Who Best Drives Payment Method Innovation?

Financial institutions vs. tech organizations

By Mark Coronna

Twenty years ago, payment innovation was driven by a combination of two large member organizations: Visa and American Express. A closer look at those two organizations reveals the internal dynamics that prove the larger banks drove innovation first; regional and community banks benefited after.

Call this a “trickle down” version of payment innovation, which is akin to most technology adoption in that era. Large organizations went first, then mid-sized organizations, and finally the smaller organizations. This model worked for bank customers too, since they had no voice in the matter. Whatever banks offered was all they expected. And sometimes, as in the case of ATMs, it took decades for broad adoption to take hold.

The demise of the paper check is another example: Deluxe Corp, the largest check printer, predicted the decline of the check many years before it actually occurred — the first month fewer checks were written than the previous month was July 2001. Deluxe had a contingency plan, having acquired several electronic payments businesses to hedge declining paper check revenue. While Deluxe was planning for the decline of the paper check, it underestimated consumer preference for debit cards. The drop in check use of 44 percent from 2003 to 2012 wasn’t a slow decline, it was a precipice. Consumer power emerged.

But now, large banks no longer drive innovation. Visa and American Express couldn’t keep pace once bank customers started demanding new payment models. These organizations were slow to understand the Internet, and slow to bring forward new payment models for online commerce.

Consumers needed payment platforms that could handle Internet purchases – quickly and securely. And they wanted to be able to conduct person-to-person transactions. Meanwhile online retailers weren’t too happy with the interchange rates charged by banks.

Both consumers and retailers alike desired faster payment resolutions, better access to online systems, and lower cost payment vehicles. 

Bottom line — the large banks couldn’t handle the innovations consumers wanted, but start-up tech organizations could by building their business models around unmet consumer needs.

With shifting demands from bank consumers due to the new online dynamic, opportunities were naturally created for innovative payment ventures. Some moved quickly to enter the market. CheckFree, for example, promised end-to-end electronic bill payments. But in reality, they had an army of staff working behind the curtain typing up check requests and mailing paper checks out. A better example of innovation that stuck is PayPal, which enabled person-to-person payments that came from individuals selling products to other individuals.

Recently, the emergence of more innovative payment approaches are shaking up the market. Bitcoin, for example, is technology-driven — versus market-driven — and offers something new, simply because the technology enables it. However, Gartner’s Hype Cycle for technology adoption places Bitcoin squarely in the promotional camp, not adoptive. Good payment systems are built on trust, security and regulation. Bitcoin hasn’t achieved critical mass as an unregulated payment platform.

Bottom line

Who or what will drive payment innovation in the near future? If the two choices are financial institutions — and their association proxies Visa and American Express — or technology organizations with a better understanding of consumer needs, it may be a toss-up. Financial institutions don’t seem to be willing to concede when they have so much revenue at stake. And what’s more, they’re able to acquire innovators in tech payments. Surprisingly Visa and Amex haven’t been more aggressive in this area.

With large customer bases, innovative technology, fast business biorhythms, and the will to take more risks, I’d put my chips on U.S. Bank or Chase — two well-managed banks with deep payment expertise. Or, you can put your chips on the next successful payment start-up, if you can discern who that might be — or just watch these banks and their next payment acquisitions.

Mark Coronna is area managing partner and chief marketing officer with Chief Outsiders, the nation’s leading fractional CMO firm focused on mid-size company growth. He helps CEOs across multiple industries and business sizes develop key market insights, innovative products and services, and effective go-to-market programs to accelerate business growth. More info

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