How Stripe can win the payments war in Asia

By Karen Mok for TechinAsia.com
Stripe is one of the most beloved startups in Silicon Valley. Stripe has been a definitive success in the US, but it’s looking beyond those borders in its next phase of growth. Asia is a clear contender – it has about half of the world’s smartphone users and is predicted to see the fastest e-commerce growth in the world in the years to come.

It’s backed by Silicon Valley heavyweights Sequoia, Andreessen Horowitz, Khosla Ventures, and PayPal co-founders Peter Thiel, Elon Musk, and Max Levchin. Stripe has been a definitive success in the US, but it’s looking beyond those borders in its next phase of growth. Asia is a clear contender – it has about half of the world’s smartphone users and is predicted to see the fastest e-commerce growth in the world in the years to come. But before we talk future plans, let’s take a moment to understand the present:

5 things about Stripe & the current state of payments

1. Payments has many pains

Dealing with payments is notoriously complex and time-consuming for Internet companies (called “merchants” in the payments world). Enter Stripe with its secure, easy-to-use APIs, which reduces merchant setup and integration time to a matter of minutes, thanks to instant approval and clear documentation for developers. Stripe has also simplified the fee structure to a set 2.9% + 0.30 per transaction (note: fees are different in international markets) and promises no setup fees.

Merchants also struggle with abandoned shopping carts on mobile, so Stripe rolled out a one-click, seamless checkout experience that promises higher cart to payment conversion rates, along with a clear dashboard and analytics for merchants. The recent launch of Stripe Relay lets merchants customize the payment interface to their business so customers can pay without ever leaving the merchant site. These features are important for anyone who’s ever tried booking the last plane ticket available and lost Internet connection as the page was redirecting.

2. Now’s the time

PayPal was the disruptor in the dot-com era, but we are now in a mobile-first world with double-digit growth in smartphone ownership in the emerging markets. This means high tide for mobile payments: as income levels rise in Asia, Africa, and Latin America, mobile-first transaction volume will accelerate. Not to mention the Internet companies that don’t even exist yet but are bound to have payment needs as traditional industries come online.

An ever-expanding market is a good place to be, but credit card ownership remains below 10% in much of Southeast Asia due to underdeveloped financial services  and stringent requirements for credit approval. Non-card based transactions (e.g., bank transfers, cash on delivery, mobile money) are far more common in the emerging markets.

3. But the winner takes all

Sounds like a world of opportunity right? It is…but it isn’t. Since the business model is a simple fee per transaction, volume is key. Currently competition is fierce between Stripe and Braintree, which was acquired by PayPal in 2013 for $800M. Both companies have positioned themselves as the go-to gateway for Internet-based payments, and now it’s a war to acquire merchants for transaction volume.

Recently Stripe locked down partnerships with social network giants Facebook and Twitter, in addition to working with Lyft, Postmates, Instacart, Squarespace, while Braintree has snapped up Airbnb, Dropbox, and Uber. Stripe’s social network route banks on a social commerce market size of $30 billion USD.

4. Regulation matters

Unique regulations in each country, and in some cases, states within a country, can really slow scaling velocity, but they are a necessary beast. Consumer confidence in using online payments comes from knowing their data is secure and false charges can be disputed.

In the best case scenario, the government establishes regulations that hold payment processors to a standard level of secure operation but doesn’t create unnecessary bottlenecks. In reality, online payments is a whole new world for governments, many of which lack the expertise to develop the proper legislation.

5. Payment as a Platform

Value is generated not only from the transaction itself, but also the applications that developers build on top of the core technology powering the transaction. In 2014, Stripe launched the GC Stripe Platform Initiative with General Catalyst Partners (one of the company’s early investors) to fund seed-stage startups that build new products on top of Stripe’s APIs. The availability and use of more Stripe-powered products and applications generates network effects that make Stripe a true payments ecosystem, not just a payment gateway.

How to win Asia

As Stripe expands, it has to assess market entry on a country-by-country basis due to the unique regulations and consumer behaviors in each market, particularly in a highly fragmented region like Asia. Here’s three ways to make it happen:

1. Look for the fundamentals

Stripe’s currently beta-testing in Singapore and is fully operational in Japan. I anticipate Hong Kong and New Zealand to be next. These countries already score high on these fundamentals:

• Clear regulation: Singapore is a clear leader here; one signal is collaboration among the government, banks (e.g., DBS) and mobile network operators (e.g., Singtel) to launch new mobile and online payment products that don’t face interoperability challenges. Another signal is a clear and efficient legal system for resolving disputes. South Korea, while being one of the most digitally connected markets in Asia, still lacks clear dispute resolution legislation, which makes risk of entry a lot higher. Everyone’s got eyes on India, but The Reserve Bank of India has a painful regulation that mandates customers to enter a two-step authentication password for every online credit card payment – a huge point of friction for recurring payments.

Stripe is one of the most beloved startups in Silicon Valley.

• Established financial services industry: This signals consumers have access to banking and card-based services, a prerequisite for consumers to obtain debit and credit cards. In countries like Thailand and Vietnam where credit card penetration is under 10%, alternative payment systems like SIM-based e-wallets are catching on fast to facilitate mobile and online payments for the unbanked.
• Consumer readiness for digital payments: Having the proper regulation and a developed financial services industry still doesn’t guarantee consumer adoption of online payments, as is the case in Taiwan. In Hong Kong, overall online payment volume is still low, but it’s likely this will change since consumers already trust e-wallets – most notably, the Octopus card, which started as a means to pay for transportation but is now accepted by over 7,000 merchants.
• High Internet and smartphone penetration: Here Vietnam, Indonesia, and The Philippines, while demonstrating consumer readiness for online payments, need to upgrade and expand Internet and mobile coverage if they are to unlock the full market potential of online and mobile-based payments.

While Singapore, Hong Kong, and New Zealand can serve as stable testing grounds, they are relatively small markets – the populations of Singapore (5M), Hong Kong (7M), New Zealand (4M) combined – 16M – is just a fraction of Indonesia’s overall population and less than a hundredth of China’s.

So should an international player enter a market when the fundamentals aren’t all in place? It’s going to be a strategic decision on a country-by-country basis: the upside of being a market leader in a high transaction volume market may justify the higher risk and cost of localizing the product and marketing for initial entry. Being a first mover doesn’t guarantee winner-takes-all, but note that switching costs for merchants in this industry are high.

2. Catch the big fish merchants

In this winner-takes-all market, everyone’s competing for transaction volume. So the logical step is to go after the big retailers that (a) bring the volume and (b) are likely to be around for a while. Currently Stripe only accepts merchants in countries where it operates, so Lazada (Singapore) and Redmart (Singapore) would be top targets. But the challenge for an international player like Stripe is the Alibaba / Alipay phenomenon: e-commerce companies, once they reach a formidable size, have the resources to develop proprietary payment platforms that are locally customized.

Case in point: In 2014, Lazada launched helloPay, which is being positioned as a PayPal-like e-wallet for Singapore, Indonesia, and The Philippines. Whether other retail giants Flipkart (India), Coupang (South Korea), Tokopedia (Indonesia), MatahariMall (Indonesia), and Zalora (Indonesia), all of which currently operate in non-Stripe supported countries, will make similar moves remains to be seen.

Here Stripe’s advantage over local payment gateways goes back to its core technology – the flexibility of its APIs and the ease of merchant setup have not been replicated. Building brand awareness and evangelism, starting with the developer community, about Stripe’s unique solution could do the company huge favors in merchant acquisition.

3. Localize with non-card payment methods

Everyone’s talking about Southeast Asia becoming the third-largest e-commerce market in the world, surpassing even the US.

But if 63% of e-commerce transactions in the region are non-card based, Stripe won’t be able to capitalize on this transaction volume without integrating non-card payment methods. I’d place my bets on e-wallets: in 2012 over 20% of e-commerce transactions were made with e-wallets in Asia Pacific and that number is expected to rise to 41% by 2017.

 

The go-to success story here is China’s AliPay (a spinoff from e-commerce site Alibaba) which processed thirty percent  of total global online payments in 2014. Note Stripe does support Alipay, so Stripe merchants can access the Chinese consumer base, although Stripe is not currently supporting Chinese merchants. AliPay integration is a must for China, but it’ll a different platform (and regulations) for Vietnam, Indonesia, Thailand, India.

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The cost of country-by-country customization can be high, but my confidence in Stripe goes back to the flexibility of their APIs. The ease-of-use, clear documentation, and support in multiple programming languages gives developers in each market the tools to build locally customized applications powered by Stripe, unlocking the potential for powerful network effects.

As we enter 2016, and as members of the tech community, we share an energy to tackle hard problems that will keep improving on human and digital interactions.

This is what makes the payments world so fascinating – for every problem or inefficiency, there’s at least one startup trying to make the process easier for merchants and / or consumers. But the economics of this space cannot be understated – it is a low-margin, high-volume, winner-takes-all market where deep pockets, accommodating regulation, strategic distribution and partnerships, and powerful network effects drive the dynamics.

Stripe is a clear leader in terms of product. If it can localize and acquire key merchants in the region while accounting for slower-to-move regulations, it stands a strong chance of being a winner.
The article first appeared in TIA.com