Partners at AH Capital Management, the big-name venture capital firm better known as Andreessen Horowitz, see an opportunity for entrepreneurs to design payment systems in what they call “high-risk” niches, such as gaming, sports betting and cannabis.
Those areas, where there are elevated fraud and customer chargebacks, aren’t having their particular needs met by basic payment software products, two partners wrote in a post on the investment firm’s website. So, that creates an opening for payments developers to create vertical-specific software with better tools for compliance, identity management and fraud detection, among other improvements, the AH Capital Management authors wrote in their Monday website post.
Part of the problem is that banks often charge higher fees to payment providers in these areas because of higher legal compliance costs associated with such niches. That lifts costs for businesses in those spheres.
“These industries are larger than you may expect, and they are also growing their online presence quickly,” wrote Andreessen Horowitz partners Sumeet Singh and Seema Amble in the post, which noted their views weren’t necessarily the views of the firm and that some of the information cited might be from companies it invests in.
The high-risk niches are lucrative targets. Gaming generated $60 billion in payments volume in 2021, increasing 8% over 2020; sports betting logged $52 billion in volume in 2021, doubling over the prior year; and cannabis had $25 billion in volume for 2021, up 40% over the prior year, the post said.
Gaming would benefit from better payments software
Gaming has had particularly acute problems in developing payment solutions partly because its industry attracts a high percentage of fraudsters and youngsters. The youthful users may knowingly or unknowingly make purchases their parents later try to reject. Pavilion Payments and Tilia are among payments firms growing in the gaming arena.
“Now that consumers are buying and downloading games online and shopping in-game more often than they’re shopping at brick-and-mortar stores, game developers are dealing with elevated fraud levels and are often forced to rely on platforms that may take advantage of them,” the authors said.
The partners counted telehealth, travel, online dating and adult entertainment as other areas among the “high risk” niches ripe for payments software development. All of those areas have generally provided poor payments services, with “clunky experiences and limited capabilities,” the post said. That included poor customer support, slow processing, excessive decline rates and inadequate dispute resolution.
Just as importantly, “direct providers” of such services also have required fees as high as 15% of the transaction in these niches, the authors said. And that’s if they stick around because many fly-by-night providers shut down, the post said.
With “indirect providers” of payments services, like Apple through its app store, high-risk industry operators are deprived of being able to build direct ties with their customers and also face take rates as high as 30%, the writers said. This is often the case for online game developers offering their creations and third-party platforms.
“This is a massive toll, especially for new companies that are innovating on the back of new platform shifts, increased digital adoption, and regulatory tailwinds,” they wrote.
More states are legalizing and better regulating these industries and that could be a benefit. The global spread of gaming could be as well. And the framework with respect to how charges are assessed is changing.
Under a U.S. appellate court ruling last month, Apple can’t stop developers from having consumers pay through third-party channels for in-app purchases, the post noted. The tech giant has also been trying to fend off antitrust concerns by letting “reader” apps like Netflix and Spotify skip its in-app payment requirements and link to their own web stores for the transaction, the writers said.
Eventually, new payments entrants in these high-risk industries will deliver innovations better suited to these niches, the authors predicted. “These companies will likely not resemble traditional payment companies, but rather offer software products that include payment acceptance as one part of a broader feature set,” they wrote.
They expect these new vertical-specific software products will improve the payment experience for both purveyors as well as customers; gather more customer data; offer built-in compliance tools; extend methods to reduce fraud and generally incorporate payments in a more strategic way.
“The opportunity to serve companies in these high-risk industries is clear. New startups building vertical-specific tools could cover this whitespace or developer-friendly payment platforms like Stripe and Adyen could continue adding more software features for customers in high-risk industries,” the post said.
The authors cited very few companies already creating the kind of niche-specific payments software they had in mind, briefly calling out the fraud-prevention firm Sardine and the global payment orchestration business Payrails. Both of those companies have received investments from the firm, as has digital payments innovator Stripe. Ultimately, Singh and Amble made a pitch for entrepreneurs contemplating such ideas to get in touch.