[IMPORTANT] My thoughts on the payment space

[Sai To Yeung]

Team,

Here are my thoughts on why I believe there is an opportunity for us in this space.  Bear with me for a bit because this is a long email, but I think this is an important discussion to have at this point in time.

First, a few assumptions that we need to confirm:

1. Merchants are willing to give up immediate payment in return for savings

• For those who find the immediacy of funds to be essential, we can:
• Charge them a fee to get it earlier; Faisal (the payments consultant I spoke to) told me that it's possible, but there's an increasing cost associated with three-day, two-day, and next day ACH
• Give them credit and we take the responsibility for chargebacks (Square seems to be doing this: http://www.quora.com/Square-Inc-1/How-does-Square-clear-funds-overnight-and-get-around-the-ACH-delay); if we find that a user is abusing their TouchBase card in that they are paying for stuff without having any money in their checking account, we can just cancel their account.  My expectation is that obedient customers far outnumber the bad apples.

1. Customers are willing to accept inconveniences like a long sign-up process (might take 2 days to verify their bank account, see: https://docs.balancedpayments.com/current/?language=bash#debiting-bank-accounts) and no refunds in return for savings

• The first is a pain in the ass, but there's a lot we can do to facilitate this process, like send follow up emails to confirm.  I signed up with Dwolla and it was pretty straightforward even though it took a while.
• The second I think is very workable and probably necessary.  There are some pretty nasty costs (e.g. $25 for chargeback costs), but if we add in some provisions in the beginning, like the card can only be used for transactions $30 or less, then I think for consumers it's acceptable that they can't get refunds.  This isn't new either - airlines do this with their tickets, with nonrefundable tickets usually being a lot cheaper.  (Another benefit to limiting the transaction size is that assuming we take on the risks of nonpayment on behalf of merchants, we are less susceptible to variability in payments.  If a payment doesn't go through, we only lose out in small increments).

Faisal also told me that ACH payments on their own shouldn't cost that much.  He said that no-frills processors charge ~$0.25 per transaction, and the only reason that companies like Balanced and WePay charge more is because they're adding something on top of it (like an API).  He cut me off when I asked him which vendors he was talking about (because he wanted some consulting fees I'm guessing).  However, a couple companies that he recommended on Quora are ACHQ and First ACH, which have costs of ~$0.25 per transaction or even lower at higher volumes:

• http://www.achq.com/pricing.php
• http://www.firstach.com/front/pricing_plans.asp
  

With these guys, he mentioned that we don't get a merchant account (basically a bank account to store payments) bundled in, but this usually costs around $5000 to $6000 (not sure if yearly or monthly), but this can be easily disregarded once we get to scale.  I think Dwolla was even able to get this fee waived by partnering up with their local credit union.

Finally, I'd just like to say that there are others who think this is the way to disrupt payments (http://www.quora.com/Payments/What-startups-or-technology-will-disrupt-Visa-Mastercard-American-Express-and-Discover).  In any industry that is disrupted, there's always some initial hesitation because of trust and because there are features that consumers think they need, but at the end they realized they didn't.  Think of Southwest Airlines and how there's no assigned seats and only peanuts for a snack.  Think of Wikipedia and how there's no central authority like Britanica.  Think of AirBnb and how there's no spotless bedroom or bathroom.  

In all of these cases, some consumers realized that they value cost more than convenience.   As long as we never compromise on security, we can gradually convince users that they don't need certain conveniences.  Once we can convince early adopters who care most about cost, the rest of the population will become more comfortable.

Now the ultimate goal - eventually we want to get a point where turn our product into something in which we're actively seeking merchants to one where merchants will call us wanting to be added.  That means advertising dollars, custom coupons, and the ability for us to price more aggressively.

Hope all of this made sense.  Happy to talk more.

Thanks,

Sai To