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!!!!!!The!Innovation!Project!2013!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Interactive!CEO!Sessions!|!March!20621,!2013!

MARKET!PLATFORM!DYNAMICS!! ! ! ! ! ! !!!!!!!!!!!!!theinnovationproject2013.com!! ! ! !

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Over!two!days,!more!than!100!speakers!and!500!senior!members!of!the!payments!industry!will!

change!the!way!that!the!payments!and!its!broader!commerce!ecosystem!thinks,!talks,!delivers!

and!ignites!innovation.!On!March!20th!and!21st!the!greatest!minds!in!commerce!and!payments!

will!assemble!at!Harvard!University!near!Boston!to!kick!the!conversation!about!innovation!up!to!

an!entirely!different!level!at!a!program!called!The!Innovation!Project.!Speakers!and!delegates!are!among!the!most!senior!executives!and!elite!innovators!from!literally!every!established!

payments!company!worldwide,!along!with!the!CEOs/founders!of!the!most!innovative!startMups.!!

!For!one!of!the!event's!five!modules,!we’ve!arranged!something!quite!special!by!pairing!eight!

celebrated!thought!leaders!with!veteran!CEOs!to!talk!about!how!they!individually!and!

collectively!have!innovated!payments.!

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Al!Gore!(former!U.S.!VP),!Steve!Levitt!(Freakonomics),!Eric!Reis!(The0Lean0Start0Up),!Rosie!Rios!(US!Treasurer),!Russell!Simmons!(Rush!Card),!Raj!Date!(CFPB),!and!Josh!Lerner!(Architecture0of0Innovation)0are!among!those0set0to!challenge!the!conventional!wisdom!around!what!it!will!take!

to!get!merchants!and!consumers!to!adopt!new!ways!to!shop!and!pay.!!!!Then,!selected!audience!members!will!have!a!chance!to!interact!with!these!speakers!on!stage!–!

in!live!case!sessions.!The!result!is!our!“Up!Close!and!Personal”!Interactive!Keynotes!that!will!

entertain,!inform!and!challenge!your!way!of!thinking.!

These!eight!powerMpacked!sessions!are!the!“glue”!that!knits!together!our!two!days!at!Harvard.!

Each!of!these!sessions!is!designed!to!“set!the!table”!for!a!very!different!kind!of!conversation!

about!igniting!innovation!in!payments!–!with!the!innovators!whose!necks!are!on!the!line!to!

deliver!paired!with!“celebrity!innovators”!who!know!a!thing!or!two!about!payments!and!

innovation!but!work!outside!of!the!sector.!

To!start!off,!we're!featuring!the!following!two!panels:!!

"Shoponomics:!The!Hidden!Side!of!Why!Consumers!Buy!and!How!They!Pay"!!

Steve!Levitt,!economist!and!Freakonomics!author!who!made!“economics”!(and!“freak”)!

everyday!words,!and!Don!Kingsborough,!PayPal’s!King!of!POS!and!former!President!of!both!

Blackhawk!and!Hasbro,!will!open!our!eyes!to!what!we!have!all!totally!missed!from!the!clues!

that!consumers!are!leaving!for!us!in!the!big!bad!world!of!payments.!Ed!McLaughlin,!Chief!

Product!Officer!for!MasterCard,!Dan!Henry,!CEO!of!NetSpend,!Alex!Rampell,!CEO!of!TrialPay,!

and!Troy!Carrothers,!Head!of!Financial!Services!at!Kohl’s,!are!among!the!CEOs!who!will!share!

their!inner!most!consumer!behavior!secrets!and!the!lessons!they!have!learned!(sometimes!the!

hard!way)!when!overlooking!the!breadcrumbs!that!consumers!drop!that!we!often!overlook!

when!it!comes!to!their!buying!and!payment!habits.!

!!!!!!The!Innovation!Project!2013!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Interactive!CEO!Sessions!|!March!20621,!2013!


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"The!Architecture!of!Innovation:!How!Big!Companies!Can!Innovate!Like!Little!Companies."!!

Think!small.!Words!to!live!by,!if!you’re!a!CMlevel!exec!and!want!to!innovate!like!a!start!up.!So!says!Josh!Lerner,!HBS!Professor!and!author!of!The0Architecture0of0Innovation.!He!and!Diane!Offereins,!President!of!the!Discover!Network,!will!challenge!everything!you!have!ever!heard!or!done!to!create!and!ignite!an!innovation!agenda!in!payments!–!with!some!of!the!most!successful!largeMcompany!innovators!in!this!space!(who!have!the!battle!scars!to!prove!it)!including!Mike!Kennedy,!Founder!and!Chairman!of!ClearExchange,!Mike!Pasilla,!CEO!of!Elavon,!Chitra!Narasimhan,!Managing!Director!from!Citi!Ventures,!and!Chris!Gardner,!serial!entrepreneur!and!CEO!of!Paydiant!(who!will!tell!us!what!it!feels!like!as!an!entrepreneur!selling!into!incumbent!organizations).!

Each!week!we'll!add!another!deep!dive!into!an!Interactive!CEO!Keynote!panel.!!



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Shoponomics:!

The!Hidden!Side!of!Why!Consumers!Buy!and!How!They!Pay!

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March!20!11:15!a.m.!–!12:45!p.m.!

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Thought!Leader!and!CEO!Counterparty!!

Steve!Levitt!|!Economist,!Author,!Freakonomics!!Don!Kingsborough!|!VP!PayPal!POS,!former!President!of!Blackhawk!and!Hasbro!

CEO!Panel!!

Dan!Henry!|!CEO!of!NetSpend!!Ed!McLaughlin!|!CPO!for!MasterCard!!

Alex!Rampell!|!CEO!of!TrialPay!Troy!Carrothers!|!Head!of!Financial!Services!at!Kohl's

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!!!!!!The!Innovation!Project!2013! 1!

Interactive*CEO*Session*|*Shoponomics*Meets*Freakonomics*|*March*20,*2013!

MARKET*PLATFORM*DYNAMICS!* * * * * * *************theinnovationproject2013.com** * * !

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Spoiler*alert.**

After*Steve*Levitt’s*(Freakonomics)*and*Don*Kingsborough’s*(PayPal)*CEO*panel*on*consumers*and*the*adoption*of*new*payments*and*commerce*innovations,*you’ll*never*believe*anything*you*hear*ever*again*on*what*it*will*take*for*consumers*to*break*their*old*habits*and*make*the*move*to*mobile*(or*whatever*else*you*have*up*your*sleeve).**

Payments*101.**

Payments!is!a!two8sided!business.!It!requires!the!engagement!of!both!merchants!and!consumers.!So,!

anything!that!is!intended!to!“innovate”!payments!better!deliver!enough!value!to!both!sides!so!that!both!

merchants!and!consumers!have!the!incentives!to!move!away!from!what!they!know!works!today!to!the!

promise!of!something!that!might!work!better!in!the!future.!!!

Payments*Innovation*101.*

Turns!out,!that’s!a!big!deal!—!otherwise,!the!thousands!of!“payments!innovations”!that!have!been!put!

into!the!market!over!the!last!five!or!six!several!years!would!have!gotten!traction,!and!we’d!all!be!living!

happily8ever8after!in!our!payments!innovation!nirvana.!!

Consumers!and!merchants!have!ingrained!habits!that!dictate!their!behaviors!including!where!they!shop,!

how!they!decide!what!to!buy,!and!how!they!pay.!!Some!say!that!those!habits!are!irrational!—!sort!of!like!

I!happen!to!think!my!mother’s!budget!envelopes!are!—!but!they!help!people!cope!with!the!complexity!

of!their!financial!lives!and!so,!who’s!to!really!judge?!

Merchants!have!ingrained!habits!too,!resulting!from!investments!in!training!a!high!turnover!staff!and!

point!of!sale!equipment,!and!standards!that!are!expensive!to!swap!out.!!

Freakonomics*101.*

So,!all!of!the!innovation!that!sounds!so!cool!has!to!actually!interrupt!those!habits!–!and!basically!get!

consumers!and!merchants!to!invests!in!creating!a!whole!new!routine!–!and!the!reward!that!makes!all!of!

that!time!and!effort!worthwhile.!

This!is!where,!in!the!words!of!Steve!Levitt,!author!of!Freakonomics!and!one!of!The!Innovation!Project!2013’s!interactive!keynote!leaders,!“the!conventional!wisdom!is!often!wrong.”!And!"cool"!doesn’t!solve!

any!more!problems!or!create!a!better!value!for!most!consumers!than!implementing!a!new!technology!

on!the!merchant!side!solely!because!it!is!cheaper.!!

• Square!wasn’t!about!the!dongle;!it!was!about!a!new!business!model!that!made!it!possible!for!micro!

merchants!to!get!a!merchant!account!–!and!use!the!dongle!as!a!way!to!convert!their!phones!into!

acceptance!devices.!

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• Starbucks’!mobile!app!wasn’t!about!payment!via!mobile;!it!was!about!using!the!phone!to!give!

people!better!information!about!their!prepaid!card!balances!–!which!was!then!bundled!with!




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payment.!!

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• LevelUp!wasn’t!about!zero!interchange!to!merchants;!it!is!about!giving!consumers!a!credit!pegged!

to!the!frequency!of!visits!to!their!favorite!merchants!–!which!created!the!basis!for!a!new!business!

model!that,!in!turn,!pegged!merchant!payments!to!a!percentage!of!that!credit.!

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• MUPesa!wasn’t!about!replacing!cash!with!the!mobile!phone;!it!is!about!giving!Kenyans!a!safer!way!to!

send!money!to!their!relatives!in!the!villages!–!which!in!turn,!increased!the!amount!of!cash!

circulating!in!that!economy!as!money!was!transferred!from!person!to!person!in!a!safer,!easier!and!

more!reliable!way.!!

In!every!single!one!of!these!cases,!trusting!“conventional!wisdom”!would!have!gotten!these!innovators!

very!little!and!probably!into!a!heap!of!trouble!(and!debt).!!

Innovation*Project*2013*101*

Six!of!the!most!dynamic!(and!well,!battle!scared)!innovators!in!payments!will!give!The!Innovation!Project!

delegates!a!first8hand!account!of!what!happened!when!they!turned!conventional!wisdom!on!its!keister!

and!gave!consumers!something!new!to!use!when!shopping!or!paying.!!

• Dan-Henry,-CEO-of-NetSpend,!says!that!it!“provides!something!that!better!meets!the!financial!

services!needs!of!its!customers!than!a!traditional!bank!account”!—!which!is!a!noble!and!valuable!

mission!—!yet!prepaid!remains!one!of!the!least!sticky!financial!services!products!on!the!market.!

While!most!of!its!competitors!have!had!their!clocks!cleaned!earnings!wise,!NetSpend!has!done!

remarkably!well!—!well!recently,!that!is.!NetSpend!may!have!seen!its!share!of!tough!times,!but!may!

be!on!to!something,!and!is!definitely!into!the!sort!of!innovation!that!gives!its!customers!a!reason!to!

stick!with!it.!Dan!will!share!the!good,!the!bad,!the!ugly!and!the!behavioral!economics!of!the!

alternative!banking!product!that!few!have!managed!to!make!pay!(for!themselves)!yet!continue!to!

try.!!!

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• Alex-Rampell,-CEO-of-TrialPay!kicked!conventional!wisdom!to!the!curb!years!ago,!at!the!ripe!old!age!

of!26.!TrialPay!was!born!because!Alex!figured!out!that!many!people!like!to!buy!many!things!but!few!

people!like!to!buy!all!things.!TrialPay!is!all!about!getting!people!to!acquire!the!stuff!they!may!want!

but!don’t!want!to!pay!for!(or!pay!full!price!for)!like!software!–!by!throwing!it!in!with!stuff!that!

people!are!willing!to!pay!for,!like!red!roses!on!Valentines!Day.!I!say!truly!pay!attention!here!to!the!

man!behind!the!curtain!whose!ingenious!business!model!has!the!rose!guy!and!the!software!guy!

being!compensated!for!sharing!leads,!and!the!consumer!scoring!great!products.!Find!out!how!he!did!

that,!and!more,!only!if!you’re!an!Innovation!Project!2013!delegate.!

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• Ed-McLaughlin,-CPO-of-MasterCard,!is!all!about!moving!MasterCard!and!its!customers!toward!a!

world!“where!the!physical!and!digital!worlds!are!converging”!and!where!“mobile!will!shape!the!way!

consumers!shop!for!goods!and!services.”!Except!that!its!consumers!and!merchants!aren’t!quite!

ready!to!go!all!the!way!–!shop-and-pay!–!using!their!mobile!devices!–!even!if!that’s!the!yellow!brick!




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road!that!Ed!and!team!would!like!them!to!follow.!As!an!early!adopter!of!NFC!mobile!payments,!P2P,!

mobile!prepaid,!offers,!deals!and!other!engagement!experiences,!Ed!and!MasterCard!can!also!attest!

to!another!Steve!Levitt!Freaknonomics,truism:!“Information!is!a!beacon,!a!cudgel,!an!olive!branch,!a!

deterrent!—!all!depending!on!who!wields!it!and!how.”!Ed!will!share!his!(and!MasterCard’s)!deep!

dark!information!pockets!about!how!MasterCard’s!various!pursuits!in!payments!innovation!has!been!

all!of!the!above!–!and!more!–!and!helped!to!shape,!reshape!and!recast!MasterCard's!payments!

consumer!innovation!agenda.!

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• Troy-Carrothers,-Head-of-Financial-Services-at-Kohls,!will!tell!a!very!different!tale.!Kohls,!which!in!2009!tied!Nordstrom’s!for!the!top!spot!as!retailer!of!the!year,!has!seen!its!powerful!formula!of!price!

+!product!quality!+!promotions!stumble!a!bit!since.!The!2012!holiday!season!was!okay,!not!

spectacular,!and!its!exclusive!fashion!forward!lines!like!Jennifer!Lopez,!Derek!Lam,!Narcisco!

Rodriquez,!and!others!haven’t!really!driven!consumers!to!whip!out!their!Kohl’s!cards!and!rush!to!the!

registers.!Nor!has!the!slump!in!JC!Penney!sales!–!Kohl’s!hasn’t!really!seen!many!of!those!customers!

come!their!way!either.!Says!Carrothers’!boss,!Kohl’s!CEO,!Kevin!Mansell,!“How!do!we!reconnect!with!

the!customers,!so!we!quit!disappointing!her?!We!keep!her!engaged!and!give!her!a!unique!

experience.”!Sales!and!coupons!and!promotions!have!been!a!core!part!of!how!Kohls!does!that!and!

create!the!demand!for!its!“highly!discretionary”!items!–!but!anything!mobile!seems!like!it!has!taken!

a!bit!of!a!back!seat!to!taking!care!of!the!basics!–!giving!consumers!an!incentive!to!make!Kohl’s!their!

habit.!How!mobile!and!digital!can!and!will!change!that!is!what!we’ll!hear!first!hand!from!Troy.!

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• Don-Kingsborough,-VP-of-POS-at-PayPal,!has!been!in!retail!for!40!years.!Don’t!forget,!before!PayPal!and!even!Blackhawk,!there!was!Hasbro!and!Teddy!Ruxpin.!Kingsborough!is!all!about!“giving!the!

consumer!what!she!wants”!and!not!what!they!or!the!merchants!want!them!to!have.!As!the!creator!

of!Blackhawk’s!prepaid!network,!Kingsborough!knows!first8hand!the!complexities!of!igniting!a!new!

network!of!any!kind.!“Getting!consumers!to!adopt!any!new!thing!and!having!retailers!adopt!at!the!

same!time!is!difficult,"!he!says.!But!PayPal!has!a!lot!of!the!chickens!lined!up!with!its!135+!million!

digital!wallets!and!its!recent!deal!with!Discover!gives!it!the!7+!million!merchant!eggs!those!

consumers!need!to!use!those!wallets.!But!that’s!not!enough!–!PayPal!still!needs!consumers!to!

develop!a!habit!of!using!PayPal!offline!just!as!they!do!off!eBay!today.!Easier!said!than!done.!Not!only!

will!Don!share!the!tricks!and!traps!of!cracking!chicken!and!egg!dilemmas!in!a!payments!

environment,!he’ll!share!new!brand!new!insights!from!PayPal’s!massive!global!test!and!learn!

experiments!related!to!mobile!payments.!We’ll!get!his!take!on!how!much!consumers!like!and!use!

mobile,!why!in!the!world!they!are!issuing!plastic!cards,!whether!“empty!hands”!has!been!the!

success!they!had!hoped!for!and!why!everyday!spend!is!in!their!sweet!spot!—!and!how!they!plan!to!

dominate.!!!

Innovation*Project*2013*Delegate*101*

And,!around!all!of!this!insight,!Steve!Levitt!will!push,!prod!and!poke!them!all!to!uncover!the!hidden!clues!

for!how!we!can!all!leverage!the!assets!we!have!(or!could!acquire)!to!get!consumers!to!shop!and!pay!the!

way!we!all!imagine!it!to!be!–!a!world!where!mobile!makes!it!frictionless,!seamless!and!painless.!!




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Key!questions!–!among!others!will!include:!

• If!consumers!like!plastic!so!much!and!don’t!seem!to!mind!using!their!phones!in!stores!to!look!up!

stuff!and!then!walking!to!the!register!to!pay!with!a!plastic!card,!why!do!we?!!

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• For!whose!benefit!is!the!mobile!payments!solution!being!pushed!–!the!consumers!or!the!merchants!

or!the!networks?!Whose!problem!does!it!really!solve!–!and!if!that!problem!is!so!large,!then!why!is!

there!so!much!difficulty!getting!everyone!to!agree!to!move!now?!

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• What!is!the!real!value!of!the!deals!and!promotions!and!loyalty!programs!that!all!of!you!seem!to!

thrive!on!and!use!with!great!frequency?!Are!the!right!incentives!being!applied!to!the!right!set!of!

actors?!How!do!you!know!and!what!should!you!be!doing!instead?!

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• What!lessons!can!be!taken!from!the!JC!Penney!experience?!Why!does!everyday!pricing!work!for!

Walmart!and!not!JC!Penney?!And,!can!daily!deals!sashay!into!something!else!and!survive!that!

transition!in!the!consumers!mind?!

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• PayPal!is!an!interesting!poster!child!for!how!consumers!parse!their!loyalty!when!using!a!digital!

wallet.!They!chose!the!wallet!–!PayPal!–!and!the!merchant!–!but!not!the!underlying!payment!

method.!As!a!merchant!and!as!PayPal,!you!smile,!but!do!you!if!you’re!the!bank,!or!a!competing!

network.!How!do!you!break!through!–!and!what!incentives!do!you!need!beyond!the!typical!coupon!

and!promotions!menu?!

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The!Architecture!of!Innovation:!

How!Big!Companies!Can!Innovate!Like!Little!Companies!

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March!21!2:30!p.m.!–!4:00!p.m.!

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Thought!Leader!and!CEO!Counterparty!!!

Josh!Lerner!|!HBS!Professor!and!Author!of!The$Architecture$of$Innovation!!Diane!Offereins!|!President,!Discover!Network!

CEO!Panel!!!

Mike!Kennedy!|!Founder!and!Chairman!of!ClearExchange!and!EVP!of!Wells!Fargo!Strategy!and!Innovation!!

Chitra!Narasimhan!|!Managing!Director,!Citi!Ventures!and!former!head!of!Strategy!American!Express!!

Mike!Pasilla!|!CEO!of!Elavon!!Chris!Gardner!|!Serial!entrepreneur!and!CEO!of!Paydiant!

!!

The$Innovation$Project$2013$ 1$Interactive*CEO*Session*|*The*Architecture*of*Innovation*|*March*21,*2013$

MARKET*PLATFORM*DYNAMICS!* * * * * * *************theinnovationproject2013.com** * * $

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!Out*With*the*Old,*In*With*The*New*$

Peter$Drucker,$the$father$of$modern$management$and$perhaps$the$most$influential$thinker$on$that$

subject$once$said,$“If$you$want$something$new,$you$have$to$stop$doing$something$old.”$When$written$in$

the$mid$1950s,$Drucker$was$describing$the$rationale$for$his$legendary$“management$by$objectives”$

concept,$which$as$we$all$know,$is$about$aligning$employee$performance$with$corporate$objectives$in$

order$to$assure$that$corporate$strategy$is$executed$effectively$and$consistently.$!But,$that$same$notion$could$also$be$the$tweet$that$Josh$Lerner$L$Harvard$Business$School$professor,$

expert$on$entrepreneurism,$innovation,$venture$capital$and$private$equity,$and$author$of$the$recently$

released$book$“The%Architecture%of%Innovation”$L$might$use$to$describe$how$corporates$must$approach$

innovation$today.$!Lerner$draws$his$insights$from$decades$of$work$at$the$intersection$of$entrepreneurship,$venture$

investing,$and$private$equity.$He$may$spend$a$lot$of$his$days$at$the$blackboard$as$an$HBS$professor,$but$

he$is$an$active$and$wellLrespected$advisor$to$the$biggest$names$in$the$business$in$these$areas.$One$of$

Lerner’s$most$potent$observations$—$and$key$input$to$this$book$—$relates$to$his$research$into$the$

performance$of$companies$that$had$been$acquired$by$private$equity$firms$and$then$ultimately$spun$off$

business$units.$He$and$his$colleagues$observed$that$before$the$transaction$and$spin$offs,$there$were$few$

differences$in$performance$between$the$firms$and$their$category$competitors.$After$the$acquisition$and$

spin$off,$things$changed.$The$acquired$firms$became$more$innovative,$not$because$they$did$more$

“innovative”$things,$but$because$the$things$they$decided$to$innovate$around$were$more$focused,$

investments$in$innovation$more$targeted,$and$incentives$around$outcomes$more$clearly$defined.$$

Overall$performance$in$the$core$business$improved$as$well.$This$drove$a$number$of$additional$insights$

around$the$structure$of$—$or$architecture$of$innovation$—$ in$large$organizations.$!“An$abundance$of$evidence$suggests$that$greater$attention$to$the$ways$in$which$organizations$and$

incentives$shape$the$innovation$process$can$produce$significantly$better$results,”$Lerner$says,$

conceding$with$“innovation$is$complex$and$multiLfaceted.”$But$he$is$pretty$emphatic$that$the$

traditional$ways$that$corporations$attack$“innovation”$today$is$deeply$flawed$—$and$worse.$!Centralized$R&D$models,$which$relegate$the$responsibility$for$innovation$to$a$particular$group$within$a$

company,$is$a$pretty$standard$way$for$many$large$companies$to$organize$its$innovation$initiatives.$ The$

rationale$for$such$a$method$is$to$“ring$fence”$innovation$so$that$it$doesn’t$disrupt$or$distract$the$core$

business$and$so$that$outcomes$related$to$innovation$can$be$measured$and$monitored.$Except$that$the$

actual$results$don’t$exactly$map$to$those$expectations.$!As$recently$as$the$end$of$the$1990s,$for$those$companies$that$organized$innovation$that$way,$R&DL$

driven$innovation$contributed$less$than$25$percent$of$the$value$of$what$investments$in$traditional$assets$

would$have$produced$for$that$company$(e.g.$supply$chain$efficiencies,$cost$reductions,$etc.).$A$cascade$

of$misaligned$incentives$produce$the$wrong$outcomes,$Lerner$concludes,$including$not$knowing$when$to$

deep$six$innovations$that$just$won’t$ever$produce$useful$results$and,$ironically,$shuttering$projects$just$

because$new$leadership$feels$compelled$to$change$things.$



!

!

!So,$if$R&D$efforts$in$large$corporates$don’t$drive$innovation,$then$the$venture$capital$model$must.$Venture$investing$is,$of$course,$when$independent$investors$contribute$funds$and$the$professionals$who$manage$those$funds$make$bets$on$companies$that$have$the$prospect$of$delivering$a$return$on$those$investments$over$a$set$time$horizon,$usually$8$to$10$years.$But$Lerner$doesn’t$exactly$think$that’s$the$

poster$child$for$commercializing$innovation$either.$Investments$made$by$the$entire$venture$capital$sector$over$the$course$of$any$given$year$amount$to$much$less$than$the$R&D$budgets$of$a$single$giant$pharmaceutical$firm$like$Merck$or$a$notLsoLinnovative$GM.$And,$in$2011,$ventureLbacked$firms$

represented$less$than$10$percent$of$all$publically$traded$firms$in$the$U.S.$!The$venture$model,$Lerner$believes,$is$flawed$for$a$number$of$reasons$too,$including$its$dependence$on$public$markets$to$produce$liquidity$–$the$hallowed$“exit.”$ That$causes$VCs$to$invest$only$in$firms$that$

can$scale$and$drive$an$exit$in$their$investment$time$horizon$or$by$pegging$company$valuations$to$the$public$market’s$view$of$the$value$of$that$sector.$The$result$is$that$some$promising$sectors$or$companies$are$completely$overlooked$given$their$longer$or$more$difficult$time$horizons.$Some$companies$can$also$

become$completely$overvalued$because$the$market$overstates$the$value$of$a$technology$or$a$concept$that$may$not$be$all$that$valuable$to$the$sector$at$all,$making$it$harder$to$ultimately$produce$a$return$on$that$investment.$!Architecting*Innovation*in*Payments$Lerner’s$insights$as$applied$to$innovation$in$the$payments$sector$is$relevant,$important$and$critical,$

especially$as$the$pace$around$innovation$in$this$sector$is$increasing.$Payments$is$about$the$most$complex$platform$industry$there$is$and$igniting$innovation$in$payments$is$anything$but$a$given,$even$if$a$

company$is$doing$it$within$the$construct$of$a$successfully$operating$platform.$The$complexity,$as$we$all$know,$rests$with$the$discipline$of$having$a$strategy$that$can$create$the$delicate$balance$across$all$stakeholders,$deliver$traction$in$a$relevant$timeframe$and$drive$profits.$Many$investments$in$innovation$

by$corporates$and$venture$funds$underestimate$the$complexity$of$getting$that$to$happen$and$overestimate$the$adoption$of$“new”$by$merchants$and$consumers,$often$because$the$incentives$associated$with$driving$this$adoption$haven’t$been$well$developed.$!The$combination$of$new$technology,$investment$bubbles$and$a$lack$of$appreciation$for$this$complexity$

has$caused$otherwise$rational$people$to$make$irrational$or$illLtimed$bets$in$payments.$Consider$the$

following:$!• IllLtimed$investments$in$payments$technology$didn’t$just$start$a$few$years$ago.$The$Internet$bubble$

of$the$2000s,$fueled$by$the$ability$to$shop$online$for$the$first$time,$is$rife$with$payments$innovation$road$kill,$including$one$that$the$venture$community$itself$voted$one$of$its$worst$all$time$investments$–$Flooz.$This$online$currency$worked$then$ like$Facebook$Credits$and$Amazon$Coins$works$today$–$except$that$the$stuff$people$wanted$to$buy$was$physical$goods$from$places$like$Macy's$and$the$Gap.$Even$ $50$ million$ dollars$ and$ endorsements$ from$ celebs$ such$ as$ Whoopi$ Goldberg$ couldn’t$ get$enough$ legitimate$consumers$ to$ try$ it.$ Flooz$shut$down$ in$2001,$not$ too$ long$after$ it$ launched$ in$2001,$when$the$only$people$who$responded$well$to$its$proposition$were$crooks$who$used$it$to$hack$into$people’s$accounts.$



!

!

!• Then$there’s$Pay$By$Touch.$This$company$attracted$$360$million$dollars$in$2003L2004$when$it$

devised$the$payment$method$to$end$all$payment$methods$–$pay$by$finger.$It$was$rolled$out$to$700$retail$locations$to$great$fanfare$only$to$fall$into$bankruptcy$less$than$five$years$later.$Investors$had$themselves$convinced$that$the$payment$system$of$the$future$was$one$that$rode$ACH$(so$cheaper$for$merchants),$leveraged$something$that$everyone$carried$into$the$grocery$store$(not$your$phone$but$your$finger),$and$was$secure$(used$a$PIN).$Obviously$the$pitch$was$compelling$enough$to$create$an$avalanche$of$funding,$but$not$enough$to$get$consumers$to$sign$on.$They,$in$fact,$gave$Pay$By$Touch$the$finger$(but$not$the$one$that$they$were$supposed$to$pay$with)$and$the$investors$lost$it$all.$

!!• The$daily$deals/group$buying$market$frenzy,$fueled$primarily$by$Groupon’s$entry$into$the$business$in$

2008,$also$drove$a$massive$amount$of$investment$in$“offers”Lbased$companies$by$venture$firms$and$initiatives$funded$by$just$about$every$payments$player$in$the$land.$It$also$ended$up$driving$huge$consolidation$as$about$170$of$530$offers$and$deal$sites$that$existed$in$2012$(down$considerably$from$

2011)$were$either$shut$down$or$sold$at$fire$sale$prices.$Groupon$itself$has$lost$more$than$80$percent$of$its$value$since$it$went$public$in$November$of$2011,$and$Amazon’s$book$value$of$its$$175$million$stake$in$Living$Social’s$stood$at$$52$million$at$the$end$of$2012;$after$Living$Social$posted$a$$905$million$operating$loss$that$same$year.$Investors$failed$to$recognize$that$the$“80%$off”$deals$was$a$race$to$the$bottom$of$the$market$that$few$merchants$wanted$to$run$consistently$and$that$deal$customers$didn’t$have$much$of$an$interest$in$becoming$full$price$customers$at$those$same$merchants.$

!!• Then$there's$NFC.$It's$hard$to$know$just$how$much$venture$firms$—$plus$those$in$the$payments$and$

mobile$ecosystems$—$have$invested$to$help$ignite$this$technology,$but$it's$likely$we're$in$the$billions.$We$do$have$a$few$concrete$data$points$though.$At$least$$100$million$was$invested$by$AT&T,$Verizon$

Wireless$and$TLMobile$in$ISIS$—$the$mobile$NFC$payments$network$that$has$delayed$its$launches$many$times$and$is$barely$in$the$market$today.$Vivotech$–$the$NFC$pioneer$that$came$onto$the$scene$in$2001,$raised$about$that$same$amount$over$the$decade$that$it$was$hawking$NFC$as$well$—$

investments$fueled$by$analyst$hype$and$payment$network$belief$that$that$NFC$was$the$future$of$mobile$payments.$In$spite$of$payment$network$evangelism,$a$challenging$value$proposition,$business$

model$and$steep$ignition$curve$resulted$in$Vivotech$selling$its$patent$portfolio$to$a$ventureLbacked$start$up$in$2011$for$pennies$on$the$dollar.$

!So,$where$are$we$now?$And$just$what$is$the$architecture$of$innovation$in$payments$going$forward?$

Well,$sort$of$where$Lerner$thinks$it$just$might$have$its$best$prospects$to$succeed.$

The$largest$players$in$the$space$are$today$funding$dozens$of$“innovation$experiments”$focused$on$

driving$payments$into$the$mobile$realm,$and$more$broadly$expanding$the$reach$of$electronic$payments.$At$the$same$time,$access$to$new$technologies$and$the$availability$of$IPLenabled$devices$such$as$the$

smart$phone$and$tablet$reduced$the$barriers$to$entry$for$many$an$emerging$venture$to$make$a$play$for$something$new,$innovative$and$gameLchanging.$ Hundreds$of$millions$of$dollars$of$venture$money$

The$Innovation$Project$2013$ 4$

Interactive*CEO*Session*|*The*Architecture*of*Innovation*|*March*21,*2013$


!

!

!poured$(and$are$pouring)$into$the$sector$to$foster$the$“next”$new$thing$in$payments.$In$2012$alone,$

more$than$$1$billion$was$invested$in$emerging$payments$firms$by$VCs.$

!But$as$good$(and$well$funded)$as$their$great$ideas$might$be,$most$of$these$ventures$will$need$

distribution$and$scale$to$ignite$and$access$to$the$“incumbents”$to$make$that$happen$in$any$sort$of$

meaningful$way.$They’ll$also$need$access$to$the$people$inside$the$organization$who$can$“school”$them$

on$what$it$means$to$be$in$the$payments$business.$Many$of$them$have$no$clear$idea$of$its$complicated$

innerLworkings.$

!Those$two$forces,$Lerner$believes,$sets$up$exactly$the$right$environment$for$the$right$model$for$

innovation$in$large$organizations$–$corporate$venturing$–$something$that$takes$the$best$of$both$worlds$

and$devises$a$structure,$a$framework$and$a$set$of$incentives$for$advancing$strategic$goals$and$generating$

good$returns$on$those$investments.$

!Simply$stated,$it$involves$having$corporations$invest$in$promising$start$ups,$usually$through$a$separate$

entity,$and$then$creating$an$operating$model$that$is$helpful$enough$to$the$venture$without$drowning$it$

in$the$corporate$bureaucracy$that$would$only$slow$things$down$–$or$worse.$

!Lerner$is$the$first$to$point$out$that$corporate$venturing$isn’t$always$the$match$made$in$heaven.$As$he$

recounts$in$his$book,$venture$capitalists$view$corporates$as$“the$dinosaurs$that$they’re$trying$to$kill,$the$

market$opportunity$they’re$trying$to$capture,”$so$it$isn’t$a$given$that$they’ll$be$met$with$open$arms$

when$they$arrive$on$the$scene$with$their$corporate$checkbooks.$But,$he$also$suggests$that$it$has$

produced$positive$results.$Lerner$says$the$returns$from$corporate$venturing$are$at$least$as$good$as$

venture$firms$produce$–$and$has$become$a$mechanism$for$both$stimulating$demand$for$a$company’s$

product$as$well$as$seeding$companies$to$develop$innovation$that$complements$its$own.$And$it$just$has$

to$in$payments$—$because$hardly$anyone$can$do$everything$without$playing$with$the$big$guys.$

!It$certainly$seems$to$have$caught$on$in$payments:$

!• American$Express$launched$a$$100$million$fund,$American$Express$Ventures,$to$invest$in$ventures$in$

2011.$

• Starbucks$invested$$25$million$in$Square$in$August$2012$and$will$be$deploying$its$mobile$payments$

app$to$its$Starbucks$customers.$It$now$also$sells$Square$dongles$in$its$store.$

• Citi$Ventures,$a$unit$of$Citigroup,$has$invested$in$a$number$of$companies,$including$Square,$Jumio$—$

an$online$credit$card$scanner,$and$most$recently,$Plastic$Jungle$—$an$online$exchange$for$gift$cards.$

• Visa$invested$an$undisclosed$amount$in$Square$in$2011.$

• First$Data$has$invested$an$undisclosed$amount$in$Cardspring,$a$platform$that$has$fuels$its$open$

redemption$platform$called$OfferWise.$

• Google$Ventures$invested$in$Square$contender,$Corduro,$in$2011.$

• MasterCard$invested$in$a$number$of$ventures$in$2012,$including$Truaxis,$a$cardLlinked$offers$

platform,$and$iZettle,$the$Swedish$version$of$Square.$

• Ingenico$invested$in$ROAM,$a$mobile$commerce$entity.$



!

!

!Of$course,$this$list$is$just$a$small$sample$of$the$activity$that$is$mashing$up$the$deep$pockets$of$corporates$

and$the$new$ideas$of$innovators$to$architect$innovation$for$the$benefit$of$both.$For$every$strategic$

investment,$there$are$many$more$partnerships$struck$that$combine$the$assets$and$energy$of$these$two$

very$different$types$of$organizations$–$in$fact$there$is$probably$a$press$release$a$day$announcing$these$

sorts$of$alliances.$!Payments*Innovation*in*Action$So,$is$this$the$right$way$to$architect$innovation$in$a$sector$as$dynamic$and$complex$as$payments?$!We’ll$find$out$by$probing$five$of$payments$most$courageous$and$experienced$innovators$who$will$

debate$with$each$other,$Innovation$Project$delegates$and$Lerner$over$90$minutes$in$a$place$that$has$

given$birth$to$many$an$innovative$idea$–$Harvard’s$Science$Center.$

!• Chris&Gardner,&co/Founder&and&CEO&of&Paydiant,$ is$a$successful$serial$payments$entrepreneur.$It’s$

rare$to$get$one$hit$in$this$complicated$space,$but$Gardner$and$team$seem$poised$to$go$three$for$

three.$ Gardner,$though,$has$a$healthy$respect$for$the$complexity$of$the$business$and$concedes,$

“Changes$in$the$payments$industry$take$a$while.”$Founded$in$2010,$Paydiant$is$a$cloudLbased$

solution$that$enables$banks$and$merchants$to$accept$payments$via$the$mobile$phone$–$primarily$via$

a$QR$codes$today.$It$has$garnered$some$pretty$highLpowered$incumbent$partners$and$customers$in$

its$short$life,$including$FIS,$Vantiv$and$Bank$of$America,$in$order$to$do$what$all$ventures$want$to$do,$

“get$our$ecosystem$and$our$acceptance$method$broadly$deployed.”$$Yet,$working$with$incumbents,$

much$less$large$incumbents,$is$not$without$its$challenges.$Scale$can$be$a$double$edge$–$the$same$

thing$that$makes$incumbents$attractive$to$work$with$–$their$largesse$–$may$make$it$harder$for$them$

to$move$at$the$speed$of$emerging$innovators$as$they$wrestle$with$competing$priorities$and$agendas.$

Gardner$will$share$his$thoughts$on$how$he$and$Paydiant$have$aligned$incentives$for$innovation$with$

partners$not$known$for$moving$quickly.$!!• Mike&Kennedy,&Chairman&of&ClearXchange,&is$pretty$emphatic$about$its$goal$for$innovating$the$role$

of$banks$in$mobile$payments:$“We$don’t$want$to$end$up$in$the$background$as$another$utility.”$

ClearXchange$is$a$mobile$payments$network$that$connects$Bank$of$America,$JPMorgan$Chase$and$

Wells$Fargo$—$those$mega$banks$that$together$account$for$one$of$every$three$bank$accounts$in$the$

U.S.$—$enabling$the$transfer$of$funds$from$one$person$to$another$across$that$network$using$only$a$

mobile$phone$number.$ Kennedy,$who$also$serves$as$EVP$for$innovation$at$Wells$Fargo,$is$convinced$

that$while$a$“gameLchanger”$for$mobile$payments,$ClearXchange$is$also$poised$for$success$because$

it$is$complementary$to$the$current$payments$products$issued$by$those$same$banks$and$used$by$

those$customers.$Kennedy$will$dispel$the$myth$that$big$banks,$innovation$and$speed$to$market$

aren’t$mutually$exclusive.$He$will$also$lead$The$Innovation$Project$delegates$through$ClearXchange’s$

blueprint$for$getting$the$three$biggest$banks$to$the$table$around$a$new$idea,$and$how$that$

framework$may$have$to$change$in$order$to$take$ClearXchange$to$the$next$level$of$innovation$in$

mobile$payments.$



!

!

!• Mike&Pasilla,&CEO&of&Elavon,$seems$attracted$to$payments$innovation$like$a$moth$to$a$flame.$“I’ve$

always$chosen$the$option$that$presents$the$greatest$challenge$and$provides$the$greatest$return,”$he$says.$ “I$don’t$go$for$the$sure$thing.”$Well,$he$sure$seems$to$have$picked$the$right$industry$at$the$

right$time.$Elavon$is$the$fourth$largest$merchant$acquirer$and$card$processor$in$the$U.S.$and$is$owned$by$U.S.$Bank.$It$also$operates$in$a$sector$that$is$being$challenged$by$new$and$old$players$alike,$who$see$acquiring$as$a$logical$place$to$disintermediate$existing$players.$Tired$of$being$labeled$a$“fast$

follower,”$Passilla$is$creating$an$innovation$agenda$around$new$ideas$that$instead$lead$the$market$by$giving$customers$and$partners$a$bigger$voice$in$how$that$agenda$should$look.$And,$initiating$partnerships$that$accelerate$the$pace$of$innovation$for$its$customers$–$and$establishing$a$platform$

for$emerging$innovators$to$plug$into.$ Passilla$will$describe$how$innovation$works$at$Elavon,$give$us$peek$into$his$innovation$roadmap,$and$explain$how$he$attracts$and$retains$key$partnerships$while$balancing$the$requirements$of$his$bank$parent$company,$and$a$regulatory$environment$that$layers$

added$challenges$to$an$already$tricky$process.$!!• Chitra&Narasimhan,&Managing&Director&at&CitiVentures,&is$a$payments$innovation$pioneer.$She$was$

tapped$by$Ken$Chennault$at$American$Express$in$the$early$to$mid$2000s$to$develop$both$its$Corporate$Development$and$its$Enterprise$Growth$initiatives$–$two$groups$that$are$at$the$heart$of$the$innovation$we$see$coming$out$of$that$163LyearLold$company$today.$Now,$as$a$driving$force$for$

CitiVenture’s$incubation$initiatives,$ she$seeks$out$the$next$generation$of$innovators$for$Citibank.$Narasimhan$has,$therefore,$walked$the$high$wire$between$corporate$priorities$and$innovation$imperatives$many$a$time.$Her$advice$for$both$innovators$and$investors$is$consistent:$“Believe$in$the$

idea$and$don’t$forget$the$big$picture,”$a$nod$to$the$slippery$slope$that$consistently$focuses$on$what’s$wrong$and$not$what’s$right$about$what$an$idea$can$bring$to$both.$ Narasimhan$will$offer$her$insights$about$how$to$structure$innovation$inside$huge$financial$institutions$and$then$make$

investments$that$fulfill$corporate$commitments$but$don’t$stifle$emerging$innovators.$

!These$insights$will$be$brought$front$and$center$to$The$Innovation$Project$2013$delegates$by$Lerner$and$Diane&Offereins,&President&of&the&Discover&Network.$Offereins$was$handed$the$reins$in$2008$and$given$responsibility$for$Discover$Network,$PULSE$and$Diners$Club$International.$But$it$was$she$who$first$

thought$about$licensing$the$Discover$network$to$other$innovators$to$propel$their$innovation$agenda$four$years$ago.$"We$are$kind$of$like$a$startup$business,"$Offereins$says.$"We$have$fierce$competition$with$two$established$players$in$the$market.$We$cannot$use$a$meLtoo$strategy.$We$need$to$be$different.$We$need$to$be$way$more$creative."$And$way$more$creative$she$has$been.$Announcing$the$PayPal$partnership$in$August$2012$was$the$result$of$that$fourLyear$journey$that$laid$the$groundwork$for$an$entirely$new$innovation$architecture$at$Discover;$one$that,$frankly,$rocked$the$industry$when$it$was$made$public.$The$strategy$that$Offereins$used$to$move$that$ball$down$the$field,$the$incentives$that$were$needed$in$order$to$get$organization$on$board$and$aligned$a$new$vision$for$its$future,$and$what’s$next$for$the$sector$will$be$the$topics$that$she’ll$use$to$challenge$this$panel$and$IP$2013$delegates$to$think$differently$about$designing$innovation.$

!Key*questions*that*she*and*Lerner*will*pose*to*this*roundtable*include:$



!

!

!• Does$payments$pose$any$unique$problems$for$innovation$in$large$organization$or$is$it$just$like$

innovating$anything$else?$!• Discover$is$an$innovation$introduced$by$a$very$large$company$—$Sears.$How$did$Sears$pull$off$

creating$a$viable$fourth$payments$network$that’s$worth$billions$and$what$does$this$teach$other$companies$that$are$interested$in$doing$something$big?$

!• Are$there$other$Discover/Sears$plays$in$payments?$If$so,$where$do$you$see$them$happening$and$

when?$!• Groupon$was$a$small$firm$innovation$that$Google$was$about$ready$to$plunk$$6$billion$down$to$buy.$

How$can$large$companies$avoid$getting$caught$up$in$the$enthusiasm$for$the$next$big$thing$and$avoid$overpaying$for$ventures$that$may$be$promising$but$completely$overvalued?$

!• Can$strategic$partnerships$with$new$ventures$help$an$organization$stay$innovative?$Why$not$just$

structure$those$and$avoid$making$financial$investments?$!• The$rapid$rise$of$smart$mobile$devices$caught$a$lot$of$companies$off$guard,$including$a$lot$of$

savvy$and$hip$high$tech$firms.$ Two$questions:$Can$corporate$innovators$do$a$better$job$of$predicting$disruptive$innovation$and$its$implications$for$their$own$innovation?$And$are$there$any$lessons$for$how$companies$should$rejigger$their$innovation$agenda$when$there’s$a$sudden$change$resulting$from$drastic$innovation?$

!• What$the$biggest$failure$in$innovation$that$you’ve$seen$from$a$large$company$in$payments$and$how$

could$it$have$been$avoided?$!• How$do$you$avoid$overpowering$the$innovative$ideas$that$are$brought$to$you$by$emerging$ventures?$

How$do$you$decide$which$to$pursue$and$why?$How$do$you$motivate$that$individual$or$that$group$to$continue$to$bring$you$new$ideas?$

!• How$do$you$know$when$an$innovative$idea$has$run$its$course$and$when$to$shut$it$down?$Is$the$

metric$for$that$different$in$payments?$!• How$do$you$convince$innovators$that$you$really$aren’t$the$dinosaurs$that$they$think$you$are$—$

and$make$them$love$you$long$after$the$check$has$been$cashed?$!• What$internal$and$external$forces$have$made$innovation$more$difficult$in$the$last$three$years?$

What$needs$to$change$going$forward?$And$do$you$think$it$will?$$!

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