On March 5, 2015, Professor Michael Katz, Sarin Chair in Strategy and Leadership, Director of the Center for Telecommunications and Digital Convergence, and professor of business at the UC Berkeley Haas School of Business, gave the lunchtime keynote address for the Berkeley Business Law Journal’s “Bits Bites Plastic: The New World of Electronic Payments and e-Currency” symposium at the UC Berkeley School of Law.
Professor Katz began by revealing his insights on the integration of mobile technology into our everyday lives. The first personal computer was commercially marketed in 1975. By 1983, there were nearly 2 million computers in the United States. In 2014, the Cisco Visual Networking Index estimated 7.4 billion computing devices worldwide with an estimate that in 2015 the number of mobile-connected devices would exceed the number of humans on Earth. A great deal of this technology is used to conduct business and commercial transactions. Paypal, Google Checkout, Apple Pay, and Venmo are quickly gaining traction in a global marketplace that is increasingly reliant on digital commerce and e-currency. Professor Katz explains that digital cash is the natural evolution of currency and that vendors and banking companies are well-advised to develop models of payment facilitation incorporated digital cash to keep up with the digital currency revolution.
Resolving the Chicken and Egg Problem of New Payment Platforms
Professor Katz explained that this payment revolution does face an inherent problem. The usefulness and profitability of a payment platform is directly correlated with its user base. Payment platforms are network businesses – their value comes from consumers using them and merchants accepting them. Accordingly, a platform is worth nothing if there is no user base. Merchants will refuse to undergo the transaction costs of offering a payment platform without a confirmed consumer base. Consumers will refuse to use a new payment method unless merchants accept it. Payment platforms are a two-sided marketplace and new digital payment platforms must overcome this inherent chicken and egg problem if they are to survive. So how can do they do it?
One solution is to focus on one side of the two-sided marketplace first. The popular payment app Venmo did exactly this. By focusing on person-to-person (effectively consumer-to-consumer) payment transactions, it eliminated the need of businesses to accept the payment platform while it built its consumer base – after all, it was meant for you and your friends, not to pay for groceries at Wal-Mart or a latte at Starbucks.
Venmo co-founder Iqram Magdon-Ismail said that “Over the next decade [Venmo’s] goals are to be accepted like Visa and used like Facebook.” When Braintree acquired the company in 2012 for $26.2 million, it knew the value of Venmo’s network and the value of its solution to the chicken and egg conundrum. As Bill Ready, the CEO of Braintree and Venmo told Bloomberg Business, “[Venmo’s] a great way to get consumers comfortable with using their phone to pay. Then as they become comfortable with that use, they can start to try others.” It was only a year later that Braintree launched Venmo Touch, a service that lets consumers pay using their phone at stores through the Venmo app. The establishment of a prior user base solved the problem of merchants hesitating to incur the transaction costs because they knew Venmo had an already existing and vibrant user base – thereby solving the two-sided equation.
On the other hand, enticing consumers by already providing an established merchant network is how Apple is promoting its newly revealed payment platform – Apple Pay. In Apple Pay’s promotions, one of the central tenants is the wide availability for use in “hundreds of thousands of stores accepting contactless payments.” The fandom of Apple’s loyal userbase combined with the ability to use it in their daily transactions makes the switch to Apple Pay, over traditional payment methods, painless for consumers – thus growing its network.
The Real Tech Revolution
Digital currency and payment platforms have to meet the demands of merchants and consumers if they are going to survive in the market. In this way, Professor Katz explained that new payment platforms are really just digital implementations of the same methods for addressing the needs of merchants and consumers. Merchants desire platforms with low transaction costs and quick payment times while consumers desire convenience, privacy, incentives, and lines of credit.
Paying with plastic has met these needs – which is why 2012 saw 122.8 billion noncash payments, excluding wire transfers, with a value of $79 trillion [Federal Reserve Payment Study available here]. According to Professor Katz, digital currency platforms like Apple Pay, Google Wallet, and Venmo Touch seek to address these same needs. However, with the new platforms come new concerns. Consumer concerns with the security of mobile payment platforms on smartphones is one such concern.
However, while the new generation of digital payment platforms introduce their own breed of concerns, they also assist merchants and payment companies in preventing fraud and preventing defaults. Professor Katz insists the real revolution in mobile payment technology is the data. Katz explained how companies can now use a person’s status updates, published locations from GPS tags on their photos, as well as their purchases shared on social media to get a better sense of how likely a person is to default on loans or commit credit card fraud. Now, more than ever before, companies can use the data gathered through payment platforms to get a better picture of your life. Gone are the days of buying a bunch of jewelry, moving the Florida, and declaring bankruptcy. Today, the background check your bank takes out on you before extending you a loan most likely includes your latest status update, liked tweet, and Instagram account number. Companies are even able to use data to predict pregnancies . . . sometimes before the families are even aware.
Additionally, Professor Katz explains how the big data revolution enables better targeted marketing. From a payment perspective, this means companies can get a better sense of which merchants to expand platforms to in order to get the biggest bang for their digital buck.
So Who Owns My Data and What Can They Do With It?
With over a hundred billion transactions worth of data being recorded, traded, sold, and bought each year, the question of ownership greatly concerns Professor Katz. Before dismissing this as purely an academic exercise, consider the fact that in the recent Radio Shack bankruptcy action, the company announced it would put its customer personal data up for sale as a liquidated asset.
As valuable a commodity as consumer financial data is, it is surprising that the law deciding this matter is not very clear. Banks, payment networks, and merchants themselves all are lobbying Congress to loosen restrictions on the collection and use (read “monetization”) of such data while privacy activists and consumer watch groups are lobbying for stronger regulations.
In the third branch of American government, courts around the country grapple with the duty of care possessors of consumer financial data have to prevent data breaches and inform consumers of the loss of their data. Such is the case with the recent episode of the Home Depot data breach litigation and the now infamous Target data breach class action.
The Future of Digital Currency
Professor Katz predicts that digital currency is not going away any time soon. As new platforms continue to develop and technology makes commercial transactions easier, companies will continue to meet the demands of merchants and consumers so long as economies continue to exist. In the meantime, Congress will have to sort through issues of mass data ownership, consumer privacy, and statutory guidelines for handling such data while the courts will continue sorting out problems as they arise. In many ways, as Professor Katz argues, there isn’t a revolution at all – just the natural evolution of an industry.