Disruptive innovations in payments

Michael Wade Professor,

IMD Business School

Disruptive Innovation in Payments

Michael Wade, Professor of Strategy and Innovation

IMD, Lausanne, Switzerland

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MAPS HAVE BEEN DISRUPTED BY…

WHICH IS BEING DISRUPTED BY…

Almost all disruptive innovations do one of two things (or both)…

1. They provide a new benefit

2. They solve an existing problem

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Theory of Disruptive Innovations

Source: Christensen, The Innovators Dilemma, 1997

Thanks to Albrecht Enders

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Disruptive Innovation

Performance required by average users

Established product Sustaining innovations

New product

Could this happen to you? 8

We asked you, and this is what you told us...

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How likely is it that there will be a major disruptive innovation in payments in the next 5 years?

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Which of the following groups of companies do you believe will be the biggest winners following the next disruptive innovation in payments?

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Which of the following groups of companies do you believe will be the biggest losers following the next disruptive innovation in payments?

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The main driver of disruption in payments is… Regulation or Technology?

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In addition…

You were pretty sure that…

- Mobile devices would pay a big role in the future of payments (infrastructure, loyalty, etc…)

- Data about payments will drive new business models

- Interchange is here to stay

- Banks will continue to control online access to consumer’s funds

You weren’t sure about…

- The future of NFC or biometrics

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Where is the threat coming from?

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People are shopping in a new way…

Consumers have been changing the way they shop, but not yet the way

they pay…

however, there are lots of players out there who want to change that.

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So, who are these potential disruptors?

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...and how are they going to eat your lunch?

Source: Douwe Lycklama, Innopay, 2012

Digital Wallets

• Most of the big players are on the wallet bandwagon (card companies, telcos, Apple, Google, industry consortia…)

• Different varieties: NFC (Google Wallet), QR (Apple, LevelUp)

• Cool factor: keeps the card in the pocket. In some systems, even the phone stays in the pocket (Sum up and Pay with Square)!

• Great opportunity for added services (for consumers and merchants), targeted marketing, consumer tracking, couponing, loyalty, etc.

• Innovative examples of wallets in use across the world (Tesco’s shopping wall in South Korea)

• But… slower adoption than expected

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So far, digital wallets have more ‘bark than bite’. Widespread adoption (NFC,

QR) might change that. However, while there will be winners and losers

depending on the wallet, they have relatively little impact on the current

payments system. Conclusion: low disruptive threat

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Transactional Innovations

P2P systems are everywhere!

Across the globe, companies are offering real-time, low-cost P2P transaction services that are circumventing the traditional payment infrastructure…and they are multiplying at an alarming rate!

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• Immensely popular in some developing countries • Lots of positive media coverage • New consumer segments (individuals and

businesses without back accounts) • Send and receive cash using mobile phones • Often operated through Telcos

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Mobile phone based P2P systems are disruptive within markets where the

banking infrastructure is poor and regulations are less stringent, but have not gained much traction in developed

countries. Conclusion: low disruptive threat

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Transactional innovations that are closer to home

• Many systems are designed to cut out acquirers and credit cards (popmoney, Dwolla, GoCardless). Instead, they promote direct bank-to-bank transactions.

• Aimed at merchants as well as consumers. • Transit systems, like Octopus, aggregate transactions

and thus dig into transaction fees. • Social lending systems, like Zopa and Lending Club,

take advantage of tight lending by banks and low interest rates.

• Virtual currencies like BitCoin aim to completely disrupt the current payments system.

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Taking aim at you…

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Lots of potential for disruption here… but lack of scale, consumer risk aversion,

regulation, lack of standards, and the chicken and egg problem, are likely to

keep these services as niche players for the foreseeable future.

Conclusion: moderate disruptive threat

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At this point, you might be feeling pretty good…

…and so you should.

Many of your potential disruptors are weak… and we haven’t even talked

about your strongest asset yet.

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Most consumers are happy with the current system!

satisfied

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• Just last month, Amazon launched the Amazon Coin, which is tied to the US$. So far, it can only be used to buy apps for the Kindle, and cannot be exchanged for other currencies.

• It is aggressively offering loans to small businesses, but the proceeds can only be used to purchase items from its sites.

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Amazon is focused on its own businesses and unlikely to disrupt the payments landscape in the short term.

Conclusion: low disruptive threat

• Google is an experienced disruptor!

• It is heavily promoting its wallet, which it is offering for free

• It has launched a credit card in the US and UK (with MasterCard)

• It is offering loans for purchasing AdWords

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Google is dangerous because it is prepared to give valuable things away for free. For the moment, however, it seems focused on advertising, not payments.

Conclusion: moderate disruptive threat

• Apple has an impressive track record of disruption

• Has a wallet product – Passbook – based on QR technology

• NFC was expected to be added to the iPhone5 but was not

• Acquired biometric scanner maker AuthenTec in 2012

• Rumours of an iWatch, that can be used for payments linked to an Passbook-enabled iPhone in the pocket

• But, that’s not all…

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• Apple already has the world’s largest database of consumer payment information

• Apple already has products that are being used as POS devices

• Apple has all the necessary pieces!!! Plus a HUGE motivation for disruption – it could save a lot of $$$

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The cost of the current payment system to Apple is huge. Expect them to do something about it. They have it

all: an established customer relationship, a trusted brand, payment

information, purchase and POS devices, a channel, and deep pockets.

Conclusion: high disruptive threat

• PayPal is already in your business:

– It is an acquirer

– It has banking licenses

– It facilitates transactions through multiple methods (and actively discriminates between them)

– It is jumping the divide from an online payment processor to a one-stop-payment-shop: online, offline, and mobile

– It has made deals with offline retailers like Starbucks, Home Depot, and Abercrombie & Fitch

– It has arrangements with a card company (Discover) and an equipment company (NCR)

– It is huge: 110 million active users

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PayPal is an ambitious player with a good brand, a wide reach, a

reputation for agility, and deep pockets. Unlike Apple, PayPal was

born in the payments industry. This IS their core business.

Conclusion: high disruptive threat

What is the bottom line…?

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Consumers are generally satisfied…they trust the current system, they know how it works, they see it as inexpensive and convenient.

…but, they are starting to see the real cost of the system; they want more information and services; they want more speed; and are more open than ever to alternatives (the iPhone effect).

Conclusion: safe for now, but the clock is ticking! 41

Merchants are frustrated. Their costs are high and unpredictable. They want a stronger relationship with their customers. They want to add services. The feel constrained by the current system.

Conclusion: they need you, but are not loyal to you. If they see something cheaper and better, they will jump.

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My best guess…

The current system will survive, but the winners and losers will be unequally distributed, including within this room!!

Banks …OK for the foreseeable future

Acquirers …vulnerable in a mobile world

Card companies …need to up their game

Telcos …power if they choose to use it

Equipment vendors …in for a bumpy ride

Consultants …always happy! 43

Retail story…

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Remember what I said about disruptive innovations…?

1. They provide a new benefit

2. They solve an existing problem

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Don’t wait to be disrupted. Figure out the consumer and merchant pain

points and develop solutions now. It is better to disrupt yourself than be

disrupted by others!

Disruptive Innovation in Payments

Michael Wade, Professor of Strategy and Innovation,

IMD, Lausanne

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