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Payments Businesses Are Damn Hard: The Cover App Edition

Cover's fate underscores how hard it is to build sustainable payment-processing businesses without enormous transaction volume.

Jason Del Rey has been a business journalist for 15 years and has covered Amazon, Walmart, and the e-commerce industry for the last decade. He was a senior correspondent at Vox.

Cover, a young payments app, is accepted in 350 restaurants in four cities. It has processed more than $10 million in transactions since the beginning of the year. But it will record, at most, just $150,000 in revenue in 2015 after passing on a big cut of its fees to other financial institutions, its founder says.

So go the economics of a young payments business. And so ends Cover’s life as a stand-alone company. Founder Mark Egerman said today that his startup has sold to European competitor Velocity in a small deal, after passing on taking on more venture capital under less-than-great terms.

“Payments is really a hard business,” Egerman said flatly.

Cover allows diners to pay for a meal by pressing a few buttons in a smartphone app at partnering restaurants instead of handing over a credit card or cash. The company generates revenue by charging restaurants 3 percent of the price of each meal. But, like many payment processing businesses, Cover passes along about two-thirds of that fee to banks and other financial institutions behind the scenes. So on a $100 meal, Cover’s cut is $3, but it only keeps $1 for itself. Then it has to pay for all of its expenses.

If that doesn’t sound sustainable for a small, venture-backed company, that’s because it’s not. (Cover has raised about $7 million.) Cover’s fate underscores how hard it is to build sustainable payment-processing businesses without enormous transaction volume, and why even much bigger payments startups such as Square and Stripe are diversifying their product offerings to beef up profit margins and create new e-commerce markets.

Square processes more than $30 billion in brick-and-mortar transactions each year, charging merchants a 2.75 percent fee for each transaction. Like Cover, it passes on about two-thirds of that fee to other financial players in the payments ecosystem, including banks and credit card companies.

To supplement this business as it readies for an IPO and to live up to its $6 billion valuation, the company has unveiled a host of products to create new revenue streams with better profit margins. Its cash-advance business, Square Capital, was doling out $1 million a day as of August. It is also selling software products to merchants through monthly subscriptions — another avenue to move past the minor margins of the payments business.

Stripe, the online payments company, has said it processes billions of dollars in payments, but it already has a $5 billion valuation. Its one and only revenue source is still the 2.9 percent cut it takes of most transactions, plus a flat 30-cent fee. It, too, is looking for new areas of growth from new types of commerce.

Last week, it announced a new software product that merchants can use to more easily sell goods across a range of Internet platforms that are experimenting with adding shopping capabilities, including Twitter. In the process, Stripe is trying to spur a new type of “social commerce” to take hold, creating transactions (and transaction fees) that simply didn’t exist before. It isn’t changing how it makes money, through processing fees, but instead is trying to grow the total commerce pie.

For Cover, Egerman said the hope is that by combining with Velocity, it will now have the resources to attract more merchants and increase its transaction volume substantially. Velocity has raised $16 million from investors in recent months.

Velocity can also help Cover make money beyond payments transactions, most notably by charging restaurants for its technology that can help them launch their own custom loyalty programs, Egerman said. Cover’s entire 21-person staff will move over in the deal.

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