Surprisingly, Payment Service Providers

It must be the hardest job in tech to raise money for a new social network. Facebook and Google together now command 2/3 of all new mobile ad spend, the life blood of any social network, leaving little room for anyone else. In terms of valuable data, the largest networks have become “walled gardens,” limiting access directly to their data, both to increase their own value to advertisers and reduce the value of other ad platforms. The strategy has worked brilliantly. Yahoo, AOL, even Twitter have become resultant road-kill.

Yet as networks move beyond ad revenue and set their sights on payment and commerce revenues, our view is they face an entirely new and surprising, group of competitors, namely payment service providers (PSPs) and potentially also credit card companies. These businesses are sitting on an as-yet untapped $100BN opportunity, by using their incredibly valuable consumer transaction data to attract billions in spend from major brands, much of it inevitably from social networks’ future revenue potential.

PSPs include companies as diverse as First Data, Worldpay, and even Paypal, defined by a common role in acting as a bridge between consumers and dealing with acquiring banks and merchants to process payments. Some 300 PSPs operate in the US and Europe alone.

Our thesis is simple: it is no longer possible to beat large networks at sheer reach. Facebook runs 62 million lines of code across multiple products serving 1.8 billion people. Google’s complexity is mind-boggling (2 billion lines of code) across literally everything from Android phones to driverless cars. Any attempt to build a social network from scratch in the face of this dominance would be futile.

But real competition can still emerge from companies who have far better, more valuable data on a large enough group of consumers, backed by robust utility. PSPs who take and process consumer payments are arguably the best placed to provide that competition.

They know far more about an individual than Facebook can ever determine from likes and shares, however nuanced Facebook might try to make them. As one example, Worldpay captures over a third of UK terminal payments, giving it huge insight into who is a valuable consumer, and as importantly, who might be a fraud. First Data processes over 2,500 transactions per second, something Facebook can only dream of. Using that data requires great care, as data protection and privacy rules, especially outside the US, are hardening, are no laughing matter, and nor should they be. But the fact remains PSPs collectively are sitting on perhaps the most valuable treasure trove of information directly pertinent to exactly where the large networks are moving, namely who buys what, how much can they afford, how can I sell them more, and who do I need to be careful about.

A key driver of this opportunity is the sheer reach of PSPs. The top 5 PSPs in the world collectively process payments for more than 1 billion consumers world-wide. Even if this reach is somewhat less than the 2 billion or so achieved by Facebook and Google combined, the value of the data PSPs gain is far, far greater than that gathered by social networks, because it is based on actual transactions. The PSP customer base is also entirely focused on consumers who spend money, cutting out segments of the population with less disposable income, such as teenagers or people living in more rural areas. The data is empirical, not merely attitudinal.

The larger PSPs have only recently begun to wake up to the potential of monetising their data. In recent years, the larger PSPs such as Heartland (recently acquired by Global Payments), Fidelity, First Data, and Digital River have made a concerted effort via acquisitions to expand aggressively their data science capabilities.

We already see PSPs leveraging their data in ways impossible to imagine a few years ago, including the following examples:

  • Using social media “checking in” as a key input to better fraud detection, false positive fraud signals, and as a way for banks to pinpoint where a customer might be for a specific relevant offer.
  • Providing details (up to levels permitted by data privacy) on cardholder payment behavior across different brands and channels.
  • Analyzing merchant activity and transactions as a key input to measuring credit-worthiness.
  • Identifying specific locations within a city, or address clusters of consumer homes, where specific offers or brand promotions are likely to be most effective.

The Mastercard example is only one illustration of this trend (article):

“MasterCard decided to sell specific customer segment information to its merchants. Of course, as all personal identifiable information is stripped, no private information is shared, but specifically it sells information on detailed customer segments and spending patterns. MasterCard crunches all the data that it can get its hands on, including over five years of historical data, and consequently creates segments about customers that are loyal to a certain product category or store or on other specific patterns. This provides great insights. A nice example is that the data shows that every city has its own spending DNA.”

So why haven’t PSPs yet become data companies? We think this is for two main reasons.

First, PSPs are incredibly profitable already and the pressure to change therefore far less; the top 5 PSPs collectively made $5 billion of operating profit in the past year. Second, that profit is highly predictable from regular transaction flows, and the top 5 collectively already have over $100B of market value and very high margins, so the simple question is “why bother doing something new?”

Our thesis is more radical. We see PSPs as being able to double their value and size by becoming in effect two businesses. One would be the core payment acquiring and processing business they are already in. The second would be an entirely distinct big data analytics and aggregated consumer information business which can provide insights Facebook and Google simply cannot match. It is that second, data-driven business that we see as a huge potential future challenger to the dominance of social networks, not in terms of user engagement, but where it matters most, in terms of siphoning off valuable marketing revenue from the largest brands.

The prize is astronomical. Facebook and Google are worth collectively almost $1 trillion today, virtually all driven by being the best data sources for major brands looking to attract and retain customers. If PSP’s can capture only a small proportion of the future potential revenue from these same brands, the PSP sector can increase its value by literally hundreds of billions of dollars.

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