Tag: Disruptive Innovation

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!”

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.