MasterCard Inc. hopes that the wisdom of crowds will help it eliminate the need to build alternative payment systems.
The Purchase, N.Y., company has decided to open up its software platform, letting independent software developers create payments applications that would use MasterCard's network for … just about anything they can come up with.
Observers say letting anyone build payments tools could open the innovation floodgates. Though MasterCard should be prepared to see plenty of half-baked concepts, they say, a few breakthroughs could also result.
Apple Inc. has used the same approach to great success in the app store for its iPhone. PayPal Inc. opened up its platform last year and has already announced key partnerships with companies that have adapted its payments technology.
A growing number of start-ups have developed payment alternatives to facilitate transactions in ways that the traditional card networks cannot support. These companies can now focus on building technology that reaches the end users but no longer need to design an accompanying network, said Joshua Peirez, MasterCard's chief innovation officer.
"If that means that there are less opportunities for someone to come up with an idea that excludes us as an alternate payment — but rather includes us — that's great," he said. "Instead of competing with us, use us to achieve your objective. … That's good for us, and that's good for our banks."
Peirez called online auction sites a good example of an emerging application that could have used MasterCard, rather than excluded it, if the company had opened its platform sooner. "Had we done this 10 years ago, there probably wouldn't be a PayPal," he said, because developers would have been able to incorporate MasterCard's existing network instead of trying to build out PayPal's.
But PayPal became the dominant payment system for such auctions because few viable alternatives existed for bidders to pay electronically. eBay Inc. bought PayPal in 2002.
Though MasterCard is following PayPal's lead in opening its platform, Peirez said this means MasterCard can learn from PayPal's early efforts.
"Sometimes, if you move second, you end up with a better system," he said. "You always see something or learn something from the first mover that you can leverage." For example, developers have been sending MasterCard hundreds of e-mails of feedback on their early experiences with PayPal's platform, he said.
Peirez still sees MasterCard as an early mover and sees advantages to that as well. "I'm certainly excited to have moved faster than a Visa or an Amex or any of my core competitors," he said.
PayPal opened its technology in November and has since announced noteworthy examples of developers' adapting its system in new ways.
Fidelity National Information Services Inc. blended PayPal with its bill-pay offering, and Green Dot Corp. added PayPal as a funding option for reloading its prepaid cards.
Dan Schatt, a PayPal senior director and the head of financial innovations, said its strength is not only in its first-mover status. PayPal's reach is not limited to its existing user base, he said. Anyone with an e-mail address or a phone number can receive payments through PayPal's system.
"We're a little bit different in that we're aligning ourselves with the Internet" instead of one card brand or one issuer, Schatt said. "Our network is basically anyone with an e-mail address."
Though most of the more ambitious banking applications of PayPal's system came at about the time it opened up the platform, Schatt said more are to come. Banks, for example, are looking at PayPal as a paperless alternative to small-business invoicing, he said.
PayPal's more recent developer-made applications are smaller in scope, but that does not reflect a waning interest among banks, Schatt said. They simply take longer to churn out applications than smaller development teams.
Over time, "you're going to see lots and lots of banks" incorporating PayPal, he said.
Damon Hougland, the senior director of PayPal's development platform, said his company is not concerned by the opening of MasterCard's system. Developers would have no reason to favor one platform over the other, he said. "It would be possible for developers to integrate with both MasterCard and PayPal."
Technology's rapid evolution necessitates these moves by both companies.
"In the past, a lot of online payments really have been focused on the shopping cart/Web checkout experience," Hougland said, "and I really do think the signposts are telling us the industry is going to go beyond that."
"I tell my kid — my son is 10 years old — I didn't have the Internet when I was a kid, and he's amazed," he said. "What I expect to happen when he's grown up and he has his own kids is, he'll say, 'You know what? We had to access the Internet on computers.' And to them, that will shock them."
James Van Dyke, the principal and founder of Javelin Strategy and Research in Pleasanton, Calif., said that whether MasterCard's open platform can allow for something as complex as PayPal depends on how open MasterCard truly is.
"Someone could create a PayPal"-style system that uses MasterCard's network if the card company's system is open enough, Van Dyke said. But could it sustain a PayPal?
To create a true MasterCard-powered alternative payment system, developers "would have to go deep," he said. "They couldn't be [making] some lightweight app."
Many financial companies tried to create alternative payment systems on their own as PayPal was growing, but they failed, largely because of fraud.
PayPal's developers "were such innovators around fraud" that they developed security systems the broader financial services industry adopted, such as challenge deposits for verifying bank accounts, he said.
MasterCard has likened itself to Apple Inc. in its approach to developers, in that it plans to police applications to prevent anyone from doing something malicious, Van Dyke said. Though this may be necessary, it forces the card company to risk censoring the very innovation it professes to encourage. "In the process of cleaning" its platform, "you have to make sure you don't go too far and stifle it," he said.
As for PayPal, he said, inconsistent momentum in financial services apps speaks to the complexity of the systems PayPal hopes to tie in to — there is no such thing as a one-size-fits-all app.
"For these apps to have any value at all, they have to be bank- or issuer-specific," Van Dyke said. Otherwise, "you run into the same problem Yodlee has had" with pulling data from online banking sites for its aggregation system. Any time a bank changed something on its end, it ran the risk of breaking its Yodlee connection.
Whether other payment brands follow will depend largely on whether PayPal and MasterCard can demonstrate clear success, he said, adding, "This might be a little bit more difficult than they thought."