It’s startups vs. Goliaths in a death match for a multibillion dollar market

[This article It’s startups vs. Goliaths in a death match for a multibillion dollar market first appeared on Upstart Business Journal]

There’s a land grab in the payments business, and everybody wants a piece of turf.

Square, Stripe, YapStone and PayNearMe headline a jostling crowd of startups, dozens of them aiming to streamline how money changes hands. New entrants join every week, while giants such as Facebook, Apple, Amazon and Google top a list of big companies that already have substantial payments operations or who have signaled a move in that direction.

“It’s exciting times for the payments business. After all, everybody has to get paid,” said Swee-May Ngeow, a San Francisco-based managing director in Accenture Payment Services. “The payments landscape is changing quite a bit.”

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The payments stampede is being fueled by an array of factors: Top-tier Bay Area firms such as Sequoia Capital, Andreessen Horowitz and Khosla Ventures are throwing venture capital at a market that’s seen as prime for disruption. As computing costs fall, the barriers to entry are low. Big banks are still working through the aftermath of the financial crisis. Smartphone-enabled consumers, meanwhile, want added convenience and freedom from paying by paper, whether checks or cash.

Giants jump in

Even industry veterans are stunned by the pace of startups emerging in an industry long dominated by established players in banking and finance. Many of those staffing these startups hail from the world of technology rather than the staid world of banking, though that may change over time.

“We are in a new era for Wells Fargo,” the bank’s Chief Marketing Officer Jamie Moldafsky told those attending an industry conference this month, according to industry website “Historically, when people have asked us, ‘Who are your competitors?’, as a bank we would answer, Chase or Bank of America. Today, however, we would answer, Google or Amazon.”

That was before Facebook dropped $19 billion on WhatsApp last month, a move that could set the stage for the social networking giant to make a big splash in payments. Once you own the rails for moving texts among WhatsApp users, it’s not much of a stretch for person-to-person payments to cross the same tracks, analysts say.

Tom Villante, Chairman of Walnut Creek-based payments firm YapStone, expects that Facebook and Google will expand their payments business because the data collected in handling payments could be leveraged into one of their core operations — advertising, which could be better targeted based on past spending.

Apple’s App Store and iTunes already hold credit and debit cards on millions of customers, which could be used to pay other merchants directly. The iPhone could help the company expand further into mobile payments.

For similar reasons, Verizon Wireless, AT&T and other carriers see payments as a natural extension of their services and are staking out their territory by investing in promising startups and joint ventures.

Ebay’s PayPal, among the dominant players, made a bigger push into mobile payments with its $800 million purchase of Braintree last year.

Indeed, given the economic rewards of collecting a small fee for facilitating payments — a business model that Visa, MasterCard and their partnering banks have had profitably to themselves for decades — it might be easier to list the financial players who have no interest in getting a piece of the action.

Needless to say, longer-term players including Foster City-based Visa are watching closely.

“When you’re this successful, you have to expect others are trying to figure out how to take the business from you,” Visa CEO Charlie Schiff said, adding that his team is constantly assessing the new players and asking, “What can they do that we cannot?”

Many of these new entrants work in some fashion with the stalwarts of the payments system such as Visa and Wells Fargo.

Threat from startups

But it’s the proliferation of smaller, fast-growing companies, many in the Bay Area with the region’s deep talent in tech and finance, that have captured the imagination of entrepreneurs and the dollars of investors.

YapStone, billed by some as the biggest company you’ve never heard of, generated almost $100 million in revenue last year by processing $8 billion in payments for rents, church donations and other services.

“We”re on a hiring spree,” said Matt Golis, CEO of YapStone, which employs 165 people and climbing. “We look for experience in the payments industry, especially those who have scaled other companies in the internet world, so it’s not surprising that our people have worked at PayPal and Square, among others.”

In addition to adding talent, YapStone is also scouting for larger quarters to accommodate all the growth.

Another fast-growing firm, Stripe, co-founded by John and Patrick Collison, makes it easy for app developers to accept card payments. Stripe counts Lyft, One King’s Lane, Sosh and TaskRabbit among its clients and recently raised $80 million in financing at a valuation of $1.75 billion, up from just $500 million in 2012.

With fresh cash in its pockets, Stripe wasted no time going global, adding 135 currencies this month to the four it could previously handle.

Stripe employs 86 people in a former trunk factory in the Mission district. The company’s San Francisco hiring push includes engineers, account executives and a recruiter to help with the overall effort.

Just as Stripe’s software makes it easier for developers to accept payments in their mobile apps, Square’s power is in making it easier for merchants to accept card payments, with less hassle, better technology and easier-to-understand pricing than what was previously available to many of them.

“The payments business used to focus on the transaction, now ‘pre-transaction’ and ‘post-transaction’ is getting the attention,” Accenture’s Ngeow said. Those activities mean consumers might get more than just convenience from the new payment ventures. Merchants might offer coupons and specials to customers as they enter a store, award loyalty points with the payment or collect data on customer purchases so merchants can better target other deals to them.

Then there’s PayNearMe, which facilitates cash payments by having buyers take payment slips or a PayNearMe card to retailers such as 7-Eleven, Family Dollar and ACE Cash Express locations to make payments on anything from sports tickets to water bills to a growing variety of online purchases. The Sunnyvale company has raised $50 million, $20 million of it late last year in a round led by GSV Capital, with August Capital, Khosla Ventures, Maveron and True Ventures participating.

Diving into payment niches

Ancillary apps and services have discovered they too can become players in the lucrative payments business by teaming up with Stripe, Braintree or similar services.

OpenTable is testing a mobile payment service in San Francisco that would allow diners to put the tab on their credit card with a tap on their smartphone, using OpenTable’s app. San Francisco-based Lovely, which opened its doors in 2011 to help renters find an apartment, sees rent payment as a natural extension of its services. The company purchased Rentmatic last November to facilitate electronic rent payments from tenants’ checking accounts.

Meanwhile, Uber, Lyft and similar services are not only changing urban transportation, but also making the traditional fumbling for cash at the end of the ride a distant memory.

“The goal is to make payments as effortless as possible,” said Jane Wallace, a San Francisco-based payments expert who has worked at Bank of America, Visa and Intuit.

The land grab in the payments business will no doubt have a few big winners and many losers in a shakeout that could come as early as this year. It is too soon for a casualty count of those who don’t make it among this crop of payment entrepreneurs.

New entrants are expected to emerge as long as entrepreneurs and their financial backers see an opportunity to build companies worth billions.

Most see innovation in payments as a winning hand for shoppers and merchants as well as entrepreneurs and their investors.

“It’s easy to send a package around the world, but it’s very difficult to send money globally,” said Stripe’s John Collison. “Stripe is trying to give access to global payments to everyone.”