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What is innovation in payments?

I was asked to write about innovation in payments last week, and so here’s the first of three parts. The first part will focus upon retail payments innovation; the second, corporate payments; and the third, trade settlement.

A weekly non-exhaustive update so to speak.

First, what is innovation?

Let’s define it again (yes, I’ve blogged about this stuff before but, just in case) and, like most of us these days, I turn to Wikipedia as my starting point:

The term innovation refers to a new way of doing something. It may refer to incremental and emergent or radical and revolutionary changes in thinking, products, processes, or organizations. Following Schumpeter (1934), contributors to the scholarly literature on innovation typically distinguish between invention, an idea made manifest, and innovation, ideas applied successfully in practice. In many fields, something new must be substantially different to be innovative, not an insignificant change, e.g., in the arts, economics, business and government policy. In economics the change must increase value, customer value, or producer value. The goal of innovation is positive change, to make someone or something better. Innovation leading to increased productivity is the fundamental source of increasing wealth in an economy.

That’s pretty comprehensive actually, but I don’t like half-page elevator statements so my definition goes more like:

Innovation: the method of creating compelling new ways of doing things that open up new markets or radically disrupt existing markets.

Innovation does not have to be positive, increase value etc, as innovation could just as easily destroy things and eradicate value. The internet has destroyed the value of newspapers and television. It’s turned news and views into free access for all, as well as connecting individuals to individuals. It is not positive for the incumbents and may be positive for the customer, although some may say not. For example, how many of us would see the destruction of the BBC, CNN and NBC as being good? Can the blogosphere and YouTuber replace the value of good news reporting and media production?

These are questions we have yet to answer, so I’m on the fence a little about whether innovation has to be positive and create value.

What innovation really needs to do is to show something compelling.

Compelling means that people use it.

The reason YouTube works is that I can send my stuff there and share it.

The blogosphere has created news reporting in real-time from a potential 3.5 billion news reporters.

The access to news is more global and comprehensive than it has ever been …

… but is the news believable?

The fact that Wikipedia has a small amount of misreporting is not a good thing is it? And when websites report celebrities as being dead when it’s blatantly untrue, you sit in a mass of confusion rather than truth.

Anyways, that’s a precursor to a debate about defining innovation and the value of the new web worlds, rather than innovation in payments. Nevertheless, it is important to get the definition right, so I come back to my definition of innovation as being a method of creating compelling new ways of doing things that open up new markets or radically disrupt existing markets, before discussing payments innovations.

So what compelling new payments markets are being created or disrupted in the retail payments world?

Certainly, mobile payments and prepaid, which were the focus of last week’s discussions, are innovating retail payments. They are opening up new markets for electronic services that displace cash. That is why they are good for the producers, the banks, as any cash displacement makes finance more efficient because it’s getting rid of paper. And paper accounts for six out of seven transactions today.

But mobile and prepaid have been trying to disrupt this space for half a decade. I first started talking about mobile as a payments mechanism back in 2004 when NTT DoCoMo started showing us the way.

Therefore, the fact that mobile is now mainstream is no longer innovative. The innovation has happened. A bit like online payments with PayPal happened. And prepaid is an innovation – creating new compelling markets based upon existing technologies – but it’s also happened.

These things are here.

That’s why I don’t call them innovations, as innovation is what I look for before it happens.

When you see Web 2.0, it’s too late.

When you see Facebook and wonder whether to compete with it, it’s too late.  It's already dominating.

When you see everyone talking about mobile payments, it’s too late.  They've taken off.

When you hear everyone discussing prepaid cards, it’s too late.  Everyone's got one.

The fact is that most banks are fast followers so they do wait until it’s too late. Then they launch their mobile and prepaid services. And they succeed. They succeed because a bank never finds it too late due to the protection of their markets from new entrants and the inertia of their customers to change provider.

That does not mean that banks should not innovate however.

So what is innovative today?

Wireless payments.

This is contactless, but it’s more than that.

It’s wireless, free-form payments built into objects, clothing, watches … anything.

Wirelessly communicating electronic payment tools for consumers.

That’s innovative.

Let’s begin by looking at a really cool film …

Nearness from timo on Vimeo.

What this film demonstrates is the notion of wireless communication by placing the receiver and emitter in near-field communication.  The receiver or emitter can be in any form of device.  A phone, a card or a watch or ear-ring.  Anything that can take an RFID chip (today) or some form of wireless chip (tomorrow).

The chips are really small, minute, tiny.  So tiny that you won't be able to see them with the human eye in some instances.

As a result, the chips can be weaved into cloth, placed in a tooth filling or embedded in bricks and tarmac.

Everything communicates.

Everything knows where everything else is.

So we think that's scary?

Well who thought the internet was scary when it started to take off?

Who rebutted mobile telephony as pure yuppiedom?

Things take off faster than you think and, by the time you see them, they are mainstream and it's too late.

So, the near future is wireless communications enabling wireless payments … and a lot more.  And it will all be based upon geo-location and proximity.

Knowing that you are walking past the shoe shop, you get an advert for your favourite Geo shoes.

Knowing that you are near the O2 stadium, you get a promotion for tonight's concert as tickets are still available (must be a rubbish act).

And knowing that you need to sort out your overdraft, you get a request to visit with the bank manager as you near the branch (oh no!).

All of this is likely in the very near term.

How near?

Well, here's a picture from my Hong Kong cab last week:

Proximity

Notice anything?

Sure, it's a poor quality picture, but second from left under the screen is a note saying: "GPS Based Advertising".

As the cab drives around Hong Kong, you get adverts tailored to the vicinity you are in.

Come and shop at Harbour City!  Visit Honeychurch Antiques in Central now!  Dive into the Computer Centre in Mongkok for very good deals!

As the taxi moves, everything changes … advert by advert.

Now imagine this in the payments context.

You see the ad for Armani and wave at the screen … the suit is in the post.

You walk past a billboard for Geo and bish, bash, bosh … the shoes arrive tomorrow.

You get the promo for tonight's concert at the O2 and ding! the RFID code for your ticket entry is delivered to your phone.

This is not the future.

It is right here, right now.

And that's what I call innovation, along with a few other things that will come into the blog in the next two weeks.

 

p.s. if you want to see more about the Hong Kong cab experience, go to the website http://www.motionpower.com.hk/ for more.


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About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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  • Felipe Zavala

    I agree, the banks are followers so they do wait until it’s no longer innovation. I´ve tried to push innovation into them and I always find the same aptitude: play safe, nobody want to be the first. It is really disappointing.

  • When talking about innovations in payments, it is important for me to mention that an Indian company, atom technolgies, a provider of payment solutions over the phones (landline through IVR and mobiles through mobile applications)has invented a new category of e-commerce called “Tele-commerce.”
    Tele-commerce is now called as the The third wave of e-commerce.
    Electronic commerce, or e-commerce, is now entering what can be described as a third or mature wave. This wave is characterized by the international nature in which e-commerce is being conducted and the reliance on revenue models as opposed to ‘good internet ideas’. The ‘dot-com’ bubble that burst at the end of the late 1990s has led to a revision of the approaches to establishing e-commerce initiatives.
    Whilst the first wave of e-commerce was dominated by US businesses and was primarily in English
    The second wave saw e-commerce shoppers interacting with websites in their own languages
    It’s now time to give way to the third wave, i.e – Tele-commerce, where transactions will be conducted over the phone using landline or mobile phones

  • Sam S

    Financial innovation will always bump up against privacy concerns.
    These concerns are the reasons bank-consumer bonds are so hard to break. I don’t want to share my information with so many entities.
    PayPal was lucky that Internet (and specifically eBay) was a killer app and yet even that needed to work with the banks.
    I like the video but I dunno what would compel me to use this technology if my bank isn’t an intermediary.