Security Notes: The New Age of Consumer Leverage

Gideon Samid • Gideon@bitmint.com

Membership organizations customarily leverage their “numbers” to extract deep discounts from merchants. Now, the emerging digital-payment reality offers the same opportunity for ad-hoc assemblies of buyers.

Suppose you are in the market for an iPad mini, and you find it in your favorite online store, priced at $375. Before you click the “buy” button, you might click the “compare” button offered by a resident app. Right away, you see the prices offered by competing retailers. Since you will get the iPad delivered to your doorstep any way, and since what you buy is standardized (all iPad minis are the same, no matter where you buy them), you would likely click on the least-expensive option.

Today, the multitude of consumers fails to leverage the power at its fingertips. Instead, ignorance prevails. However, this power—this leverage—is there for the taking. A company could use the same Internet that generates mass consumer hysteria to benefit single-minded consumers by leveraging online retailing, mass prepayment, and secure transactions.

Today, this leverage is mostly on the retailers’ side. They have copied the airline industry with fast-shifting prices. Online offerings change on a dime. Data-mining engines and “big data” predictions guide retailers to very scientific pricing strategies. All of this not only favors the retailer, it exploits the instant-gratification-seeking consumer, who is not likely to bother to compare products and prices, even though he can do it without climbing out of his cushioned seat.

Innovation, though, is erratic. The scales are expected to shift dramatically, and it is possible that retailers will be shut out of the hit-product market. Emerging businesses—we might call them “leverage companies”—plan to offer consumers who are willing to wait a day or two the advantage previously reserved only for unions and various membership organizations.

Here’s how it might work: Since many people at any given time are in the market for a hot item like the iPad mini, the leverage company will propose that you pay it, say, $350 for the gadget (a price below anything offered on the market today). If, say, 5,000 consumers respond to that offer, the leverage company will amass a cash pile of $1.75 million. With the lure of this ready cash, the leverage company then approaches all the vendors of the device, stating: “We can instantly transfer to your coffers $1.7 million, along with 5,000 addresses so you can send an iPad to each. Are you game? Make up your mind fast because we are offering your competitors the very same deal.” Once accepted, the leverage company pockets $50,000 from this one deal. Call it a middleman fee.

The consumer gets a real good price, the vendor gets a wholesale-size sale, and the leverage guy gets his middleman fee. The leverage company assumes the raw payment burden: verifying the identity of the buyers, exercising the required security measures, and handling complaints and disputes. This burden shift is a big help for the vendor, and justifies the leverage fee.

Payment-security expertise will be needed in this newly conceived payment entity. Many security questions will have to be answered before this leverage concept can fly mainstream. Security will become even more important as time goes on. That’s because, as payment becomes more native to cyberspace, we should expect a whole slew of derived businesses to spring up.

Such mass prepayment may become a powerful force in the payment landscape, and it might not take long. One may envision a future where all popular items and all commodities will be transacted without traditional retailers. The wholesaler will ship directly to the consumer. And since the fees collected by the leverage companies are flexible, one may expect a growing number of such companies competing with each other—all for the benefit of the consumer.

The leverage company might offer options. If you can wait longer for that iPad, you might pay only $330. It might take longer, after all, to get a vendor to agree to that price. And the price may have to be supported with a larger number of buyers, which will take longer to assemble.

The key to this leverage concept is the mass pre-payment. The lure to the vendor is the instant, ready cash: no money back, no regrets, no messy dispute-resolution with card networks and obstinate consumers. Indeed, this could be seen as another application that will come to full force once the payment paradigm shifts to digital cash.