Everyone is talking about disruption, the unbundling of payments and innovation…how to stay relevant: traditional payment intermediaries wonder how to adapt whilst the new kids on the block grapple with the challenge of growing at scale. The excitement is infectious; I feel suspended in a Reality Distortion Field (RDF) where everything is possible…and then I wake up.
There are a lot of amazing ideas, concepts, angles and opportunities, but to date, innovation is still incremental. Payments are being made seamless, but it is more about the experience of the purchase and less about the transaction itself. The challengers, focused on delivering customer delight, are also looking at how they can add value in ancillary services, leveraging big data in particular.
However, in the majority of cases, all examples of innovation at PayExpo and in the broader payment industry, tend to leverage the existing payment rails. Generally our market is still based on our long established card technology and infrastructure (one of the many examples talked about last week was the German challenger bank, Number26, forced to cancel customer accounts following consumers’ relentless dependency on cash/ cards and ATMs).
Incremental or sustained innovation IS a very good thing. Consumers and businesses are expecting more of our industry (48% of SMEs are frustrated by delays in business payments reaching their account; 45% of UK current account holders would be tempted to switch providers by the offer of faster electronic payments; merchants expect an increasing variety of returns on their payments investment).
However, are payments being DISRUPTED and how should existing incumbents respond?
The use of the word disruption in articles has ballooned in the past decade, driving Clayton M. Christensen to revisit the definition of Disruptive Innovation. In a nutshell, what are some of its key tenets?
- Must start in the low-end market or a new market foothold
- Doesn’t reach mainstream markets until quality becomes more standard
- Introduces new business models
On this basis, mobile payment wallets are not disruptive, but P2P lending to some extent is (started in a more sub-prime customer base, relatively new business model that removes the intermediary); contactless payments is an example of sustained innovation, but the blockchain IS a disruptive technology.
We are moving toward a new payment ecosystem, which will become more fragmented and more focused on innovation. Regulation is levelling the playing field, opening up the industry to new entrants (open-APIs and PSD2 in Europe) and also shifting the market away from existing networks toward new pipes such as Immediate Payments (New Access Model for UK Faster Payments). These market forces will result in a more open and real-time payment industry where the pressure to compete on sustained innovation will increase. It will also create the perfect environment for disruption to occur.
We are likely to see new Payment Methods that do not rely on existing card or account payment rails, coming from the lower tier of the consumer market for example (as is the case in emerging economies).
We are likely to experience fundamental changes to the business models of payments following downward pressure on interchange fees with challengers perhaps monetizing payments based on risk profile choices, bundled transactional data or bridging physical and digital assets.
So yes, payments will ultimately be disrupted. Payment incumbents need to react to incremental innovation today, for example by integrating Immediate Payments into their business models or moving toward platform ecosystems and open APIs. However they should also not overact. They have large existing customer bases that need to be supported, products and services that continue to be profitable and margins that need to be protected. Beware of the RDF!
This blog refers to the work of Clayton M. Christensen and www.innosight.com.
To find out more, please request here the presentation given at PayExpo Europe 2016 by Silvia Mensdorff-Pouilly, General Manager Europe, Processors and Networks at ACI Worldwide. According to Silvia, the new payment ecosystem is fast, open, and disruptive, and the combination of open APIs and PSD2 regulation will create opportunities for both traditional banks and challengers.