Many companies that offer alternative payments systems are still trying to figure out how to position their products, and one thing some have learned this year is that they need to be willing to adjust their business models on the fly as this market evolves.
Tempo Payments Inc. shifted its focus from merchants to banks, Obopay Inc. found that its person-to-person payments service had become a surprise hit with the underbanked and changed its marketing strategy to go after a market it had never pursued, and Bill Me Later Inc. turned its service-oriented Web site into a shopping portal.
For years Tempo has been pushing the idea of a debit card that uses the automated clearing house network to access users' bank accounts. The concept never really caught on until June, when Capital One Financial Corp. announced it was testing a nearly identical product.
The difference between the two, according to Mike Grossman, Tempo's chief executive, was subtle but important: Capital One's model started with the bank, but Tempo had aimed at the merchants.
And as soon as he heard about the Capital One product, Mr. Grossman said he knew his company needed to change its model. A month later Tempo rolled out a new strategy, offering its ACH-payment card capabilities to banks.
"When we were focused on the merchants, and against the banks, I always felt like we were swimming upstream. Now that we are working with the banks, I feel like we have the wind at our backs," Mr. Grossman said.
After years of struggle at Tempo, he said, banks are now lining up to test its debit card technology, a sign that Tempo may have finally hit upon the right strategy.
Bruce Cundiff, an analyst with Javelin Strategy and Research in Pleasanton, Calif., said merchants and consumers are eager to find payment alternatives to credit and debit cards, but the products need to be right on target.
"The ones that succeed and thrive are the ones that address the needs, and especially the unmet needs, of one or more constituencies" in the payments chain — merchants, consumers, or banks, he said. "You have to solve a problem. You can't put a solution out there in search of a problem."
In Tempo's case, Mr. Grossman said, the merchants were the wrong target. The company's original model called for merchants to issue the cards and for transactions to run over the Tempo network from the point of sale until they were turned into ACH debits.
Though the Tempo cards offered merchants something they wanted — lower interchange fees by using the ACH network instead of traditional card networks — it also required them to issue cards, a task that was foreign to merchants. "Merchants like to talk about how to lower their interchange, but that doesn't mean they were willing to make the investment" to become card issuers, Mr. Grossman said.
In contrast, working with banks makes more sense because they are already familiar with issuing cards. And, because the decoupled model breaks the link between debit cards and bank accounts, it offered banks something new: the ability to use debit cards to acquire new customers.
Mr. Grossman said Tempo had been evaluating such a move since the start of 2007, before Capital One began testing its cards, but doing so required a significant re-evaluation of its model. From the start, Tempo had focused on creating a new payment network, he said, and the decoupled debit card was initially seen as just one tool to support that strategy.
"Eventually we realized that the network and the decoupled debit card were independent sources of value" that did not need to be offered as two parts of the same service, he said. That realization was hammered home when Capital One announced its own decoupled card, generating enormous buzz within the financial industry.
"That validated exactly what we were thinking about," Mr. Grossman said. "It was my single best day since I got here" in February 2006.
In fact, he said, Capital One's much larger market presence gave the concept more of an endorsement than if Tempo had announced its own decoupled product first. "Their announcement made the rest of the industry sit up and take notice," Mr. Grossman said. "We decided to draft behind Cap One."
HSBC Finance Corp. is testing cobranded Tempo debit cards, under the brand name OptiPay, with the drugstore chain CVS Caremark Corp., and is planning similar tests with the Carteret, N.J., Pathmark Stores Inc., and two other retail chains.
Mr. Grossman said that Tempo has talked with almost all of the top 100 banks this year about his company's decoupled card, and there is "tremendous interest" in the idea. "We are going to be very, very busy in 2008."
Tempo isn't the only payments company to shift gears this year.
Obopay has developed a person-to-person payment system that uses mobile phones to access prepaid accounts. Irv Henderson, its vice president of product development, said that when the company went live in 2006, it focused on young people, especially college students, among the biggest users of mobile phones.
From the start, Obopay has repeatedly said that the perfect example of the need it is trying to meet is a group of friends splitting the check at a restaurant. Don't have any cash? Use Obopay to send your share to a friend.
However, according to Jennifer Roth, a senior analyst with the global payments practice at TowerGroup Inc., a Needham, Mass., independent research unit of MasterCard Inc., "sharing the check just isn't happening."
She said Obopay's service doesn't really satisfy a need in that example; friends will usually pay one another later with cash, or pick up the check the next time. But using their phones to initiate an electronic transfer to the person sitting next to them? "That just doesn't make sense."
However, while Obopay was targeting students, people in another market segment realized that an electronic P-to-P service was exactly what they needed; in August the San Mateo, Calif., company disclosed that about a quarter of its users were underbanked. Many of them are having their paychecks deposited directly into their Obopay prepaid accounts, and are using the service to transfer their share of the rent to a roommate, or to pay their bills.
"The combination of a mobile device and a prepaid card had great appeal to the underbanked," Mr. Henderson said, "so we adjusted our strategy."
Though Obopay's initial marketing efforts did not take into account the underbanked, over the summer it forged a relationship with the prepaid card company GreenDot Corp., enabling Obopay users to refill their accounts using Green Dot's MoneyPak funding product. Last month Obopay began a major marketing campaign to promote this capability.
Mr. Henderson called the GreenDot deal "an important part of addressing the demand from a specific market segment to load money into their Obopay accounts."
The company has found four major categories of users, each with different usage patterns. Besides the underbanked and students (who do account for a good number of transactions, whether for restaurant bills or other purchases), Mr. Henderson said that families are a key market, typically with one person sending regular payments to a small number of recipients, likely a parent dispensing allowances or sending money to a child away at school. Obopay also has developed an application that enables people to embed a payment function on social networking Web sites, which can be used by small merchants, such as an independent musician selling songs online.
(Mr. Henderson would not provide any figures on Obopay's transaction volume.)
The company talks often with users about what they want, and next quarter it plans to roll out new tools aimed at meeting the payments needs of its different user groups, Mr. Henderson said. For example, it is developing a system for the undebankd, that will notify users when a bill is due, and feature an option to pay it electronically.
For the college market Obopay is working on a feature that will automatically forward incoming payments to users' bank accounts. "We think a lot about what we think will enable each usage case," Mr. Henderson said.
Ms. Roth said that companies in this space often must rethink their approaches after one idea fails to catch on or the market moves in a new direction. "The alternative payments market is very much in flux," she said. "I must applaud Obopay for realizing its initial pitch may not have been correct."
Another company with an evolving business model is Bill Me Later, which offers instant credit for online purchases; users receive their bills by mail or e-mail, and can pay them by check or by ACH debits from their bank account.
Mark Lavelle, the Timonium, Md., company's co-founder and vice president of corporate development and strategic planning, said while his company meets the needs of shoppers who do not want to use cards because of security concerns, its strategy has always been to focus on merchants.
The pitch for merchants, he said, is twofold. First, Bill Me Later transactions are cheaper than cards — the company charges about 1.5% of the transaction fee. But the more important benefit is increasing sales. "We deliver customers that otherwise wouldn't be delivered," Mr. Lavelle said, people who will not use a card online and in the past have had no other options.
Bill Me Later's marketing strategy has gone through three phases. When it began offering its service, it was listed on merchants' checkout pages along with the other payment options. As the company realized that it was drawing people who might not have otherwise been willing to make a purchase, it also realized that its merchant clients could use this capability in their own marketing.
About two years ago some merchants began touting Bill Me Later not on their checkout pages, at the end of the shopping process, but on their home pages, where people would see it immediately.
Mr. Lavelle said the idea was to deliver as early in the shopping process as possible the message that there is an alternative payment option. As a result, Bill Me Later became more than just a payment choice, he said. "We became a marketing tool. Merchants are using it to drive people to their store."
Mr. Lavelle said the company has built a loyal following; of the more than 3 million people who have used the service, 60% have used it more than once, and there is a die-hard base of users who actively seek out Bill Me Later merchants when they want to shop online. More than 700 merchants accept the payment service.
The third phase, which kicked off at the start of this year, involved transforming Bill Me Later's Web site into a shopping portal, listing all the places where the service can be used. Once merchants began using the service as a way to attract new shoppers, Bill Me Later began expanding on this to win more business from those shoppers. "We are putting more focus on how to capture more consumer value," Mr. Lavelle said.
Mr. Cundiff said Bill Me Later's service is important because "it drives the decision to buy, not just the decision about how to pay."
He said this ability to pull in new shoppers was likely one of the reasons Bill Me Later appealed to Amazon.com Inc., which said last week that it would offer the service and purchase a minority stake in Bill Me Later.
Mr. Lavelle said Amazon and other retailers "know that only offering cards it not going to work for them. Having a well-thought-out payments model can only help their business."
