Why Payments Startups Fail: A Lesson In User Behavior

Sangeet Paul Choudary | August 9, 2012

Users hate having to learn entirely new behavior. Products that find rapid adoption typically try to fit into existing user contexts. Introducing entirely new behavior may lead to barriers in adoption and this problem is compounded in a two-sided network where having to learn new behaviors on both sides can make the mutual baiting problem of seeding the network even more complicated.

Mobile Payments is a particular case of two-sided network activity where users prefer trying the most accepted behavior and new behavior takes time to find adoption. That’s largely the reason whyNFC-enabled Payments still hasn’t gone away. Consumers won’t go out of their way to get NFC-enabled phones unless there are enough merchants accepting them and merchants don’t want to invest in terminal hardware unless enough consumers start using the network. Both sides need to change behavior, consumers need to adopt a new payment instrument and merchants need to enable new store infrastructure, both of which are new enforced behaviors.

Seed a new model by changing user behavior on one side

That’s exactly why Square has done so well, targeting one side exclusively. Square started by not changing anything at the consumer end. The consumer uses his credit card as he always did. The merchant had to change his behavior but given the superior and simpler pricing and the convenience of receiving payments anytime anywhere, the merchant side was seeded well. Now, that the merchant side is seeded, new behavior is being introduced on the consumer side with the consumer card case.

Reintermediate an existing model without changing user behavior on one side

MPESA established itself as a revolutionary payment mechanism in Kenya for a similar reason. North and East African nations already had a system of money transfer inherently linked to the religion of Islam, known as Hawala. In the Hawala system, a user asks a Hawala agent to transfer money to an acquaintance in another location, who then contacts another Hawala agent in the new location to pay the user’s acquaintance. The user then pays the sum to the first agent along with a small fee. The debt between the agents is logged and settled at a later date. MPESA simply rode on this behavior , without trying to introduce new ones and simply made it more efficient by leveraging the mobile network to track the movement of money. The user-agent relationship remained the same while the agent-agent relationship was improved drastically. Instead of logging in transactions on a book and settling them at a later date, the ma-payments system allows the agents to settle money transfer instantly. As with all platforms, when a tech-driven payment business is reintermediating an existing payments business, it should try to bring in added efficiency to the transaction without changing the current user behavior drastically.

What is critical (and common to both the above models) is the fact that for even one side of the network to adopt new behavior, the platform should offer significant advantages over existing mechanisms. Square offers better and simpler pricing and the convenience of payments on the go. MPESA offers more efficient transaction settlement between agents.

Joel Spolsky refers to this phenomenon in the technology space where he refers to it as ‘backward compatibility’. Essentially, backward compatibility is simply a conscious platform decision to ease a desired change in user behavior by supporting the existing user behavior through the transition phase.

Any form of payments has to combat a behavioral problem. Hence, building in some form of ‘Backward compatibility’ helps spur adoption because users have the choice to continue with the existing method or transition to the new one. Visa and Mastercard know a thing or two about disrupting the payments space. When wave and pay was introduced, the new cards that were issued supported both swipe (existing) and wave (new) modes of payment. Consumers could continue using swipe until merchants set up wave terminals. Of course, a string of incentives to users of wave helped execute the transition.

In a similar vein, companies like CheckFree provide a comprehensive payment mechanism to consumers while allowing merchants to either migrate to a new system (online payments) or receive checks in the mail like they already have. CheckFree changes behavior on the consumer side successfully because the consumer has the advantage of making one-stop one-click payments. Merchants are allowed the options to continue with the old behavior or adopt a new more efficient one. If CheckFree had insisted that all merchants accept epayments from Day One, it would not have been able to build a comprehensive portfolio of merchants which would have prevented it from gaining traction among consumers.

Payments is a unique space where a change in payment instrument tends to impact both buyers and sellers and very often, new payments mechanisms fail because they try to change behaviors at both ends.

This makes the payment industry, in general, very difficult to disrupt. In fact, apart from Paypal, no other business has succeeded in finding widespread global adoption in the payments industry in the last 2 – 3 decades. The key is to ease in one side at a time and not try to create new user behavior on both sides simultaneously.