Warning: this is a bit of a rant. Earlier this year there was news of Smashwords’ troubles with Paypal, now there’s Unglue.it’s problem with Amazon. The common thread is that in the modern digital economy, payment processors wield massive levels of power. If you run an online business and the likes of Paypal, Amazon and Google refuse to process your payments, you’re pretty much sunk. This applies to ebook publishers and pretty much anyone else looking to sell items online, and the problem seems to be getting worse.
Sites like Amazon, Smashwords and Barnes & Noble don’t just puts indie ebooks in front of customers. They also handle the payment processing. If someone buys your ebook at Amazon, Amazon collects the money, takes its share, and passes the rest on to you. That might not sound complex, but it’s actually a hugely beneficial service that saves most authors from having to go through the process of setting up an account with a service such as Paypal. Amazon is in a very strong position here, because almost everyone has an Amazon account, and because people tend to trust Amazon with their payment details.
But what if the big fish in the payment processing industry decide they don’t want to handle payments for your goods? For most people, there aren’t many options. Having power consolidated in the hands of a few entities might seem convenient, but when there’s a problem, it’s extremely difficult to find a solution. Consider, as an example, the case of Visa at the London Olympics. With Mastercard banished, customers had to use cash or Visa cards, but when the Visa system suffered a problem, many people were inconvenienced.
Competition is healthy and necessary in most industries. But when it comes to online payment processing, there’s very little competition. Paypal zoomed in early and gained considerable market share, although as Smashwords and other sites have discovered to their cost there can be considerable difficulties when it comes to dealing with the service. Paypal was a revolution, but over time its security features have arguably become too onerous. As someone who has sold a few items on eBay over the years, I can say that Paypal gave me a few headaches. Rivals such as Moneybookers and AlertPay haven’t really taken off to the extent that they offer a serious alternative, while e-currencies such as Liberty Reserve and Bitcoin remain very much niche services.
Amazon has its own payment processing service, as does Google, but neither are really as widespread as they might be. Google once considered launching its own Google Bucks currency, but found the legal obstacles to be too great. And therein can be found one of the biggest problems with pretty much every online payment system: they’re all tied in to the ‘old’ system of dollars, pounds, euros and other real-world currencies. A true online currency still hasn’t made it big, although early adopters of the likes of Bitcoin remain hopeful that a breakthrough could arrive soon.
As the online payment processing world remains wedded to real-world currencies, it also remains wedded to a small group of companies who deal with the vast majority of transactions. I’m talking here about companies such as Visa and Mastercard. Not knocking them, but they do wield considerable implied power. The recent example of Wikileaks is cautionary: the whistle-blowing site was left virtually unfundable when Visa and Mastercard stopped processing donations. You don’t have to be a supporter of Wikileaks to recognise that this means power is, once again, concentrated in the hands of just a small number of companies.
To truly escape this monopoly, a new company would have to build its own network from scratch. The barries to entry are so high that they’re almost impossible to breach. Consider how a new company could set up an ATM network to rival the existing system. Then there are regulatory pressures. For various very understandable reasons, the global financial system has safeguards in place to try to prevent money reaching the hands of terrorist groups. These safeguards perform a valuable service, but are they applied in the most effective ways? Any new payment system that sought to rival the traditional processors would risk being viewed with great suspicion by regulators around the world. Would new processors even be allowed to operate in many countries?
What we need is choice. We need a new service to disrupt the moribund payment processing world and encourage innovation. We need this to happen in a climate that doesn’t view any variation from the norm as suspicious. Otherwise we’re left dependant upon a small core group of companies that could, at any moment, pull the plug. If you’re making money from your ebooks, this is an important business issue. For now, there seems to be no obvious solution on the horizon. It’ll be interesting to see what happens with Unglue.it. Will they find a payment processor that is willing to bend to fit their needs? Or will Unglue.it be the ones who have to bend to fit the demands of their new processor?
There are plenty of payment processing companies out there besides the ‘big three.’ Authorize.net is one I’ve used in the past and was very happy with. All one has to do is google “internet payment processing companies” and there’s a host of them.
Posted by beatbox32 | August 9, 2012, 4:04 pmThere are lots of companies that do credit card processing if what you need to to run immediate transactions; there are very few that support delayed transactions (i.e. pledges that are charged only if some condition is met), which is what a crowdfunding site like ours requires. (Google is not one of them.) We’re looking into alternatives , but this is not, in fact, an easy problem or a competitive space.
Posted by Andromeda | August 9, 2012, 7:51 pmI totally agree with your rant. The only thing that came to mind as I read it (I am an ex banker so maybe just my slant) was that those payment systems do know the risk they take wielding this power. Every time they deny service or try to impose restrictions based on moral grounds, they make the case for a competitor. It doesn’t just happen in the virtual world. I recall when and American company bought MasterCard and suddenly their non US customers couldn’t use credit in Cuba.
Posted by PA Wilson | August 9, 2012, 5:44 pm