Split Payments (part one)

A letter to all entrepreneurs with the following interests/aspirations: Web 2.0, payment systems, saving money, executing quickly and being successful.

Dear entrepreneurs,

Please take two minutes out of your caffeine-fueled workdays to consider the following facts:

Fact: Building a payment system that’s similar to PayPal from scratch—even if on a much smaller scale and with only a handful of features—is a bad idea. You’ll get schooled by Nigerian fraudsters before you have a chance to build your risk models, lose all your money, and be forced to avoid returning phone calls from your investors. Do not attempt this.

Fact: There are a ton of opportunities, untapped business models, and extremely interesting mash-up components lurking within the PayPal feature set. If you’re serious about creating a payment application, executing on ideas quickly, and you realize that it’s usually a cash-drain to reinvent the wheel, then consider using PayPal for your backend and continue reading.

Fact: PayPal web services are largely utilized by developers who are working on storefronts and traditional, retail ecommerce projects. There is so much more potential than retail ecommerce sitting within those api’s. Write the functionality of each api down on a note card along with some of the other amazing api functionality that can be found these days (think Amazon, Google maps, etc., etc.), and mix them up all over your kitchen table. Draw 3-5 cards at random and attempt to create a product idea from these combined functionalities. Some ideas will be horrible—others won’t.

Fact: Mash it up. Consider a payment experience that could be better designed, feel safer, be faster, easier or just more fun. Solve your payment processing problems with PayPal, and season lightly with a blend of complimentary 3rd party api seasonings.

Fact: It won’t take long before you come up with a great new business idea. You’ve talked to your partner who has agreed to code it, and he’s fired up because not only is his work going to be pretty easy—he doesn’t have to learn to create risk models. You will begin to calculate pricing, taking into consideration PayPal’s fees and the cost of passing funds between your PayPal account and the PayPal accounts of others. You will figure out how much you’ll need to charge your customers in order to cover all your PayPal fees and still carve out a nice margin for your new business.

Fact: The price you will need to charge to make a buck on your new idea will be way too high! After scratching your head, you will go back to the calculator and come up with the identical numbers. After looking at the PayPal fees more closely, you will start to feel like PayPal is double taxing you. Are they?

Let’s explore a likely scenario and attempt to answer that question:

- A payment is received by your new web application, and subsequently your company’s PayPal account (PayPal charges 2.9% plus $0.30 *)

- You immediately transfer what is left, minus your fees, to a customer account (PayPal charges 2.9% plus $0.30 *)

You can already see we’re up to almost six basis points and some change before you even seen a margin. That’s going to be a tough price point to sell, I think.

You’re probably frustrated and ready to give up on creating the next great thing by now, right? Well, don’t be. There is some light at the end of the tunnel. Read part two where we cover the concept of split payments, how it ties into all this, as well as a valuable hack that can be used to solve some of these problems.

*Note: These pricing scenarious were constucted using PayPal’s most expensive price tier. See PayPal’s fees page for an accurate estimation of what your fees would be.

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