The Catalyst Code

Last Wednesday, in a statement lost on many of us in the clamor of the Visa IPO the day before, the biometrics company Pay By Touch regretfully announced that it would be shuttering its doors following nearly six years since its first biometric transaction in 2002.

Several factors were responsible for bringing the company to a halt. The first was a poor strategy for growth. Rather than focus on organic growth, the emerging player grew by acquisition. It purchased other biometric start-ups, saddling it with offices around the country, a 93,000 square feet headquarters in a prestigious building, over 750 employees, and a hodgepodge of businesses and organizational differences. The company hemorrhaged cash from its bad decisions.

The second factor was a lack of oversight by overeager and speculative investors. Although the company never turned a profit, it was a magnet for blue-chip investors. The company raised an astonishing $300 million in financing from sources ranging from hedge funds to high-net worth individuals. Investors ranged from recognizable management groups such as Plainfield Asset Management, Farallon Capital Management, Och-Ziff Capital Management, Mobius Venture Capital, Rembrandt Venture Partners to supermarket billionaire Ronald Burkle, co-owner of the Pittsburgh Penguins hockey team, Mario Lemieux, and the Getty family.

Despite its amassed treasure trove, a key component in the company’s failure was poor management. Revelations of Pay By Touch founder and chairman John Rogers checkered past revealed unpaid tax liens, civil judgments, and restraining orders, calling into question his ability to run a company. The company was plagued with retention problems. Rogers, who retained a disproportionate voting right, fired several members of the Board. Key personnel began to resign including the Chief Administrative Officer and the CFO, the fifth in a chain of CFOs in the past four years. A former VP of HR filed suit claiming wrongful termination and sexual harassment against Rogers; she was subsequently replaced by his mother. Notwithstanding the company’s massive funding, four employees filed suit for over $60,000 in back pay and vendor and contractor allegations of delinquent payments surfaced.

Acquisitions, investors, and personnel soap opera aside, the biggest problem was the company’s business model. Pay By Touch never crafted a clear value proposition. A large segment of the population still views biometrics – whether the use of the iris, the finger or the voice – as very futuristic. Privacy concerns and security issues will always loom. Pay By Touch underestimated the incentives that needed to be in place for consumers to overlook these stumbling blocks. At the same time most merchants, relatively satisfied with their legacy payment card readers, needed to know consumers were on board.

Pay by Touch’s success hedged on consumers and merchants making a fundamental, behavioral shift in the way they buy and sell things, requiring consumers to enter a code, rather than use the payment devices they’re familiar with like checks, cash or credit cards, and merchants to take on the expensive proposition of installing new hardware. Elsewhere in the payments stratosphere, biometric technology is part of a multi-factor authentication strategy (e.g., a mobile phone that uses finger authentication to access an online banking account). At the end of the day, biometrics can play a part in payments, but it is not, in itself, the solution.

–Nasreen Quibria