Disruptive Innovation In Payments – Who Will Win In The Brave New World?

(Published October 9, 2014 on Capgemini’s “Capping it Off”)

We know that the North American cards/retail payments industry structure is in a state of flux, facing revenue and regulatory challenges, along with the constant threat of substitutes.  There is the Promise of New Technology – everything from the “march of the mobile acronyms” – NFC, BLE, HCE, QR, M-POS, to mobile, loyalty, smart posters, offers, ads, gaming, P2P, social and location-based services.

Merchants aren’t very happy – they’re inviting payment alternatives, gaming for least-cost routing, resulting in the rise of ACH-based substitutes such as MCX’s new mobile wallet, CurrentC.  Merchants are also witnessing the growth of debit and prepaid and their ire is growing at increasing security mandates such as PCI/DSS and end-to-end encryption.  Some also struggle with new venues like mobile and taxis.

Consumers are increasingly feeling disenfranchised at the impact of fraud and card re-issue, increasing fees and loss of rewards, and potentially may change their debit vs. credit preferences due to a fear of compromise.

Finally, key industry initiatives are complicating the picture.  These include fraud, and the resulting movement to EMV, migration of fraud from overseas, lack of broad solution for e-commerce fraud, cost and revenue impact of CARD Act, Durbin, CFPB oversight, and rumblings about realtime payments as we’re seeing in Europe.

History is littered with failed payment approaches including Pay by Touch, Mondex, and contactless cards. But the problem with payments is a perennial one: new payment types hardly ever succeed. As I wrote earlier this year in “Achieving the Elusive 10X Factor in Payments Innovation,” three Es are vital to success of payments innovation:

  1. Easing checkout – Apple Pay combining Touch ID and NFC, there is no need to fumble with PINs or depend on unreliable bar code scanning.
  2. Eliminating friction – PayPal Order Ahead imbeds payment into ordering your food before arriving at the restaurant. The customer can then pick up their order without standing in line
  3. Enabling marketplace – Uber car service mobile ordering system creates trust by incorporating rating systems and frictionless payment, leading Uber users to be more likely to use a car service because they don’t need cash and they can depend on reliable timely pickups

I’ve also been fascinated at the extent to which Africa is leading the world in financial services innovation.  As I wrote last month in “How Africa is Leading the World in Mobile Financial Services Innovation,” disruptive innovation always comes from the bottom.  Africa is a hotbed of financial services innovation: products are simpler, cheaper and offer more value, a perfect storm of converged, ubiquitous mobile technology and financial services serving the “bottom of the pyramid” is acting as an accelerant for disruptive innovation, and established platform give rise to P2P lending, bill payment and airtime top-up, credit/savings, micro-finance, insurance.  Once those innovations reach developed markets, they sow the seeds of disruption to incumbents, as we saw with SMS messages which enjoyed much faster take-up in Africa than in the US, and with person-to-person and micro-lending services like Kiva, Prosper and Lending Club opening operations in the US.

In the future, cards and payments consumption context will change, radically altering engagement, transaction and fulfillment paradigms. Technology innovations as diverse as “body safe material,” social as the “new oil,” 3D printing and crypto-currencies will lead to a future we cannot even imagine today.  How do industry stakeholders choose the right partnerships and investments and respond strategically to market events and new regulations? We believe there are four possible scenarios, driven by technology or driven either from the top or the bottom of the market:

  1. Cool Factor in the Driver Seat: innovative start—ups drive mass adoption by easing checkout, eliminating friction and enabling marketplaces
  2. The World is my Oyster: disruptive innovations are driven from the Bottom of the Pyramid, in developing markets where simple and cheap payments offer more value
  3. Big Brother is Watching: central banks and incumbents throughout the world set the standards for payments and identity
  4. Back to the Future: entrenched players in developed markets continue to dominate the pace of innovation

Those that succeed will continue to explore the future of payments, in view of disruptive innovations and technologies, and think about not only their immediate next steps but also how to free up resources to deal with disruptive innovations.  Those considerations include harvesting the consequences of modernizing legacy systems, investing early in new technology or cutting costs.