To the Technorati, Perspective Please on Payments Start-ups

by George Peabody 0

Almost every day, one of the tech news oraggregation sites like Tech Crunch or Tech Meme features a storyabout a payments industry start-up that ends with some enthusiasticline about ‘how hot payments are’ or that someone’s ‘on a roll.’ Afew start-ups stand out. For much of the last year, driven by thepower of Twitterverse stardom and a compelling model, Jack Dorsey’sSquare has received regular coverage in the blogosphere -as well aslove in the form of new investors. During the last month, Dwollahand Bitcoin have received no little attention for the newmilestones they’ve achieved.

For example, cash-to-virtual provider Dwolla, just went over the$1 million a week threshold. Square is operating at a $3 millionper day rate. Compared to where they were just months ago, thoseare great numbers to put up on the board. And it’s great to see newplayers obtain traction.

But, it’s important to keep this growth in perspective. What’sbeing reported here, to state the obvious, is the value of alltransactions handled by the provider. But if you’re an investor -or an owner – you have to consider how much actually sticks to theorganization. Square charges 2.75 percent per transaction, withapproximately the first 2 percent of that transaction fee goes intothe card networks and financial institutions. Square’s grossrevenue comes from the remaining 0.75 percent. That means Square’skeeping around $20,000 a day to go toward its operating costs.That’s an $8 million annual run rate. Impressive, but still a longway from meriting the $1B valuation supporters claim for Squaretoday.

Dwolla’s doing $1 million a week. Dwolla only charges 25 cents pertransaction to the recipient. That’s it. Let’s assume the averagetransaction size is $10. It could easily be an order of magnitudehigher, but let’s start with $10. That’s 100,000 transactions,translating into $25,000 in weekly revenues to cover its ownoperating costs. If the average transaction size is $50, thenDwolla is keeping only $5,000 a week.

I’m not trying to rain on the parade that these start-ups arecreating. They know how tough it is to make it. They can look atBling Nation’s travails and read the signs. It’s a toughenvironment.

The media cheerleaders, however, need to keep things inperspective. The transaction volume is one measure but it’s not theonly one that matters to the organization’s success.

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