How to Tell Which Next-Great-Thing Will Be the Next Great Thing

Separating probable success from probable failure, in four handy rules.

Every October, the payments hype machine goes wild. A variety of next-great-things are about to dominate headlines and conference agendas. Most will die off quickly, so here are four rules you can use to focus in the right places:

Talk isn’t just cheap, it’s a red flag

Speculative business models fail frequently

Transformation is a rare event

Big companies speculate

 

Let’s take these one at a time:

Talk isn’t just cheap, it’s a red flag

Hype is inversely correlated with demand. Companies in demand don’t need it. Hype follows a cycle:

Step 1: Launch a new product or company.

Step 2: Be as visible as possible in every conference, trade magazine, social network, and market-research report. Produce white papers outlining how your product will be transformative. Outlandish claims get attention, so be grandiose.

Step 3: Stop spending money on hype and do some deals.

Many companies never make it to step 3. The companies worth your time are step-3 companies.

Speculative business models fail frequently

Always remember these two tests:

Test 1 If the company can’t clearly explain what it does, and do so in a few sentences with examples, that company will not make it to step 3.

Test 2 If the examples it provides are not current, tangible, and monetizable, it’s likely to fail even if it does make it to step 3.

Companies that tout technology, but can’t describe a clear target market, or a clear problem that it is solving, or a simple use case that makes sense and aligns with real, monetizable needs, are extremely common and not worth your time.

Transformation is a rare event

The big payments success stories of the recent past—Adyen, AliPay, PayPal, Square, Stripe, M-Pesa, and Tencent/WeChat Pay—result from filling previously underserved needs, not from transforming well-served needs. Adyen made selling internationally accessible at the same time that Google, Facebook, and Twitter were making global marketing more achievable. AliPay and PayPal made e-commerce payments accessible at the same time that e-commerce was exploding. Square and Stripe devised new products that enabled cost- and risk-effective ways to serve previously ignored startups and micro merchants.

M-Pesa and WeChat Pay leveraged mobile devices to create electronic payments systems in cash-based economies that lacked payments infrastructure.

None of these companies transformed an efficient, popular solution.

Big companies speculate

Adoption of a new solution by large companies is not an indicator of future success. A next-great-thing achieves mainstream adoption when both profits and growth are prevalent. Beyond that, large-company adoption lends credibility and staying power, but it does not constitute confirmation.

Apple’s 2014 adoption of near-field communication for Apple Pay is a prime example. It helped solidify NFC as the technology of choice for in-store mobile payments, but it has not guaranteed success. NFC-based wallets have proven to be a low revenue, slow growth, highly speculative market.

Let’s apply these rules to some of the products that have already been hyped as next-great-things and derive some conclusions:

Case One

Blockchain and cryptocurrencies

Talk isn’t just cheap, it’s a red flaG

Extreme hype and speculation drove Bitcoin prices to a peak last December. Hype and prices have trended downward ever since. It’s quite possible that the turn in December marked the point where blockchain moved from stage 2 of the hype cycle to stage 3.

Speculative business models fail frequently

In 2014, a venture capitalist told me his blockchain investments would pay off when a country in crisis adopted Bitcoin as its national currency. I’ll call that a speculative expectation, as is any of the following:

1. Payment-acceptance companies enabling cryptocurrency acceptance, even when there is virtually no consumer demand for cryptocurrency payment.
2. Companies using cryptocurrencies as funding vehicles, such as using initial coin offerings to raise capital to build their businesses, which will eventually enable transactions using their currencies.
3. Companies touting cryptocurrencies or blockchain as their product.

Look for real solutions to real problems, like managing payments that the banking system doesn’t handle well. International transfers are expensive and tedious and domestic cannabis sales are cash-based due to federal regulations. They are underserved needs that can be served through blockchain and cryptocurrency solutions.

Big companies speculate

There are many large companies investing in blockchain. The list includes Apple, Google, IBM, Microsoft, Oracle, Bank of America, Chase, and Wells Fargo. Yet when you Google “blockchain success stories,” you can’t find anything less than six months old. The few stories to be found are loaded with words such as “trial” and “potential,” “explore,” “research,” “pilot,” and “venture.” Billions have been invested in blockchain but it’s tough to find a single success story.

Conclusion

Blockchain hysteria seems to be ending. There is a very small set of realistic use cases for which monetizable products can be built. Focus on those and ignore any company that promotes technology or currency first and value-delivery second.

Case Two

Digital wallets and peer-to-peer (P2P) payments

Talk isn’t just cheap, it’s a red flaG

PayPal has included P2P payments in its digital wallet since the beginning. Braintree acquired Venmo’s digital wallet and P2P payments service in 2012, which PayPal in turn acquired in 2013 when it bought Braintree. Square launched its P2P payments service (Square Cash) in 2013. Google has been iterating through digital wallet and P2P payments solutions since at least 2011. Visa has been enabling P2P solutions also since at least 2011. Apple launched its wallet in 2014 and its P2P service in 2017.

Digital wallets and P2P services have been around for a long time. Their hype cycles are over and the step-3 companies have been identified. Today’s media coverage focuses on growth driven by Square Cash, Venmo, and Zelle. That’s not hype.

Speculative business models fail frequently

Digital wallets and P2P payments are not monetizable. Banks and payment networks are blocking wallet providers from earning revenue through merchant payments. Consumers aren’t willing to pay fees to pay their friends.

To monetize wallet payments, wallet providers need their own acceptance networks. Only PayPal has that. There is no proven way to monetize P2P services. PayPal and others use P2P services to attract customers and funds that can be monetized through other products. As standalone products, digital wallets and P2P services are very speculative. They can, however, serve as efficient sales engines for companies with complementary, monetizable services.

Transformation is a rare event

Digital wallets and P2P services seek to transform multiple services. Transformation of efficient, popular solutions is rare, but profound success can come from filling previously underserved needs. Digital wallets and P2P services do some of each:

1. NFC-based digital wallets seek to transform in-store payments performed through card taps or dips with phone taps. This is an effort to transform a well-served, efficient, and popular product (payment cards).
2. P2P payments compete with checks and cash, both of which are outdated, inefficient payment media. Digital P2P payments is clearly an underserved need.
3. Online digital wallets improve Web-based and in-app checkouts by automating the payment process and providing security. PayPal has proven that this is monetizable. Evolving technologies provide new opportunities.

Big companies speculate

All of the relevant digital wallet and P2P providers are big companies. Zelle is co-owned by major banks. PayPal and Square are publicly traded with multibillion-dollar valuations. Apple, Facebook, Google, Samsung and others all participate in the digital-wallet and/or P2P payments markets. Their services are growing but none has demonstrated the ability to directly monetize wallets or P2P payments. They use these services to acquire or strengthen customer relationships to be monetized through other services.

Conclusion

In cash-based countries lacking electronic payments infrastructure, digital wallets and P2P services can be a real business. Elsewhere they are not. They are complementary services that can help great companies be a little bit greater.

Whether you’re a multidecade payments veteran or a newbie, these four rules will help you understand payments-market dynamics. You’ll understand why businesses that thrive in Kenya and China won’t work in the United States, why Square Cash is valuable to Square even if it will never be a billion-dollar business, why NFC isn’t and won’t be the growth engine behind Apple Pay, and how best to invest your time when looking for the next great thing.