Disruptive Innovation

Enough With the Disruptive Innovation. Collaborate or Fail.

[This is taken in large part from from an earlier blog, but I feel it needs updating to include more than just payments.]

‘Disruptive Innovation’ has become a common cry for anyone wanting to displace the existing players. It is defined as; “an innovation that helps create a new market and value network, and eventually disrupts an existing market and value network (over a few years or decades), displacing an earlier technology.

Unfortunately the original concept is now grossly misapplied. But like how ‘irony’ now has several meanings, I guess disruptive innovation will have different meaning based on its context.

However, I’ve never heard anyone using the phrase ‘Sustaining Innovation’, which; “does not create new markets or value networks but rather only evolves existing ones with better value, allowing the firms within to compete against each other’s sustaining improvements.

So why is everyone so interesting in disrupting the existing ecosystems? And by “everyone” I of course mean those who are trying to either break into market, or those trying to wrest even more control for themselves. In payments – as my example -, non-cash payments work [mostly], and you have a large degree of faith in your bank’s ability to protect your monetary assets. Do you really want the whole thing to change? Do you even know what it is that you want that’s different?

But do things even need to change? Well yes actually, they do. And are there innovations available NOW that make the payments process easier, cheaper, and more secure for the consumer? Yes, there are. However, can we expect the entire payment industry to throw out everything they have spent billions on over the last few decades, are used BY billions, just to make room for every start-up with a good idea? No, we can’t, and that’s the real issue here.

In the last 10 years there have only been 2 true [potential] disruptors in the payments industry; the mobile phone, and block chains (Bitcoin et al), neither of which has achieved anywhere near its full potential. Yet. Not because the technologies are flawed [necessarily], but because the introduction OF the technologies was done poorly. For mobile devices, the payments challenges included the ‘fight’ between NFC and BlueTooth, the numerous options for security on the device (Secure Elements, Trusted Execution Environments and so on), and the presumed insecurity of the technology overall. For block chains is was, and still is, the almost complete lack of understanding of how they even work in the first place. I’ve looked into them and I still find the concept nearly incomprehensible.

But even these disruptors need current context, and they represent a fundamental shift from our overly complicated view of payments back to its basics; I go to work to earn value (money), the value gets stored somewhere (a bank), and I access the value when I want it regardless of time or location (mobile payment). This would suggest that the only disruption we really need is the disintermediation of some of the players. There are simply too many middle-men whose only input to the new world of payments will be value erosion. Thank God the Mobile Network Operators (MNOs) are too busy bickering amongst themselves or this would be even more complicated!

As a consumer who has a very good idea of what he want to see change, I know that only those who help the payments industry evolve will have a lasting positive impact, and this will only be through collaboration and fair competition.

I’ve used payments as an example, because that’s what I know the best, but the same can be said for almost every other industry sector. The drive to take away what others have, instead of providing a better service for the common good, is capitalism at its worst. And no, I’m not proposing some sort of socialism, it’s just logic; What’s easier? Completely replacing something, or improving what we have in collaboration with multiple players?

It’s not like there isn’t enough to go around.

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Payments Innovation Should NOT be Disruptive!

By now I think everyone has heard the phrase ‘Disruptive Innovation’, as defined by; “an innovation that helps create a new market and value network, and eventually disrupts an existing market and value network (over a few years or decades), displacing an earlier technology.“. This phase is especially bandied around in payments.

But how many of you have heard the phrase; ‘Sustaining Innovation’, which; “does not create new markets or value networks but rather only evolves existing ones with better value, allowing the firms within to compete against each other’s sustaining improvements.

So if you accept that a payment itself is just a way for you to access your stored value (what we call money) any time / place of your choosing, why is everyone so interesting in disrupting the existing payment ecosystem? And by “everyone” I of course mean those who are trying to either break into market, or those trying to wrest even more control for themselves. Non-cash payments work [for the most part], and you have a large degree of faith in your bank’s ability to protect your monetary assets, do you really want the whole thing to change? Do you even know what it is that you want that’s different from what you have today?

Do things even need to change? Yes, they do. Are there innovations available NOW that make the payments process easier, cheaper, and more secure for the consumer? Yes, there are. Can we expect the entire payment industry to throw out everything they have spent billions on over the last few decades, are used BY billions, just to make room for every start-up with a good idea? No, we can’t, and that’s the real issue here.

In the last 10 years there have only been 2 true disruptors in the payments industry; the mobile phone, and block chains (Bitcoin et al), neither of which has achieved anywhere near its full potential. Yet. Not because the technologies are flawed [necessarily], but because the introduction OF the technologies was done poorly. For mobile devices, the payments challenges included the ‘fight’ between NFC and BlueTooth, the numerous options for security on the device (Secure Elements, Trusted Execution Environments and so on), and the presumed insecurity of the technology overall. For block chains is was, and still is, the almost complete lack of understanding of how they even work in the first place. I’ve looked into them and I still find the concept nearly incomprehensible.

But even these disruptors need current context, and they represent a fundamental shift from our overly complicated view of payments back to its basics; I go to work to earn value (money), the value gets stored somewhere (a bank), and I access the value when I want it regardless of time or location (mobile payment). This would suggest that the only disruption we really need is the disintermediation of some of the players. There are simply too many middle-men whose only input to the new world of payments will be value erosion. Thank God the Mobile Network Operators (MNOs) are too busy bickering amongst themselves or this would be even more complicated!

As a consumer who has a very good idea of what he want to see change, I know that only those who help the payments industry evolve will have a lasting positive impact, and this will only be though collaboration and fair competition.

The greedy can stay home.

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Payments Disintermediation

Disintermediation in Payments, Disin’what Now?

An almost 50 year old concept is now all the rage in the payments space; disintermediation, which according to Wikipedia is; “…the removal of intermediaries in a supply chain, or “cutting out the middlemen.

It might be a cliché, and I hate any buzz-phrase not invented by me, but in the payments space this one makes perfect sense.

For example, to make a branded card payment you have not one, but several middlemen, all of whom add cost to the overall price of the goods you buy;

1. Terminal Manufacturers – those devices you slide / swipe your card into are a cost, If they are PTS and SRED compliant, a significant cost. Target, for example, spent $100 MILLION to replace theirs after their well publicised breach.

2. Acquiring Banks – The bank who authorises the payment charges roughly 0.02% of the total value of each transaction.

3. Issuing Banks – The institution who issued the card itself charges the lion’s share at a very rough average of 1.7% of the transaction value.

4. Card Schemes – The brands (Visa, MasterCard etc.) vary in the slice they take, but for the sake of argument, let’s say it’s around 0.1% of the transaction value.

5. Your Bank (in general) – May or may not charge you for the ‘privilege’ of having a card, mine does, but let’s ignore this for now.

According to statista.com the volume of credit card transactions in  2012 was around $6,000,000,000,000 (or 6 TRILLION USD), so let’s put that into perspective:

Terminal Manufactures – I cannot even begin to guess how many payment terminals there are worldwide. But I’m going to put my reputation on the line and say it’s a lot. Manufacturers have also received a very significant boost in the last year or so with the enforcement of EMV on our US brethren. For the sake of this blog, we’ll just assume many millions are spent by retail merchants on these devices.

Acquiring Banks – 0.2% of $6 trillion is $12 billion.

Issuing Banks – 1.7% of $6 trillion is $105 billion.

Card Schemes – 0.1% of $6 trillion is $6 billion.

In other words, the cost associated of using credit cards exceeds 120 billion USD!

This is actually not meant as a criticism. They provide a service, many services in fact (including paying for the inevitable fraud), and we are all very likely utilising the benefits of the non-cash services on a daily basis. My point is that we ALREADY have the ability to remove the majority of these middlemen sitting in our pockets; our mobile phones.

Your bank wants to be paid for storing, protecting, and providing access to your worth. The phone company wants to be paid for providing the bandwidth to get to your worth. That’s fair, but why should anyone else be paid? It certainly isn’t the retail merchant who’s absorbing the middleman costs, it’s us, the end consumer. And it’s about time we start demanding more options.

The disintermediation of the non-cash payments systems will be a slow process of disruptive innovation. One side will try desperately to hold on to what they have, and the other side is trying to move too fast to change everything. BOTH sides need to understand that things WILL change, but can only do so when the replacement mechanisms are truly fit for purpose. We simply aren’t there yet.

Card Schemes need time to turn their enormous ships onto a new course; banks need to take over the fraud loss liabilities; and biometrics companies need to shut the hell up about the death of password and the ridiculousness of their single factor solutions. Most of all, the consumers need to ask for something they don’t even know they need yet.

So yes, disintermediation in payments is coming, but likely not any time soon. Even with PSD2.

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[REBLOG] Ghosts in the Payments Machine

This blog was written by  and the original article is here; http://www.acuityid.com/?p=336;

“Today’s payment behemoths are trying to desperately hold on to control of the payment processing infrastructure because they intuitively – if not consciously  – understand that the true  inevitable disruption of mobile payments is radical disintermediation i.e. total or near total annihilation existing, seemingly haphazard and completely archaic business models.

This is apparent in their schizophrenic attempts to simulatneiously fight new security standards for e and m-commerce while clinging to very regulations they love to rail against to limit new market entrants. It is apparent in the reports generated by highly paid consultants to strategize about how banks can hold onto, i.e. arm twist their customers, while generating new revenue streams, i.e. fees, to compensate for  archaic service models and lost payment opportunities. It is apparent in their acquisitions and attempts to present them selves as “market innovators” and “consumer service organizations”.

If mobile payments play out the way similarly disruptive technologies have in the past, the payments landscape of 2020 and beyond will look radially different then it does today. Some, if not all of today’s industry stalwarts, in spite of their best attempts to survive, will be greatly diminished, shadows of their former selves, if not simply ghosts. Meanwhile, a host of new players with radically different visions of how payments systems ought to work will rapidly grow into expansive financial legends with global footprints.

Sound far fetched? History tells us otherwise.  Have a read through a post from 2011  A Kodak Moment. Between 2000 and 2009, Kodak imploded.  The decade started well enough for Eastman Kodak. In 2000 it clocked film revenues of $11 billion, had 70,000 employees and 14 factories around the world. Then things started going pear shaped. Come 2009, revenues from the sale of film had fallen to $1.3 billion, the workforce had dropped to 20,000 and the number of factories had gone down to one.

Or consider Digital Equipment Corporate, AOL, Kmart, or sen your local travel agency — those of you under 35, may not even know what they are.  Technology-based innovation is both the bane and savior of market evolution indifferent to the fate of those impacted by rapid, sometimes catastrophic transformation. The notion that the today’s seemingly untouchable payment legends will remain intact after the coming decade of market transformation is quite simply naive. In 1989, I consulted for a company that employed 500 people to facilitate highly-targeted,  database managed, email marketing. By 2001, I purchased a software program online that had far greater functionality for $195.

The beauty of this type of imminent and inevitable market transformation is that no one really knows how it will play out. Not the pundits or the prognosticators. Certainly not the CEO’s of major financial institutions.  So while American Express touts their “transformative move to tokenization” (quotes mine for sarcastic emphasis)  or VISA digs their heels in against the European Commissions payment card reforms,  brave entrepreneurs will continue to introduce new payment means and mechanisms, and the rest of us will continue to dance and jockey for position until the initial fallout subsides and the re-visioned marketplace emerges.

Hold on to your hats, this is going to be a wild and crazy ride!”

PCI DSS, a Self-Inflicted Catalyst for Disruptive Innovation?

For those of you who are unfamiliar with the concept of ‘Disruptive Innovation’ (like me until 5 days ago), it is defined as;

a process by which a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves up market, eventually displacing established competitors.” (http://www.claytonchristensen.com)

For decades, the card schemes (Visa, Mastercard, Amex, Discover etc.) have ruled the non-cash payments space, despite the fact that the technology behind the credit card; the card number, is now over 60 years old. There have been few alternatives proposed because:

  1. There were none that did not rely on some other form of number or separate device to authenticate. For example, bio-metrics has never been 100% free of false positives or false negatives, and therefore is not accurate enough for the payments space. Yet.
  2. Credit cards worked, the infrastructure is pretty much global, and they are still expanding.
  3. The card brands themselves are very aggressive in protecting their empires.

Even the PCI Standards (PCI DSS, PA-DSS, and PTS) can be seen as innovation stiflers, because it’s so difficult to achieve compliance that most organisations have little time or money left to experiment. Also, no-one wants to be the first to stray from the established norm as there’s simply too much to lose, and recovery is increasingly difficult given the globalisation of competition in almost every industry sector.

But, with the massive amount of innovation that AVOIDING PCI has spurned, the number of non-card-brand options has increased to the point where only the most naive of organisations are not looking around for alternative payment methods. Why use a credit card when consumers can obtain lines of credit directly from their banks and access this from their mobile device faster, more securely, and without the outrageous fees the card brands have charged all these years?

The Internet is more distributed and available than the card brands can ever be, and mobile devices already outnumber card payment terminals by orders of magnitude. There will soon be more smartphones than PEOPLE in the world, so the demand for efficiency and functionality will only increase.

And what of chip and PIN (a.k.a. EMV)? Why would anyone bother buying the expensive payment terminal (PED) models currently provided by the Ingenico’s, Verifone’s, and Micros’s of the world, when a simple software ‘fix’ on ANY terminal will provide the same functionality? Functionality that is portable to every form of transaction, from card present, to eComm, to mobile (e.g. myPinPad).

OK, so the last paragraph assumes you’re still using a credit cards, but it just goes to show the knock-on effect that the demise of credit cards will engender. PED manufactures will move into something else that requires hardware, encryption and centralised management (B.Y.O.D perhaps?), most QSA companies will fail (or start doing security properly for a change), and the banks will be held fully accountable for the security of their customer’s payment transactions.

So PCI, which started out as an attempt to keep the US Fed off the card brand’s backs, has, through its complexity, expense, and inflexibility, driven the type of innovation from which there is no turning back. The card brands will either spend all of their money buying companies that provide credit card alternatives in order to future-proof themselves (like Visa buying a stake in Square for example), or they will fail.

I’d say they have 5 – 10 more good years, you simply can’t replace something as ubiquitous as the credit card until the new payment methods have worked out all the kinks. That said, it’s the Internet again that will provide the platform, and software applications that will provide the function, so global distribution is as simple as going online.

I can’t wait to see what’s next.