the innovation they bring is limited and business models are increasingly similar: provide a consumer a more convenient way to use their credit/debit card and charge the merchant more for it; or lend to a consumer when others won’t (and peel back the funding at the first sign of struggle). These companies are able to fundraise because following the path of least resistance on what’s worked in the past versus looking towards the future is an easier, faster path to a successful capital exit. A tipping point is approaching where any innovation to reduce complexity and cost stops and we’re left with an impenetrable system and diminished customer experience. Companies that can ratchet themselves out of the status quo and embrace real value-added alternatives will profit accordingly.
These developments in the industry and their implications can be seen in many sectors…
There are more than 45 challenger banks in the US and this is growing rapidly. Each of these innovates around customer segmentation and user experience, but in the end are all acquisition channels for unregulated debit interchange. Some very large players have emerged in this space and it is hard to overlook how unregulated debit interchange won’t continue to rise as investors clamor for profits. For example, Chime (raised $805M) has 6.5M customers, Dave (raised $76M) and MoneyLion (raised $207M) have over 10M combined, and the ~40 others have millions more. These innovators will have to turn to credit card interchange and consumer fees to hike up profits.
Merchant Processors (ISOs)
Braintree (now part of PayPal) and Stripe made it easier for merchants to accept card payments online and charge a justified premium over interchange for the convenience they deliver. How justified that is will differ per merchant, but it’s clear that developing a solution to deliver a unified payment gateway is as lucrative as ever with many new startups being funded to go after a similar space. Bolt.com (raised $68M), PaySimple (raised $145M), Checkout.com (raised $380M), Rapyd.com (raised $160M) to name a few.
Merchant ISOs have made it easier to shop online with a card, so companies are making it easier to instantly issue cards or get a challenger bank off the ground fast to benefit from interchange revenue. Companies like Marqeta (raised $366M) and Stripe Issuing provide essential services for certain companies, especially the gig economy, but are increasingly being used to issue cards for all sorts of payouts to generate interchange income. This income does not balance out the costs of acceptance. Other companies like SynapseFI (raised $50M) and Bond (raised $10M) are making it easier to launch new bank products faster: why do consumers need another bank or designer metal card?
Corporate cards have some of the highest interchange rates and historically have been dominated by American Express. Several new startups, Brex (raised $315M), Divvy (raised $245M), and Ramp (raised $25M), have emerged, making it easier for businesses to issue cards to their employees. A higher number of these cards in circulation mean higher average interchange. The largest banks have experienced an explosion in high end credit cards (e.g., AmEx Platinum, Chase Sapphire) that also carry higher interchange. Acquiring these high value customers requires heavy capital investment upfront but this customer will generate more than enough interchange long term.
The largest tech companies are all developing digital wallets. Apple Pay, Google Pay, Samsung Pay, Venmo, PayPal, Masterpass, Visa Checkout etc. These 1-Click checkout solutions are becoming the norm across the web and merchants are losing control of the customer experience. Consumers have app fatigue. As customers sign up to more wallets, their card details are shared and stored in more places, increasing fraud risk. Some merchants are able to establish their own wallet to maintain ownership of the customer experience, with notable examples being Starbucks, Dunkin’, Uber, Lyft and several others. However, when a customer establishes a new digital wallet, they rarely change the default payment method, and will likely load their credit card as the most convenient method of payment at that time. This is a double edge sword: on the one hand the merchant owns the customer experience and can evolve their wallet offering to boost customer retention, but on the other hand it will never remove the burden of interchange. Steering customers to lower cost tender is an expensive process with limited efficacy per merchant but combining efforts can build rapid adoption among consumers as the friction of a single sign up is far outweighed by the benefits enjoyed at a high number of merchants.
It is clear that everyone is swimming in the same direction at the expense of merchants and being handsomely rewarded for it: towards Visa/Mastercard, more interchange, more third party mouths to feed, and more fragmentation for the consumer. Turning the tide requires collaboration.
Let’s imagine a new world.
Imagine is unifying the payment experience. We process payments at cost, enabling merchants to deliver a rewarding payment experience to their customers directly, without the need for middlemen. We offer payments at cost because we believe we can build valuable products on top that provide significant utility to merchants and consumer. Unlike Visa/MC/Amex/Discover, our network is a means to an end, not an end in and of itself. By servicing both consumer and merchant on one platform, Imagine uses first-party data to provide an insightful customer profile to merchants to further enhance the value proposition to their customers, which gets better with time. Imagine users experience a seamless online 1-click checkout in a safe environment, without the need for a plastic card that can be left on the subway. In-store, customers can use the phone in their hand, versus another reward card in their ever bloated wallet, to ensure they get the most rewarding experience possible.
Using Imagine, the optimal customer experience is controlled by merchants who know their customers the best. Carol wants to enjoy the TV. She wants it in stock, delivered fast and at the best price. She wants the comfort of buying, the security of financing, and the delight of rewards, without having to think about how to pay.
Welcome to a world that revolves around you. Imagine is open for business, rapidly signing up merchants daily. We want to chat with you about how you can participate.
Contact us for more information at firstname.lastname@example.org.