Payoneer Part 2: How Payoneer Can Build Moats in China?

Part 2 of Payoneer China. Explore some of the ways Payoneer can build moats in China. Part 1 is here

Key takeaways:

  1. Use the following moats as a framework to find and analyze competitive advantage for Payoneer China. The moats applied are : (i) Intangible Assets (ii) Network Effects (iii) Cost Advantage (iv) High Switching Costs.
  2. For intangible assets, consider reward points and perks for different status. For network effects, consider leveraging Payoneer’s international presence. For cost advantage, consider integration cost advantage. For high switching cost, consider leveraging data and software build out.

I started this journey from cross border payments, to how cross border payments companies can enter china, to look at one of the success, Payoneer. This is part 2 of my deep dive on Payoneer.

In part 1, I gave a general overview of the industry, in this article I will attempt to apply ideas as frameworks to further analyze.

ote: I am not affiliated with Payoneer. But I do applaud its success in entering the tough China market especially for a fintech payment company. And I do believe such success deserves a case study.

The Economic Moats

The oracle from Omaha, Warren Buffet, has famously used the term “economic moat”:

“In most businesses you see high returns on capital decrease over time as competition comes in. However, there is a very small minority of businesses that enjoy many years of high returns on capital. They essentially beat the odds. They defy economic gravity. And the question simply becomes, how? And in my view, it’s because they’ve created structural advantages, economic moats — a way of insulating themselves, buffering themselves against the competition — which enables them to maintain supernormal returns on capital longer than academic theory.”

Pat Dorsey from Dorsey Asset Management describes four major ways a company can establish an economic moat: (i) Intangible Assets (ii) High Switching Costs (iii) Network Effect, and (iv) Cost Advantages.

Next, let’s see how we can apply these moats to Payoneer.

Apply Economic Moats to Payoneer

First, we have to recognize that any talk about the moats / competitive advantage is pointless without a solid base. And the base for payment revolve around: cost, speed, and convenience:

I have talked about this base in part 1, so we will focus on what we can build on top with the economic moats:

Intangibles Assets:

First, the intangible assets. Intangible assets mostly refer to brands, licenses, or patents. Let’s look further at brand. Brand or “the brand effect” is hard to achieve in the highly commoditized digital world. Let me clarify, brand itself doesn’t equal asset, but only brand that produce value.

But how do digital oriented app or companies create brand value? In Banking on Status, Julian explains that certain products is able to charge a premium due to the social status it signals, such as the Rolex vs Casio watch:

Source: Bank on Status

Both watches tell time, but one is ~100 times more expensive. Even if you put in the same gold or platinum and engineering into the Casio watch, it wouldn’t have commanded the same premium as the Rolex. Why? Because the “Rolex watch brand” portrays exclusivity, not everyone is willing to spend over 10’s of thousands on a watch. It’s signaling a social status of success, and frankly makes those who wears it feels good. I know this is kind of vain, but it works! This kind of “feels good” is missing in most of digital driven apps or companies. How can the brand make its users feel good to want to be associated with it?

First, take a cue from airline and hotel rewards program. These programs serve the purpose to keep users within their system, and to make users feel good with the different status tiers: silver, gold, and platinum. Points can be exchanged for free flights or free stays. Getting to a higher status comes with perks like free upgrades and shorter wait for check-in.

Second, let’s look at how do European digital banks, a digital native entity, make their users feel good. From Banking on Status, Julian explains that European digital banks are able to charge a premium through subscription model and the draw is the social status signaled by their metal cards.

Metal card is advertised as “Make a statement”

A significant part of the value is the “social coolness” factor of a metal card when taking it out for daily use. Though credit or debit card usage is a lost cause in China, there is still appeal for Chinese who travel internationally. Just need to make sure there is no fees and users can spend at the interchange rate. Other benefits such as airport lounge access or travel insurance can still be applied as perks for higher status.

Last, let’s borrow from luxury brands on how it generates exclusivity by inviting their guests to exclusive events. There are industry related events hosted by Payoneer such as the Payoneer Forum. But these events are becoming table stakes due to competition. In order to make users feel good, should consider events such as access to sold out concerts, sporting events, movie premiers,…,etc.

In summary:

  1. Points program to keep users, and create different tiers: silver, gold, platinum
  2. Reward for the points can be free tickets, free hotel stays, or free vacation, or exclusive access to events
  3. Different tiers will have different perks, such as free access to airport lounges. Assuming travel is a big area of interest for target users.

Network Effects:

Network effect refers to companies with moat that makes it harder for others to enter due to the amount of capital and effort required. For example, one of the moat Amazon has is its massive number of warehouses that makes it very hard for any competitors to set up another FBA (fulfilled by Amazon).

In part 1, I talked about how Payoneer can bring together its international presence, like a global expansion consultant, to help the Chinese sellers expand globally.

Another example: to help sellers grow and to further build out the Payoneer network, Payoneer can bring more trusted suppliers into the eco-system. Notice the word “trusted”. Payoneer can leverage its local resources to vet and ensure quality of the suppliers, so that its customers, the online sellers, don’t have to do so individually. This can truly help sellers find the right suppliers and bring value of the network.

Cost Advantages:

Cost advantage typically refers to business able to provide services at lower cost than competitors. This can be achieved by a number of ways, such as better technology, unique assets, or better access to resources.

One of the main reason BaaS (banking as a service) is so popular is “implement once and use every where”, resulting in dramatically lowered the cost and entry threshold. This led to financial services popping up in everywhere, called embedded finance. Borrowing the same idea from BaaS, Payoneer can achieve similar effect with integration. The integration can be with marketplaces, social platforms, freelance platforms, ERPs, accounting systems, payment systems, or any other related services. Let’s call this IaaS (Integration as a Service).

One of the best example of Payoneer’s IaaS, and I would be amiss here if I didn’t talk about it here is Payoneer’s latest acquisition, Optile. Optile is a payment orchestration software that help sellers seamlessly integrate into local acquiring solution. With everything moving to cloud and abundance of APIs, Optile not only shield users from having to choose from the many options available, but also allow users to take the advantages of different products. For example, I can use product A for my normal transaction fraud check, but product B for special case like charge-back fraud check. There is saving at multiple levels. Payment orchestration can save money for users with smart payment routing (logic that routes specific transaction to the cheapest processor), as users don’t have to integrate with each solution provider individually, and as users are not high jacked by a specific vendor.

Though I like to keep my articles short, it’s worth to explore IaaS further. Ben Thompson from Stratechery called Stripe The Platform of Platforms:

The above graph shows the current Stripe, but Thompson believes that Stripe’s full potential is below with different types of platforms:

This is why Stripe is the hottest pre-IPO fintech valued ~$100 billion. Though different business than Stripe, I believe Payoneer can achieve similar effects with IaaS. While Stripe enables platforms with financial services, Payoneer enables businesses to transact and grow internationally. Stripe makes it simple for merchants to accept payments, Payoneer makes it simple for business to accept payment internationally. And I believe cross border payment will grow faster that local B2C payment as the trend we have seen during the pandemic continues.

Payoneer IaaS Layer

In summary, Payoneer’s integration layers can reduce the costs for its users at multiple levels and achieve cost advantages. Just like BaaS (such as Stripe) allows any company to seamlessly enable financial services, Payoneer’s IaaS should allow any company to seamlessly integrate with platforms and accept payment anywhere in the world as well as integrate with their internal systems.

High Switching Costs

High switching cost can provide competitive advantage for business. Some clients will stay with a product due to high switching cost even though there are better products (cheaper or more features). For example, Americans are known to not want to switch bank accounts due to the hassles involved. A number of software vendors also enjoy this advantage as companies don’t want to re-train their staff to the new software. After all, human are creature of habit. Hence, One of the way Payoneer can create high switching cost is by building out its product offerings.

Another key piece to high switching cost is the usage of data. Currently, Payoneer only offers cash advances for Amazon and Walmart sellers, but can expand such service by leveraging users’ transaction value on Payoneer to figure out the right amount of working capital to provide.

At last, Payoneer can use the status and perks that was set up in “intangible assets” to make the switching cost high especially for the bigger clients.

To summarize, Payoneer can make the switching cost high by building out its software features, leveraging data, and offering loyalty programs.

Bring it together:

Based on the 4 areas of economic moats, we made the following recommendation:

  1. Intangible asset: establish reward points and perks for different status.
  2. Network effects: leverage international presence, and build out a stronger seller and supplier network to help sellers grow
  3. Cost advantage: create integration as a service (IaaS) layer to enable users seamless payment acceptance worldwide.
  4. High switching cost: build out more software features and leverage data.

These are initial ideas. The right use cases require more extensive user research and interviews. After all, to create these moats will require serious resources and capital, and it’s important to tackle the lowest hanging fruit first to maximize output.

passion for #fintech #payments #RTP real time payment #Banking as a Service #digital strategy #blockchain