I love how economics has borrowed from physics to create a metaphor.

Economic friction is an obstacle that gets in the way of buyers and sellers settling on the best price. Service fees, middle men, transaction delays, difficulty in finding what you want to buy are all friction points. At the risk of sounding like a nutty free-marketeer, I'd like to posit that low economic friction is a Good Thing™.

In the Web's early days - there was a widely held perception that it would enable "friction-free" buying and selling. Although it's not quite that great, it definitely has enabled some amazing efficiencies. I'm think of well-known businesses like Amazon and eBay and non-traditional new-type markets like Kickstarter and Kiva.

What the Internet has done is reduce the number of friction points. If you're buying retail at BestBuy, you're driving to the store, paying a fraction of the polo shirted sales dude's salary, commission, heating, cooling, overhead lights and possibly walking out of the store with not exactly what you wanted.

If you're buying from Amazon, your friction is Amazon's mark-up, shipping and your browsing time. Of course there's heating in the warehouse and stocking clerk salaries - but the no-frills nature of a warehouse setting means it's a fraction of what it would be in a retail outlet - and benefiting from massive economy of scale advantages.

Moving money on the Internet has not kept pace with the efficiencies of buying stuff. PayPal blows. It's a common lament heard around the web. exorbinant fees, monopolistic advantage (few alternatives with their reach) and infuriating customer service. The biggest friction point is that giant piece of sandpaper that PayPal uses each time you make a transaction. It's amazing to me that PayPal is not classified as a bank and subject to banking regulation.

At VideoSift, we've been long-time PayPal customers and whingers. Paypal is what we use to pay the server bills, receive advertising funds and take charter membership. As much as we complain, it is unfortunately the most friction-free way to pay the bills. We've definitely investigated payment gateways, processors, merchant accounts etc - but when we add up all the fees and restrictions, for a small organisation like us, PayPal wins the math contest.

I don't expect this to last much longer though. Moving money on the Internet looks ripe for a big juicy disruption - and attacks on Paypal are coming from multiple fronts.

The company I'm most excited about is called Dwolla. They are enabling PayPal-like transactions with infrastructure embedded at the bank level and only charge 25c per transaction and no fee for transactions under $10. They have iPhone and Android apps and are starting to roll out the service to coffee shops and other retailers. Read this arcticle about the 28-year-old founder. It's got legs and the banks are behind it.

Square is tackling the problem from the credit card side. They've built a little magnetic strip reader that plugs ino the audio jack of an Android mobile or iPhone device. Neat. Completely mobile payments for things like markets, street vendors or any retailers who get around (escort services, drug dealers?)

Lastly, don't forget the big guys like Apple and Amazon. They have your payment details already and are starting to "white brand" their own payment systems to external vendors. Log-in with your Amazon account to buy a drink from a vending machine. You can't do it yet but I expect it's coming.

In my next blog I want to talk about interesting ways of doing business on the web pioneered by Radiohead, Louie CK and others. Then I'll prognosticate on what the near future may hold.

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