I4 Commerce has created a new “online” payment system that is essentially made possible because they use a form of bootstrap financing; it is called BILL ME LATER. It is based on a simple business model, the best kind.
Remember, a business model shows the relationships between the business and its customers and suppliers (and sometimes, it goes at least one dimension further and includes the customers of its customers and the suppliers of its suppliers. The added dimension can sometimes reveal important relationships that can also be exploited in the business.) The model also has to reveal how the business acquires new clients and customers—i.e., how it can COST-EFFECTIVELY market its products and services.
Returning to I4’s business model, we learn that about one third of users don’t want to use their credit cards over the Internet. So I4’s potential customer base is easy to identify. But these people are really customers of I4’s customers, whose real clients are the online merchants like Walmart.com and others who use BILL ME LATER. This is handy since, in terms of marketing, I4 only has to reach a small number of website operators to become a viable business—its marketing is ‘one to a few’ as opposed to ‘one to many’. The latter has been the downfall of many Internet businesses since if you want to launch a B2C Internet business, the cost to acquire new customers can be prohibitive. Mass marketing/creating a consumer market is tough whether or not it is an Internet-based business or a brick and mortar business.
For I4, they have created a viable business with just 230 website operators (Business Week January 16, 2006) agreeing to use BILL ME LATER. I4 is now doing $1 billion worth of transactions. And getting 230 website operators to adopt BILL ME LATER is a matter of just making the calls. A good salesperson (in this case, it would probably be the CEO of I4, Gary Marino) can easily call 30 major operators a day and get at least 10 face-to-face meetings. Someone with a good track record like Mr. Marino (he has experience in the credit card industry) can probably get at least 4 customers to sign on out of every 10 F2F meetings he does. (A salesperson needs to have a longterm track record in the range of 4 out of 10, i.e., a .400 ‘batting’ average’, to make this kind of cold calling/warm calling marketing/selling work.) So the marketing dimension of this business is direct selling I would think.
Now who are the suppliers to a business like BILL ME LATER? It turns out the key supplier is a bank—JPMorgan Chase, who buys BILL ME LATER’s receivables. Without this support, the faster BILL ME LATER grows, the more capital it would consume, obviously an impossible model that would seize up.
BILL ME LATER works by asking consumers for three things—their name, DOB and the last four digits of their social security number. With this info, they can check the customer’s credit rating and approve/not approve the transaction in less than 4 seconds. The customer then gets a bill in the mail or by email.
From the customer’s POV, they have not had to disclose their credit card number and they get a paper record of their transaction (if they choose the option of a snail mailed invoice) and a grace period to pay for their purchase. One of the negatives I see in this is that every time someone pings your credit rating, your credit rating suffers a 2.7 point downgrade. So if you make a lot of online purchases using BILL ME LATER, your credit rating could suffer unless BILL ME LATER has made a deal with the credit agencies to avoid this. (The credit agencies, unfairly in my view, reduce your Beacon Score with every ping. Their reasoning, I suppose, is that you are looking for credit and the more credit you take on, the worse risk you are. But if, for example, you are shopping for a home mortgage and say five banks ping your credit rating, you could lose 13.5 points which is unfair. This is one of the reasons that Mortgage Brokers are taking more and more of the home mortgage pie—they ping your credit score just once and they shop it to 15 banks and lenders… I am guessing but you probably need a Beacon Score of at least 650 to use BILL ME LATER.)
I4 has a lot of ‘pixie dust’ or differentiated value in its business model that should create a sustainable business including: a) they undercut credit card issuers by charging their merchants 1.5% of transaction volume instead of the 2% to 4% charged by their competition, b) they give online customers a new way to pay that is exactly what they are used to in RL (Real Life as opposed to the Web)—an invoice either paper or email that they can pay by cheque or EFT, c) a form of bootstrap capital or bootstrap financing by selling their receivables instantly to a supplier (a bank), d) a one-to-a-few marketing dimension that can be easily handled by direct selling. Also, there probaly is some real first mover advantage for them. As consumers become used to seeing BILL ME LATER on websites, they will come to trust it.
Trust is the underpinning of all successful relationships (personal as well as business) and business ecosystems. People like to buy from people they like and TRUST. I think that by extending this trust to the consumer level of their bsuiness model, it will create a powerful dynamic that will ‘force’ their real customers (websites that market to the consumer) to turn to BILL ME LATER for another payment option for their customers. So while I don’t see any network effects operating here (where the network becomes more valuable the more people use it*), the trust factor could be a huge barrier to entry for potential competitors.
I am sure we are going to hear a lot more about BILL ME LATER; it’s clever. Now someone should start a Canadian or Euro or Indo or Chinese or Japanese version…
Dr. Bruce
* Search engines have that kind of dynamic going for them. Their search algorithms undoubtedly use frequency of search as one of the ways they rank websites, for example. So the more people who use, say, Google, the more accurate the search results are likely to be. An obvious example of network effects would be email or IM programs. Email wouldn’t be too useful if only a handful of your friends or business acquaintances had it. The fact that most IM programs can’t interact with each other certainly diminishes the value of Instant Messaging. It’s shame that AOL, Yahoo, MSN don’t get their act together and make them all inter-operable. The Multiple Listing Service (MLS.ca or MLS.com) are probably the most important competitive weapon that residential realtors have going for them. MLS.ca and MLS.com are certainly examples of network effects taking place in a big way. An older example of network effects would be facsimile machines. Again not too useful if there are only two or three faxes in your city or town but hugely useful in their day if everyone has one.