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E-Payments: It's the Data, Stupid

30 August 2012 in Trading Ideas

A secular transition toward paying for all things electronically appears to be well underway. In its most recent survey of national payment methods, the Federal Reserve found that more than three-quarters of all noncash purchases were now done digitally and have grown more than 9% a year since 2006.

As a result of this mega-trend, a host of competition has flooded the e-payment marketplace in an attempt to gain a portion of market share.

Right now, that means rivalries with a universal business model based on fees that are charged for each purchasing transaction.

But as Alex Rampell suggests in a recent TechCrunch article , heightened competition will ultimately have the effect of forcing rivals to continually reduce fees to gain or maintain any kind of foothold, thus hitting the revenue streams of incumbents and startups alike.

In addition, Rampell says, fees will suffer from increased government intervention to limit fees charged for digital processing – this is great for consumers around the world, but doesn’t do much for the bottom line of electronic payment companies.

For Rampell, who is the co-founder and CEO of payment/advertising firm TrialPay, the ultimate winners in this space will be the companies that are able to deliver customers. “Connecting the bank accounts of buyers and sellers will never be as valuable nor defensible as connecting buyers and sellers,” he writes.

How is that connection made stronger? By “closing the loop” via the growing data cache to show how purchases can be tracked back to their original source, such as Google or Yelp. With that method, Rampell says, e-payment companies can not only provide valuable tracking, but that data can be used to generate more customers for traditional “offline” businesses.

In effect, electronic payment companies can mimic the strategies of e-commerce companies, while also controlling the point of purchase.

The tough part for investors will be to determine which companies are ahead of the curve.