eGifter's Roye Discusses Bitcoin, New Business Models And Disruptive Technology
eGifter enables thousands of consumers to shop at big name brands, like Chili’s and Foot Locker, using bitcoin. eGifter helps these brands test the benefits of bitcoin without directly accepting it themselves.
Roye looked at why bitcoin enables new businesses models, and explained why its low cost, fraud-free nature is going to be disruptive.
Smith: How did you get the idea for the eGifter?
Roye: As digital gift cards started to converge and gain market share, we were looking at mobile commerce and social commerce and saying these are trends we are interested in. One day we realized the digital gift card was perhaps the first chapter in mobile commerce and social commerce. A lot of people had tried to do all sorts of interesting things on Facebook - putting up store fronts and what not. Nothing was working. Social commerce was not happening.
We looked at the digital gift card and said this is something that could actually travel over social networks. We also said that Near Field Communication (NFC) is a nice story and mobile presentation of some form will eventually happen, but for now it is likely the first thing someone presents to a large retailer on their phone is going to be a digital gift card.
Smith: Why were efforts to commercialize Facebook (NASDAQ: FB) unsuccessful?
Roye: I think it was because they were looking for people to do something that was not in the natural flow of their social behavior. They were looking for people to stop and go shopping. If you have Facebook.com slash pick a brand and now I'm going to stop what I'm doing and go shopping. If I wanted to stop what I was doing on my social network and go shopping I would go to Amazon.com.
Just because it is on Facebook doesn't make it social. They all realized that was not going to work and quickly started shutting down these failing Facebook-centric stores and looking for other things that were more tied to natural behavior -- and one of the natural things that was happening is people were wishing each other happy birthday on Facebook. We realized we could connect to that, and the digital gift card could play a role starting to add commerce to social activity.
Smith: I read eGifter gets an understanding of important life events, like job changes?
Roye: We do what we call algorithmic gifting. We are looking for the who, what and why of gifting. Who should I give a gift, perhaps the people you interact with most on social networks? What should I give them? Probably something they like. Why should I give it to them beyond the obvious birthday? What other life events can we cull from the social graph using big data? Can we find other reasons to gift. Certainly opening up just because kind of gifting, impulsive gifting would be quite attractive to retail.
As mobile commerce becomes more frictionless it becomes a nice little gesture. It's like me buying you a drink at the bar. It's a nice little gesture I can make, and as long as it is frictionless enough I might be inclined to do it.
Smith: Like Facebook send someone a Starbucks $5 gift for their birthday?
Roye: All sorts of people are experimenting with different things. It makes sense. As we get to a point where we have micro payment options tied to your smart phone, it will be easy to do this. You see obviously commercial efforts to create new forms of currency, and you see cryptocurrency options emerging.
It is becoming easier and easier for people to have a few different payment options they are comfortable with. It will become just a matter of a gesture or two they will be able to buy something or make a payment. Then it can become a natural part of day-to-day activities.
Smith: Why was your company interested in accepting bitcoins?
Roye: We had a commitment from day one to embrace emerging payments. Thinking that some of these emerging payment forms would come at a lower transaction fee. That is very important to us in selling low margin gift cards. We also thought they might help us with fraud because we are targets for fraud and that destroys our margins.
When bitcoin came around we were immediately interested. When we found out there were processors lining up to create fraud-free, low cost transactions we were just thrilled.
We jumped on bitcoin and found pretty quickly there was a growing community of passionate supporters of bitcoin, who were appreciative of us jumping in and giving them a place to spend their bitcoins. That was an important dynamic.
The brands perhaps most in demand are some of the largest brands, and those are the ones that are probably least likely to adopt taking bitcoins early. It is going to take some time for them to come to terms with bitcoin, get comfortable with it, get through their own bureaucracy, deal with their own IT integrations, and add it.
It was nice knowing we could provide a great value to the bitcoin community, grow our revenue and provide a great service to the brands as well. We give them an opportunity to experiment with bitcoin without having to jump in with both feet.
Smith: Do you think all the big brands will accept bitcoins in the future?
Roye: I suppose there is a good chance everyone will come around eventually, but maybe not. At this point my belief is they definitely will come around, but at least as it stands right now we don't really know. We're not sitting inside these brands so we don't have any insight into the brands' positions. Unless they come out like Amazon did last week, stating something specifically about where their heads are at, I have no insight into what they are thinking.
Smith: You mentioned fraud reduction was one of the reasons you are excited about bitcoin?
Roye: When we got into the business we recognized there was a unique opportunity to do a better job at fraud than anyone had done to date. There were a bunch of great third-party systems available for fraud reduction, and big data was driving the intelligence of these systems. At the same time no one was using big data from social logins and mobile data and mixing it all together to create a better outcome. So we said we are going to be a social login-centric solution. We can take all those third-party systems and put our own layer of social and mobile decisions on top, to get the best outcome in the business and make it a competitive differentiator.
We have that advantage, but at the same time I'd love to wake up tomorrow not having to rely on our ever improving algorithms and have no fraud. Today as a “Card Not Present” merchant with MasterCard (NYSE: MA), Visa (NYSE: V) and American Express (NYSE: AXP), fraud is my problem. I'm an online merchant; I don't have a card.
Smith: Don't PayPal and Visa spend a lot of money every year battling fraud?
Roye: Yeah they battle it -- and the funny thing is, if you pick a retailer who has both an online and an offline presence, you walk into that physical store hand them the card swipe the card, the card is (fraudulent), it is not that retailer's problem. It is MasterCard’s, Visa's, or American Express's problem, because they approved it, because the card was present. You go home and you go to that same brand's website and you buy something on that website, now it is the brand's problem if they take that card, ship you that product, and it is charged back. That's what “Card Not Present” (CNP) is all about.
For online merchants we've been sitting here getting the short end of the stick for a long time on this whole thing. Things like bitcoin put pressure on the incumbents to respond both with price and service. Meaning they need to lower their prices and maybe take on the fraud themselves, instead of leaving it to us online merchants.
Smith: Where there any challenges in the bitcoin integration you did?
Roye: No, we partnered with Coinbase on the bitcoin integration. It was really a no-brainer. They built a very solid system. The most important thing from our perspective was we never touch the bitcoin. They convert it to cash for us in real time valuing how much bitcoin is needed at the moment of the transaction.
If someone wants to buy a $100 gift card, Coinbase prices it in bitcoin for the consumer and Coinbase converts it to cash for us. We don't have to deal with the risk: the regulatory risk, the market fluctuations, all that kind of stuff. If we were to take bitcoin and have to deal with the market fluctuations, given the low margins of our business we'd really just be trading bitcoins. So we really can't do that. Trading bitcoins is not our business, so their service of turning it into cash was a perfect solution for us.
Smith: Were there any surprise benefits you got from accepting bitcoin?
Roye: The passionate community. We knew there were some people who were enthusiastic about it. The skyrocketing price of bitcoin last year played a role in making the community even larger more enthusiastic and more passionate. We were lucky to see that wave that happened in mid-2013, but there really were just a of enthusiastic people and they were genuinely appreciative of what we were doing. All of a sudden we had raving fans everyday telling us how much they appreciated what we were doing. That energized us to want to do more.
Smith: Is there anything bitcoin will enable you to do in the future that other forms of payment won't let you do today?
Roye: Yeah, the micro-payment nature of bitcoin, and the fact that there is not even a base transaction fee that a lot of credit cards have, positions bitcoin really well for all types of micropayment solutions. We could wind up having a whole bunch of different digital things that we sell. The variable denomination digital gift cards we sell are essentially a brand's own currency.
Digital gift cards we sell are variable denomination, meaning they range anywhere from $1 up in 1 penny increments all the way up to as much as a thousand dollars. Imagine if you are buying really, really small amounts you see the trend towards all sorts of interesting micro payments.
An example of micro-payments is the tipping inside the Dogecoin community. Thats why we were excited about our recent addition of Dogecoin as a payment option. We added Dogecoin and Litecoin. We see the nature of cryptocurrencies could be that we have micro-sized transactions taking place and those transactions could be profitable.
Smith: Do you see that helping your group giving feature, where if its somebody's birthday five or 100 friends can all get together to put something towards that friend's gift?
Roye: Right. So imagine in the traditional model I would have to take a hundred credit card transactions, pay 25 cents a hundred times on each one of them. If everybody put in $1 thats 25 percent right there that's a business model that couldn't exist, but in a cryptocurrency which is fraud-free and super-low cost transaction you can actually do something like that.
We built what we believe is the best group-gifting engine in the world. We put a lot of energy into the group-gifting aspect of what we do. It is really a great user experience. Its completely cross platform capable. We have personalization, where you can create an animated greeting card with video messages, and we stitch all the video messages together for the people who chip in on the group. You can really create this cool social experience that fits in the cryptocurrency story we just told. The scale of it could be pretty substantial.
Smith: I've seen group gifts in real life, but your platform connects everyone regardless of physical location, making it easy to do from anywhere in the world.
Roye: That's the idea. Anywhere in the world and efficient. There are logistics of chipping in, whether it is for the coach or the teacher or someone in the office who is having the baby, to manage. There's always a person who has to manage it all and it's manual processing and chasing people who pledged the money, and maybe you don't get it and maybe you were nice enough to organize it you end up having to cover someone who never stepped up. We make that all an online function and manage it all. It is really a great tool for those scenarios.
Smith: Who are your competitors?
Roye: We definitely have competitors on both sides of the business. We have a platform side of the business where we are plugging in the entire experience we described to big brands, Facebook fan pages, websites and mobile apps. On that side we don't have competitors who are doing the group-gifting, with the deep social integrations, and the heavy degrees of personalization. We don't have anyone who is in our exact same space on that side.
Other companies put together a gift card marketplace that takes some form of emerging currencies as a form of payment, particularly bitcoin. There is a company called Gyft that is a competitor on the payment side, but they don't take currencies besides bitcoin.
Smith: What differentiates you from Gyft? The platform you've built?
Roye: Certainly the software as a service side of what we do, but also the group gift and the personalization and social features in our product are more advanced, but the group gift is something they definitely don't have.
Smith: Do you see bitcoin progressing in the mainstream retail space?
Roye: I think bitcoin is on the minds of a lot of companies and in a lot of boardrooms. I think it could be one of those things where a few important players are going to make the move and do it. And then all those other ones, who were playing a little bit of wait and see, are going to feel the pressure of having to make that move. I don't believe we are at that inflection point, but I suppose we could wake up any morning and there could be one or two announcements from some interesting brands -- and my guess is that it will cause a tidal wave of other brands trying to catch up.
When Overstock and Tiger Direct did it, these are really the early adopters. Maybe in three to six months there will be another group that will start to move the meter, but it hasn't happened yet and I don't know when that will happen.
Smith: I've read Overstock has a relatively low volume of bitcoin sales but the profit margins are substantially higher?
Roye: Yeah, that is interesting. I read some feedback from Overstock and the numbers they've achieved, they are happy with their decision. I'm sure that they've caused a lot of conversations at a lot of other retailers.
I would have thought, within this timeframe, we would maybe have seen a couple more. We have only got a quarter of the year under our belt. I wouldn't be surprised if we saw a lot more during the course of this year.
Smith: Do you think they are in the wait and see mode right now because the number of people who have bitcoin to be able to spend it in the first place is so low?
Roye: Retailers have to make a decision based on how important bitcoin can be in comparison to the scope and scale of their overall business. For us we're small, we are a startup, bitcoin moved the meter.
If you're one of these giant retailers, you look at the entire size of the bitcoin market. You say to yourself, this thing isn't going to move the meter for me. I don't need to do this to be cool, I don't need to be perceived as an early adopter, I can take more of a wait and see attitude.
While they wait, things are happening that are creating higher levels of confidence, that this thing is heading in the right direction. You have some recent regulatory clarity as it relates to the IRS position on taxes. That provides more of a clear runway. Time is creating more distance from the Silk Road era of bitcoin. The more time that passes between when there was really nothing but negative news on bitcoin gives an opportunity for some positive news to build up on bitcoin.Then bitcoin doesn't ring out negatively in the minds of people.
I think brands are probably looking at it and just trying to time it. There are some that might be a real long time before they take it, just because they have a conservative nature and they feel like it is inconsistent with who they are as a brand. I do believe there will be a lot of brands that will be very late to the game.
Smith: Have you seen other programs that are accelerating the commercialization of digital currencies?
Roye: We are seeing evidence of more commercial efforts. We were reading about Facebook getting licensed in Ireland in the next few weeks, to start offering a Facebook-based currency. I think we are going to see a lot more of that coming. I think that it is going to be an interesting balance. A brand behind their own currency gives it their credibility. And that currency can be used in their ecosystem. You think about Apple and it is at least possible, if not likely, that something like could happen like that in the Apple ecosystem.
I think you are going to see a lot more digital currencies. As far as the cryptocurrencies I think there is a lot of speculation. There are actually hundreds of cryptocurrencies right now, but there are only a handful that are reaching an interesting critical mass. As they get to a critical mass we start getting people asking us to take their currencies and then we have a list of ones that we like to take Dogecoin and Litecoin were on the top of that list.
Luckily GoCoin, who is similar to what Coinbase is to us for bitcoin. GoCoin put together a service where we could take Dogecoin and Litecoin and we become the first people who integrated with them to get it turned on. Or one of the first, I think within a week of them having turned on the service we were up and running.
As cryptocurrencies gain momentum and I think they'll continue to add a lot more.
Smith: Is one of the problems in the cryptocurrency space the 200 currencies out there, but the inability to use most of them in day to day commerce?
Roye: They have them and can trade them for bitcoin, and then come spend their bitcoin or cash the bitcoin out for USD, but people want it to be easy. If every time you needed to spend cash you had to jump through these different hoops to spend it, that will certainly slow down the growth curve for these currencies -- so giving people places to spend those currencies is one of the primary things that will impact the adoption curve.
That's why if you are a member of one of those communities, you see that we've jumped in and started to take it, you are happy and you feel like what we are doing is certainly helping the currency gain traction.
Smith: I know the Dogecoin community is big on fundraisers, like for the Jamacain bobsled team and Talladega. However the bitcoin community has not embraced that, citing scam concerns. Are there scams in the Dogecoin community? How those efforts work to pool money together but make sure nobody runs off with it?
Roye: There are these amazing things called tipbots in the Dogecoin community, and you can send a tip to anyone or any cause. I suppose it is possible a cause that's got less than scrupulous intent could emerge and convince people that they are a legitimate cause, raise funds and run away with a bunch of money. But I think you have a crowd-forming sentiment, that is more likely to flush out that type of behavior in a community like that than in almost any other situation in the real world. So I think it is possible that scams could emerge. I think it is less likely because it is so community-based, and the fact that there is so much conversation going on around it that if something stinks it is going to surface.
Smith: Getting back to remittances I've read about Western Union having a 10 percent fee to send money. I've read that bitcoin-based remittances can get a lot lower. If it is such a simple problem, why we haven't seen bitcoin solutions in that space?
Roye: I think it is coming. I think bitcoin and cryptocurrencies in general are an underpinning of an extremely efficient money transfer system, whether it be for micro-payments or small gesture type gifts, or transferring money efficiently from place A to place B. I
think the entrepreneurs are coming in by the droves. They are designing the solutions. There are definitely the ones working on international transfer systems. Of course they have tremendous amounts of compliance to deal with. The reasons it hasn't happened faster is because they are making sure they build a service that complies with the laws. At the end of the day they are going to be incredibly disruptive, because of the potential to be completely secure, fraud free, and low cost.
Smith: How efficient are services like Bitpay and Coinbase?
Roye: Right now it is one percent, and that is a reasonable number that we can afford to pay. Hopefully there continues to be a healthy amount of competition in the space and it keeps the costs down. If all of a sudden they aren't much more attractive than the traditional alternatives, it will slow the growth curve and that wouldn't be good for the cryptocurrency as a whole.
Hopefully the economics of the business are such that they'll be able to keep the costs very low and really speed the adoption, because, for some, if you have a very high margin business the extra point may not be worth your time or energy to get familiar with all this, and deal with another integration and deal with the accounting and whatnot.
In a business like ours, where we are dealing with only a couple points worth of profit margin, it is much more material. But not everybody has that situation. Clearly they have to keep the cost benefit in the equation, to maximize the adoption curve.
Smith: I have an iPhone, I didn't see a way to spend bitcoins with my phone on your app; why is that?
Roye: You have to use the mobile website on iPhones. Apple does not allow apps to take bitcoin. We did have an Apple solution at one point, where you would pop out of the app and go into a browser to complete the bitcoin transaction. For a while that was okay, but ultimately they decided even that wasn't okay. The only way you can do a bitcoin transaction on an iPhone at eGifter, or anywhere for that matter, is in your browser not in the app.
Smith: Is that a deal-breaker for you, long term? If it is still restricted in five years, would that impact your decision to use bitcoin or not?
Roye: No, because of the great Android market. I think the more Apple restricts emerging and interesting things that people want to use, the more that will impact them and their marketshare in the long term. They are in a position where they don't necessarily have to be first. They run a much tighter community than the Android community; they have much more control. They have the power to maintain that control, but they can't wait forever. Eventually they will need to come around. As it stands right now, you need to get into the browser to complete the transaction.
Smith: How critical to your business is bitcoin? If bitcoin was to go away, would your business still be able to compete or would you have to change strategies?
Roye: It is definitely important part of the consumer side of the business, because we are starting to move some nice volume in bitcoin sales, but a lot of it has been a surprise and wasn't in the plan. We just expected it to be another form of payment. We didn't recognize that there would be an explosion in the value, creating lots of people with bitcoin wealth wanting to spend it. We didn't realize there would be such an enthusiastic community. All that was surprise upside, and therefore if it was to change it would just take us back to a level set which would take us back to the original plan, which didn't have explosive bitcoin growth in the model.
In that model we are focused on good, healthy growth, making our fraud system better, making the mobile commerce experience better and, of course, focusing on the platform side.
Smith: You see bitcoin as a way to dramatically accelerate the growth of your business, but not change the fundamentals of it?
Roye: Yeah. What we are seeing is, there are many emerging forms of payment. It might be that there is some sort of Facebook credits or something that becomes equally important, as lots of people take those on, and then we do an integration there and take it as a form of payment. We might find that it also offers us a fraud-free, lower cost transaction that could be just as meaningful as bitcoin, I suppose. It is really hard for us to forecast. Ultimately we don't think that the revolution in payments is going to stop. We think it just started.
Smith: It will be interesting to see what Facebook's cost structures are. Because it seems it would be hard for Facebook or PayPal or anyone to compete on cost with bitcoin.
Roye: They are going to have a lot of issues that bring costs into the equation. With so many emerging players having their own universe to leverage, whether it be pay with Amazon, the mobile OS's Android and Apple, or even the carriers, they all seem to want to get into the payment business. I'd assume they'd all find efficient ways to do it that are going to create a better solution than what exists today, or they serve no purpose.
There are probably only a couple places you can get better one cost, and the other is fraud. If you do fraud better and you do it at a lower cost,then you are a better solution. If you don't do one of those things better, than what are you bringing to the party?
Disclosure: At the time of this writing, David Smith has a long bitcoin position.
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