Innovation in the payments space is harder than in most markets: it requires pushing boundaries from both a technological as well as a regulatory standpoint. Naturally, as we look at less technologically-oriented companies (like major banks), this problem becomes more pronounced. Because they focus on providing services to well-established businesses, not a fast-moving base of start-up clients, they aren’t required to challenge the status quo or relentlessly root out inefficiencies in existing systems.
Ironically, while major banks have significant clout in discussions with regulators, it’s becoming increasingly clear that start-ups, not banks, are the ones driving changes in regulation to accommodate innovative products. In 1999, PayPal changed the face of online commerce and drove the direction of much of the online payment regulatory landscape. Today small but fast-growing companies such as Square and my own, Stripe, are challenging areas traditionally dominated by large financial institutions.
Innovation comes from the ability to respond quickly to changes in the market and environment. While talking to companies in the collaborative consumption space, we learned that much of their operational overhead came not from accepting payments, but from disbursing funds to the supply side of the marketplace: Lyft, a ridesharing app, needed to send funds to drivers, while Postmates, a mobile delivery app, wanted to send money to couriers. So in less than four months, we developed and launched our Payouts product. Rather than undergo a time-consuming and error-prone process of sending manual payments through their banks, marketplaces could now manage multi-party payments with a few lines of code.
Banks have seemed wanting in agility and innovation in financial technology, especially when it comes to that used by sellers. Why is this? We think these banks are in the doldrums thanks to a lack of emphasis on technical expertise (including reliance on outsourced technology). They are ignoring the very telling leading edge of the market and failing to empower the types of people who drive progress.
Stripe has benefited from living directly in the center of a generation of entrepreneurs, who are pushing technology boundaries. In order to understand the developments of the market and build products that solve needs and drive change, you need two-way interaction with fellow disruptive businesses. By narrowly focusing on existing big players and large accounts, banks have lost the connection with those who inspire innovation.
Stripe, whose investors include Peter Thiel, Max Levchin, Elon Musk, Sequoia Capital and Andreessen Horowitz, is available in the U.S., Canada and the UK and is in private beta in Ireland and France.