I recently read an excellent article, 2012: The Year in Payments - A Look Back At The News And The Noise In Payments by Karen Webster, CEO of Market Platform Dynamics and founder of PYMNTS.com. In the article, Webster reviews some of the major developments in digital payments over the last year, and gives her opinion of what is likely to happen in 2013 and beyond. Beyond her detailed reviews and predictions, the article is a very well written overview of the evolution toward a digital money economy, including the major advances already underway as well as the huge challenges that still lie ahead.
For several years now I’ve been convinced that the development of a global digital money ecosystem is among the most exciting and important societal challenges in the coming decades. It’s right up there, in my opinion, with other technology-based transformational innovations, including electricity, the telephone, radio and TV, and the Internet and World Wide Web.
Where are we in digital payments? Webster believes that 2012 will be viewed in the payments history books as a very good year. “Payments innovation fueled by the IP-enablement of devices used by consumers and merchants to interact drove payments innovation into high gear. Players large and small flooded the market with new applications, new business models, and new approaches to transforming the shopping experience.”
She cites five recent market dynamics as significantly accelerating the pace of innovation in payments. Three of these are the major technology advances that are driving just about all recent IT-based innovations: the explosive growth of smart mobile phones, the advent of cloud computing, and what she calls big data mashups, which combine transaction data with behavioral and real time location-based data. The two other market dynamics are the IPO of Visa and MasterCard in 2006 and 2007 respectively, which is putting shareholder pressure on both companies to expand their core platforms with new offerings; and the growing investments in mobile payment startups by VC firms.
“However, we have a long ways to go,” adds Webster. “Innovation in payments is a long journey from idea to ignition and adoption given the complexities associated with igniting innovation in payments. We know payments to be a complex ecosystem, with many stakeholders who must be incented (and enabled technically) to work together to adopt new products or enhancements. As a result, change moves through the ecosystem very slowly. And the two stakeholders who must ultimately adopt new payments innovations - merchants and consumers - have to be convinced that moving away from what they know and feel comfortable with - is worth the effort. . . Getting to ignition - when there is a critical mass of consumers and merchants - just takes time.”
The global payments ecosystem is complex indeed. It involves huge numbers of individuals, merchants of all sizes and a variety of financial institutions. It also includes government regulators in just about every country around the world. More recently, with the evolution to digital payments, this legacy ecosystem is being joined by a whole set of new players, including mobile network operators; IT and Internet companies; startups with innovative technologies, applications and business models; and all kinds of coalitions, partnerships and joint ventures.
An already complex ecosystem is getting more crowded and complex. It is also quite fragmented, with a number of disparate market experiments underway. For example, many companies have developed their own digital wallet, essentially an app in a smart mobile device that aggregates the things we now carry in our physical wallet, including payment and loyalty cards, coupons, passes, checks, and various kinds of identification. This had led to a digital wallet war, as vendors and vendor coalitions are fighting to be the digital wallet in your mobile device. But each such wallet only works with the members of that particular coalition. So, an individual would have to carry multiple digital wallets to make sure that they can interact with the various institutions they deal with. “There is no reason to think consumers will want multiple digital wallets any more than they want multiple leather wallets,” observes Webster.
What will it take to get this complex, fragmented ecosystem to ignition, that is, to widespread acceptance around the world?
Most everyone will agree that the Internet, e-mail and the World Wide Web have achieved the kind of ignition we would like digital payments to get to. Technology advances were absolutely necessary, but not sufficient. In order to translate these technology advances into widespread market acceptance, their underlying architecture had to embrace a common set of simple standards.
For example, in the early decades of the IT industry, there were a number of proprietary e-mail systems that made it easy to communicate within a company. But, it was quite a bit more difficult to reach out beyond the company’s boundaries, especially to one with a different proprietary e-mail system. Then in the 1980s, a small set of Internet e-mail protocols were adopted, - e.g., SMTP, MIME, POP, IMAP, - as well as a common format for e-mail addresses, - username@domain. These enabled people to communicate with anyone, on any system, from any vendor as long as they all used the common Internet e-mail standards. e-mail usage took off.
Similarly, the success of the World Wide Web is based on a simple set of standards, - HTML, HTTP, URLs, - developed by Tim Berners-Lee at CERN in the early 1990s, - and the easy-to-use, graphical Mosaic web browser, - developed by Marc Andreessen at the University of Illinois. This enabled any PC with a web browser connected to the Internet to access information on any web server anywhere in the world. There are multiple web browsers from different vendors, but they are all based on the same standards, have a similar look and feel and, with relatively few exceptions, can access the content of any web server.
To get to ignition, the digital payments ecosystem must equally embrace a common set of standards. The finance industry did so decades ago, when it adopted common payment instruments like checks, credit cards and debit cards. There will be a number of digital wallets in the market, but they all will have to be based on a set of agreed upon standards that let’s them all access different payments mechanisms, identity cards, offers, loyalty programs, etc. It’s fine for vendors to compete on the different features, applications and services offered in their wallets, but they will need to have a common look and feel to make them easily usable by large numbers of people, as well as be able to interact with the many services, information and applications offered by different institutions in their payments clouds.
How long will it take? It is very hard to predict. Complex ecosystems take decades to build, and they typically evolve over time in a series of incremental steps that build on each other. New, disruptive capabilities generally leverage and co-exist with existing legacy infrastructures.
“[With] very, very few exceptions, the innovation that is taking place is being done on top of the existing card infrastructure, “ writes Webster. “Existing credit and debit and prepaid products are the cornerstones of the new developments that will reshape how consumers and merchants interact. . . . If you’re an innovator, that makes it a lot easier to get something developed. Getting adoption is still difficult, but innovators aren’t asking consumers to abandon what they use today, just to use it in a different context (e.g. mobile versus plastic card). . . The opportunity for the traditional players who represent innovation’s backbone becomes how to take share from issuers and even payment types.”
“The huge paradox of payments is that it is a system that is horrendously complicated and therefore very difficult to change anything that touches it. But it works really, really well, and is incredibly fast. A swipe at the point of sale works 99.99... percent of the time and it takes about a second to process, if that. That makes the most complex part of this industry changing anything that begins at the physical point of sale – and that is where the innovation is happening today and will continue for years to come – after all, it is where 95 percent of all transactions happen today.”
She believes that it will be a decade at least before a majority of our transactions take place using a digital wallet in a mobile device. “So, in the interim, consumers and merchants will just add mobile to the litany of payment methods that they have and use today already – cash, check (given new life thanks to remote check deposit), and cards.”
Harvard business professor Clayton Christensen, - generally recognized as the foremost authority on disruptive innovation, - has observed that one of the best ways to establish disruptive products in the marketplace is through what he calls new-market disruptions, rather than through direct competition against entrenched offerings. New-market disruptions are new products which are so much more affordable and simpler to use that they can reach brand new customers whose needs were previously unserved by existing offerings.
This is clearly the case with the billions around the world without access to traditional financial services. There is growing evidence that the poorer you are, the higher the costs and risks of cash. Being stuck using cash consumes extra time, involves high fees, and makes it hard to rise out of poverty. Mobile digital money is their ticket to financial inclusiveness and membership in the global digital economy.
Mobile phones, cloud-based services and broadband wireless networks are the platforms now enabling such new-market, low cost disruptive innovations. An increasing fraction of those billions with no access to financial services already have mobile phones. Given advances in technology, it won’t be long before most of them have a smart mobile device capable of supporting digital wallets and access to cloud-based payment and identity services.
In Digital Currency Improves Financial Access, Roger Voorhies of the Gates Foundation writes: “Shifting the bulk of the poor’s financial transactions into digital form is the catalytic change that can strip the majority of cash processing costs out of the system and make ongoing costs predictable. This means that the shift to digital can pave the way for affordable and far-reaching services that directly address poor people’s needs.”
It is thus quite likely that digital payment ecosystems will achieve ignition in developing economies where the needs and potential benefits are greatest. But even in the US there are unmet needs in over one in four households. A recent FDIC survey reported that 8.2 percent of US households are unbanked, and an additional 20.1 percent are underbanked.
A well functioning digital payments infrastructure will also help lower costs and reduce fraud with government disbursements and social services to their citizens. In addition, companies will want to offer them products and services through their mobile devices, especially in light of the worldwide economic empowerment predicted over the next 15 -20 years, including significant numbers rising out of extreme poverty and a growing middle class.
It is very hard to anticipate the consequences of technology-based disruptive innovations, especially those technologies that end up transforming something that’s part of the very fabric of society. In the late 19th century, electricity was mostly viewed as enabling the replacement of kerosene lamps and candles with light bulbs. It took several decades for electric appliances, the assembly line and mass production to emerge. It was clear from the earliest days that the Internet and World Wide Web would revolutionize communications and access to information. But the disruptive consequences of e-business, social networks and online media and entertainment caught most of us by surprise.
Few things are as universal as money, or as integrated into just about every aspect of society and our personal lives. So, once we get to ignition, that is, to the widespread use of a global digital money ecosystem accessed through our mobile devices, we can expect a plethora of innovations that we can barely being to anticipate.