Kwedit Founder Danny Shader on Why His Highly Hyped Company Isn’t What You Think

If there’s one point that Kwedit founder Danny Shader would like to communicate above all else, it is that his one year-old company — which has already been excoriated by Stephen Colbert and favorably reviewed in the NYT — is a serious operation with two potentially lucrative ways to change how we pay for things.

Shader’s message may be hard to stick. Kwedit, which went live on February 3, has received attention mostly for one aspect of its business: Kwedit Promises. It’s a novel feature that allows anyone over the age of 13 to pay for digital goods online by extending them small amounts of credit. Later, using the company’s Kwedit Direct system, he or she can pay the credit back using Mom or Dad’s credit card; by sending in cash through a Kwedit-supplied envelope; or by printing up a barcode that can be scanned at a nearby 7-Eleven, which accepts cash payments, then alerts Kwedit that a particular “promise” has been kept. Users can default, of course. But those who don’t pay are cut off, while those who do are assigned a high Kwedit score that escalates as more amounts of Kwedit are extended and repaid.

Here’s the thing, though: Shader, 49, isn’t focused on Internet transactions alone, and they aren’t why Kwedit’s investors, including True Ventures, Maveron, and Floodgate, have already given Kwedit $6.3 million over two rounds of funding.

Instead, Shader is busily mulling ways to enable at least one-quarter of the U.S. population to make remote cash transactions through Kwedit, from global remittances to bill paying to catalog shopping. “Basically, if you want to use cash to pay a vendor but can’t hand it to them directly, we’re building a set of services to do that for you,” he says.

Ambitious, yes, though given Shader’s background — CEO of Good Technology, EIR at both Kleiner Perkins and Benchmark Capital, co-founder and CEO of Accept.com, an online consumer-to-consumer payments service that was purchased by Amazon for roughly $175 million in stock in 1999 — its hard to dismiss his expectations as completely wild-eyed, too.

Yesterday, I talked with Shader about his very big plans.

So much of Kwedit’s success hinges on its relationship with 7-Eleven. Who negotiated that partnership and how?

I did it. I knew two people who knew the head of merchandising at 7-Eleven, and it was one of those meetings that you dream about. They went incredibly fast [afterward], too.

Is it an exclusive relationship?

To [CEO] Joe DiPinto’s credit, it isn’t. [Our agreement is that] if we build a bigger payment network, they’ll get a bigger share. Their view is if they can make us successful – they have 5,800 locations — they’ll end up with a large share of whatever we do.

They want to be the destination for the same audience that we want to serve, which is why they sell prepaid credit cards, prepaid money orders. Meanwhile, we can and over time will go into other retailers.

Any new partners you can name?

Nothing is imminent. We’re very focused on 7-Eleven right now.

How many employees are you overseeing, and what are they working on?

We have nine full-time employees and another four or five contractors. We’re doing a lot of engineering, business development, and technology. We’ve very technically deep.

What we are becoming is a company that facilitates payments for people who want to use cash to pay for remote transactions. Clearly that includes e-commerce gaming, but also direct response, catalog sales, bill payment, remittance to other countries, buying transportation tickets…

But you aren’t talking about going into the bill-pay business directly.

No, we’ll never be in bill pay business but we can be a front end and leverage our connections to retailers.

How big is the market you’re chasing exactly?

Twenty-five percent of the country doesn’t have a credit or a debit card. In many cases, people are well-served by prepaid Visas, and that there’s a huge and very successful prepaid industry in the U.S. underscores as much. But in many cases, people aren’t well-served by a prepaid card. You have to create an account, then load it with cash that you tie to yourself somehow to pay for things. But let’s say that all you want is one bus ticket from [the Bay Area] to L.A. for an arbitrary amount of money. To use a card, you have to buy it, load it, pay an account maintenance fee, possibly reload it.

Using Kwedit Direct would be far simpler. We’d have the relationship [with the bus company]. All you’d have to do is call and make your reservation. Then, if you had a printer, you’d print out your Kwedit slip, you’d walk into a retail store, they’d say that’s $52.40, and as soon as that cash drawer closed with your money in it, your ticket would be issued to you.Think of it as a long credit-card authorization. The transaction is teed up, but nothing ships until you are at 7-Eleven.

So you do best in a situation where someone needs to conduct an arbitrarily complex transaction. Where will you get the volume you need? Are you banking on one area, like remittances?

Remittance is big, but the bulk case for Kwedit Direct is that cash will never be the dominant form of payment for anyone’s business but  a small form of payment for everyone’s business. We aren’t and don’t need to compete with Visa or Mastercard. We can build scale by representing a single percent — maybe a low single percent — of transactions where we can be the payment method.

Are you really the first company to strike on this plan?

We don’t have any direct competitors in the U.S., but there are systems that look like ours outside the country, including in Japan, which also does a lot of work with 7-Eleven. The implementation and customers are different but in Japan, it’s very common to walk into a store to [buy something elsewhere].

You haven’t announced any Kwedit Direct customers yet, is that right?

PokeTALK [an Internet telephony startup] and [the virtual goods startup] Social Gold are customers. We have some crazy number of accounts that our sales force is working their way through. We’re working with massive companies — brand entities — but they’ll take time. They have long integration cycles.

Sound like you’re much more focused on blowing out Kwedit Direct than on the Promises idea. What percentage of revenue is each supposed to bring in?

I have no idea, I wish I knew. They are complementary; they’re also both pretty unique opportunities.

How many people have used a Kwedit Promise so far?

It’s in the thousands, the many thousands.

Who is right now providing their customers with the option to buy their content using Kwedit?

We’re working with [online games publishers] FooPets, Puzzle Pirates, and Bite Me; the [small literary] magazine, GUD; we just signed up a science fiction publisher-

And what sort of repayment rates are you seeing?

[It was] 26 percent [a couple of weeks ago] and it’s been rising since then because the initial promises are very small — typically $5 or less. If you don’t repay your promise, you’re out of the system. But if you do pay, you can make larger and larger promises. So a small percentage of the population is making bigger promises — and bigger repayments. In fact, if you’ve made a promise and make a second promise, the repayment rate is incredibly high.

How are most people paying you back?

It’s a mix of credit cards, cash in the mail, and 7-Eleven.

And what’s your take in all of these transactions?

We don’t disclose that, but I’ll tell you that 7-Eleven gets more than we do, and that combined, it should be cheaper than prepaid, and cheaper than bill-to-phone [where consumers charge digital services to their monthly phone bills]. Certainly, it’s much  more expensive than a credit card or PayPal but this is for people who don’t have credit cards or PayPal accounts.
 
What do you know about your users? Are most teenagers? Also, how can you be certain they’re 13 years and older?

You can come in through a publisher and we’re only working with those who are appealing to people who are 13 years or older. You won’t find us on Club Penguin, for example. On FooPets, they’re mostly teenagers, but at GUD magazine, they’ll mostly be adults, so it depends on the content provider.

Have you considered flipping the model around and rewarding people with high scores by providing some sort of cost savings?

There are a bunch of things that publishers want to do to encourage repayment, like offer limited-edition goods to people with high Kwedit scores. There are many incentives we can come up with and that we’re experimenting with.
 
There’s also been talk about the possibility of Kwedit cannibalizing actual paying customers. How valid a concern is that, in your view?

The short answer is that if a publisher wants to block its users from using Kwedit, they can. But if you have a good, paying customer giving you $20 a month, and that person takes out a Kwedit promise for $5, I think common sense tells you that he’s going to pay you your $20 again because that’s his monthly budget. And he may default on that $5. But the next guy who doesn’t have a credit card and does pay back his Kwedit is an incremental add-on.

What about people gaming the system? I’m sure it’s a small percentage of people who bother, but what do you say about publishers who are concerned about account spawning?

The methods depend on the game. In a game where there is no intraplayer trading, you tie a person’s Kwedit [score] to their identity in the game, so if they cheat, they have to start over with a new character. In another scenario, where you can resell digital content, like in Second Life, we use an optional phone screen model in which case you have to give us a phone number, and because you can’t spawn phone numbers, you can’t [create numerous shell identities]. We also use an outside vendor that’s in the machine ID business that has 150 techniques to make it hard for you to do incremental accounts.

Increasingly, the way that problem will get solved is through Facebook Connect. When we implement that — and it will be up shortly — it will be very hard to create an identify that has a lot of real connections.

Obviously, Kwedit intends to become a substantial payments business. Do you regret giving it a silly name? I still have a hard time saying it with a straight face.

[Laughs.] I don’t think people think PayPal is a silly name. What’s valuable is that it’s memorable. I also think our [cartoon logo] duck is mnemonic. I probably wouldn’t have launched Kwedit Promise with the duck because it caused so much controversy. But store associates at 7-Elevens know how to process these transactions because of it. When they see the duck logo, they know what to do.