New payment schemes are tough

As a Silicon Valley based analyst, I have the opportunity to see pitches from many high tech start ups. Most are technology driven, but haven't really thought through the business model. Bling Nation is a perfect example. From today's American Banker, "Bling Nation, the mobile payments and loyalty company, has shut down its service in a move it insists is only temporary." A payments company needs to make three groups of people happy: consumers (or payers), banks, and merchants. They also need to overcome network effect issues to make these people happy. Consumers don't want a payment method that isn't widely accepted. Merchants don't want to spend to set up payment methods that no one uses. The first attempt at creating a business model was to sign up community banks and merchants in these areas. This is a time intensive and labor intensive effort, and had no compelling value to the consumer. Why not use the credit card and or debit card and get rewards? Small banks were happy to issue, especially to displace spend on credit cards likely to be issued by the large mono-lines. The second attempt at creating a viable business model was to create a rewards program to address issue number one. But then merchants needed to pay for this and they already had payment methods that had rewards programs: the payment methods mentioned above. A third attempt at creating a business model was partnering with PayPal, but this was not going to address either challenge mentioned above: consumer adoption or merchant adoption. Finding a funding account wasn't the challenge. In summary, when looking at payment schemes for business viability, they need to make consumers, banks and merchants happy, and much happier than they are today in order to actually change behavior. Network effects are great barriers to entry, and it takes a compelling value proposition to overcome this very real obstacle.