Within the next few years, every tech / digital platform is likely to launch its own payment service. Not all will be successful, but all will likely try either directly or indirectly.
First, it will be a trickle.
It is trickling now. Trickling a little bit with Apple, a little bit with Google, a little bit with Facebook, a little bit with Uber, a little bit with Amazon…
And then it will be a flood.
While digital payments is not a new idea, the value proposition of digital payments is shifting very quickly.
The motivation may ultimately come down to a single word: Data.
Since the earliest days of the internet, there has been an invisible war in cyberspace for your data. The earliest internet players got off the ground by capitalizing on the advantages of the internet vs offline incumbents such as reducing the need for expensive physical real estate. This first wave has made offline players largely irrelevant but did not require much data.
But soon enough, many, many internet-first players popped up almost overnight to capitalize on the same advantages. The players that eventually thrived / survived all did so by evolving to become platforms / ecosystems. And at the core of every platform and ecosystem is a robust network (e.g. users, merchant, advertisers, developers, etc) and an incredibly difficult-to-replicate dataset.
The internet inherently makes it much easier for start-ups to get off the ground, theoretically, but in reality, it is clear that start-ups face a challenging uphill battle trying to compete against internet-first incumbents that have mature networks and proprietary datasets.
Sure, someone can code an app that looks like Facebook / Instagram / Snapchat in a few days (few hours?) but mature networks are very hard to break.
In fact, it is becoming increasingly apparent that the easiest way to break an incumbent network is to have your own network to leverage.
To break a network, bring your own network to war.
This realization (either directly or indirectly) is likely leading to or will lead to an unstable equilibrium. While cyberspace could have seen an extended era of peace with each player tending to their own walled garden (e.g. Google in search, Amazon in ecommerce, Facebook in social, Uber/Lyft in ride hailing, Yelp in local services reviews, Match in dating, LinkedIn in professional networks, etc), ambition (and paranoia) will ultimately doom any desire for peace because every successful network has likely realized that they are potentially under threat by other successful networks as well. The only way to survive is to expand.
This is not just a hypothetical…this has become very much a reality in China where the entire internet has been carved up into 2 ecosystems: Alibaba vs Tencent. Alibaba and Tencent leveraged their own core networks (ecommerce and social networks, respectively) to extend into adjacent verticals including media, news, search, delivery, cloud infrastructure, fintech, etc with the desire to eventually control every need of their user’s lives.
This is where data comes into the picture. When it comes to a network-on-network fight, the key advantage the incumbent has is its own proprietary data.
For example, Facebook is making moves into ecommerce, but there is no doubt that Amazon has a significant advantage in transactions data for most of the customers that Facebook would like to capture. Amazon already knows what types of goods you like, what types of brands you like, how frequently you order, etc. Facebook does not. And it is the incumbent’s job to ensure that their dataset continues to expand at a rate that is faster than the entrant’s.
The desire for proprietary data (and the desire to keep proprietary data, proprietary) is driving further cracks into the open internet. Today, we live in multiple internet ecosystems, but they are hardly interoperable. Your Facebook data is trapped in Facebook. Your Google data is trapped in Google. Your Amazon data is trapped in Amazon. There are no roads between these gardens.
And because there are no roads between these gardens, payments is evolving to become the key battleground between them all.
Essentially, payments is the trojan horse.
Payments is theoretically neutral and is accepted by all the platforms. Facebook may not be able to gather data within Amazon’s ecosystem, but what if an Amazon customer chooses to pay for something using a Facebook-related wallet or card that runs on Visa’s network? Google may not be able to gather data within Facebook’s ecosystem, but what if a Facebook user chooses to pay for something using a Google-related wallet or card running on Visa’s network?
Payments may turn out to be the trojan horse that allows one walled garden to invade another.
Payments is essentially becoming the last road connecting all of these walled gardens and the desire for data on the other side of the wall(s) has never been greater.
Payments is no longer just payments, but also data. As a result, payments is becoming exponentially more valuable than just 5 or 10 or 20 years ago. For this reason, Capital Flywheels’ Paper Portfolio continues to allocate a significant portion of the portfolio to payment assets.
Many investors in payment companies still seem to focus on the same story from 10-20 years ago – digitizing cash. But they are missing the big picture.
Capital Flywheels believes that in the next 5 years, payment investors will increasingly realize that the real story for payments is data. Investors will also likely increasingly realize that because payments is becoming integral to internet platforms, it only makes sense to be invested in payment assets that are aligned with the goals of the internet platforms.
Disclosures: I own shares in BABA, FB, MTCH, and UBER. I have no intention to trade any shares mentioned in the next 48 hours.