With rabid coverage on every major tech site, only Turkish prisoners and my parents could have missed the most important product launch in startup history. No, it wasn’t a cure for cancer or even irritable bowels . It was Coin. What is coin? As if you didn’t know… It’s an electronic payment card that stores your other cards so you never leave home with a lumpy wallet – crammed with ways to pay for things. It’s a complex, stopgap solution to a fluffy, bourgeois problem. Even though I’d been pitched several similar solutions at MasterCard, Citi and American Express, I’m not immune to Coin’s novelty and elegant execution. But I also know that no merchant or ATM can accept Coin without violating piles of payment network rules. This left me with two questions: how did this novelty product get so much instant, gushing coverage? More importantly, what could Coin’s strategy be? I have an interesting theory.
The Product Challenge
Coin is in pre-release so it’s hard to know much about real-world performance. From the demo, it looks like a big improvement over the clunky options I’ve seen before. But I wouldn’t expect any less from a good design team with access to today’s development tools.
It’s clear these guys know what they’re doing. So they must also know that Visa, MasterCard and American Express have all kinds of rules for logo placement, holograms, raised lettering, CVC codes, expiration dates – even card thickness. Many are for fraud prevention. Others are for branding. Regardless, ATMs and merchants must comply. If a store accepted a Coin payment that proved to be fraudulent, the merchant would bear the risk – unless Coin offered is own fraud protection. In other words, as things stand, no merchant can accept this card without risking cash or the vengeful wrath of the payment gods.
The idea of handing consumers the ability to program existing payment cards onto a secondary card is almost exactly how skimming devices work (minus the fancy smartphone integration). The opportunity for fraud could be off the charts. Coin’s website addresses it this way:
The Coin app requires that you take a picture of the front and back of the card, type in card details, and then swipe the card (using a reader we provide) to ensure the card’s encoded magnetic stripe data matches the card details provided. It is not possible to complete these steps unless you are in physical possession of a card. As an additional safeguard, the Coin app will only allow you to add cards you own.
Is it a good business?
If there were no obstacles, it’s clear what’s in it for Coin. Like Paypal does online and Square does with phone dongles, Coin wants to wedge itself into a direct consumer relationship. Power lies with whoever has the most direct relationship with consumers (or merchants as with Square). As soon as enough consumers toss their Visa, MasterCard and American Express cards into Coin’s backseat, Coin can offer its own payment services and incentivize people to fund their purchases with low cost bank transfers instead of credit cards.
Will consumers want it? There is definitely a small group of relatively rich, tech-savvy early adopters who will love this idea. But in the hierarchy of problems, consolidating multiple cards is an afterthought. I doubt if enough people who have this “problem” are technically savvy enough to use Coin’s solution.
One lesson we learned at Amex with the Zync card is people don’t want to be that involved with their payment instrument. It’s a means to an end, not an object of desire. People do change behavior when there’s a big enough incentive. Starbucks got huge adoption by offering perks for using their payments app. But Starbucks has broad distribution and a habitual relationship with customers. After its first set of early adopters, Coin will need to scramble for $100M+ of VC money to fund marketing and incentives – unless Coin finds a partner to help distribute the cards.
The Napster/YouTube Strategy
To me, the most interesting part of Coin’s story is its go-to-market strategy.
Payment network rules are a deal-breaker for Coin. It needs all three networks (and likely some ATM networks) to change their rules to gain adoption. So their direct-to-consumer PR blitz was Coin’s only choice. If they can demonstrate demand, they can get investors and some leverage with the networks.
The strategy is not unlike Napster and YouTube. Napster created a platform for trading music illegally. When The Man came down from the mountain bearing subpoenas, the company tried to negotiate “going legit” but failed. They built up too much animosity from the establishment, which held on to power until Apple’s iTunes came along. Apple’s iPod was so popular, music companies could no longer fight the inevitable.
Like Napster, YouTube systematically tolerated copyright violations. Unlike Napster, it ultimately succeeded. YouTube racked up massive traffic with other people’s content. It took years and many legal battles to set up a system to take down unauthorized content. In the meantime, traffic grew, the company got acquired by Google, and litigants became content partners. Free porn clip sites followed the same exact pattern.
When viewed through the Napster/YouTube lens, it’s easy to answer why incumbent networks might take a wait-and-see approach. They hold the legal cards in their pocket. (Perhaps they could store all their legal cards on a single card with Coin…) In the meantime, Coin has one shot to make its case – directly to the people.
To Partner or Not to Partner?
It’s hard to know exactly how many payments executives are still clinging to the dream of a world full of plastic cards being slid or tapped for ever and ever. (For a long time, I knew quite a few.) I’m not one of them. One of the first projects I did when I joined Amex in 2007 I called, “Value of the American Express Brand in a Cardless World.” I don’t believe payments are moving to a single, consolidated card. Nor are they moving to NFC chips. Even smartphones are a stopgap. We are moving to a completely cardless world. I’ll cover that in a different article. (Sign up here for my updates).
So if I were back heading innovation at one of the big payments networks, there are three reasons why I probably would pass on Coin:
- It’s a stopgap technology. If you believe the world will be cardless, as I do, Coin starts to feel a lot like investing in Blockbuster, circa 2008. Of course you could make the Netflix argument. Netflix first offered video rentals by mail, even though it always knew broadband would eventually move their entire business online. After all, they didn’t call it MailFlix. They were designed to evolve. Maybe Coin is too, but a physical unicard wouldn’t be my starting point of choice.
- A single partnership could ruin Coin. Multiple partnerships would empower it too much. I love to see innovation and competition and hope coin can develop a model that lets it challenge the big guys. But partnering with one network hurts Coin’s chances of getting cooperation from competing networks. So Coin must operate independently and convince all the networks to play. Or it can try to get an investor like Chase or Citi, which issues multiple cards, to use its clout to champion adoption. Both are long shots.
- A developer doesn’t build an app for a phone platform that doesn’t have customers. (I won’t name any names.) It’s not a good use of time or resources. Same goes for Coin. The burden of proof is on them to get enough traction to attract partners to their platform.
Oh, about that PR
So how did Coin get all that synchronized, positive coverage? It appears no pets were harmed. According to reports, Coin is backed by the well-connected Y Combinator accelerator, Twitter/Square founder Jack Dorsey, and former Google Wallet chief Osama Bedier. It never hurts to have a little Silicon Valley magic on your side.
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(Re-posted from Steve Faktor’s original on Forbes.)