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Banks over analyse innovation opportunities in payments
Second report from The Global Innovation Jury highlights how traditional payment organisations stifle innovation in favour of legacy business models.“Facing challenges with legacy systems and antiquated processes, banks and payment schemes are heavily entrenched in existing systems and processes and therefore are generally followers, rather than leaders of innovation. This indicates the precarious position of many organisations with a heritage in payments as they compete with non-traditional payments companies to take a share of the market.”
This is the conclusion made by The Global Innovation Jury a panel of 22 payment industry specialists from organisations like MasterCard, Visa, SWIFT, PayPal, Amazon, First Data, American Express and IBM, which has published its 2011 Payments Innovation Report. The first report the jury published back in 2008 reached a similar conclusion saying that innovation in payments is likely to be led by new entrants.
This time round new entrants that the jury believes are likely to spearhead innovation in payments include new banks such as Metro Bank in the UK and rural banks in India, as well as multiple payment institutions springing up as a result of the EU Payment Services Directive. The report also says newcomers from other sectors namely; Facebook, Apple and telecoms are also “real threats” to the status quo.
We are already seeing that in the area of mobile payments, whether it is in the consumer or corporate sector with major cash management banks partnering with mobile providers like Luup and Safaricom in Kenya as well as Near Field Communication specialists like Vivotech for contactless mobile payments.
The Global Innovation Jury’s 2011 report does not really tell us anything new and most of its conclusions are already being borne out in retail payments where non-banks are truly setting the pace of innovation. In the corporate payments space, banks are partnering with telecom companies and other technology and software providers to provide corporate clients with new mobile payment services. But other than players like Travelex Global Business Payments, which offers a more cost-effective, information enriched cross-border payment service for both banks and corporates, non-bank payment institutions so far are having little impact in the corporate-to-bank or interbank space.
When it comes to what payment types are likely to see the most innovation, the report concludes that most of the innovation is occurring in the area of lower value payments and that the higher the payment value, the slower the pace of innovation. However, in the area of card payments, it says the “old order” is breaking down with traditional partners “compelled to compete”. “Card and ACH as such are not going to change that much but their usage will be embedded in other innovative payment methods (PayPal transactions funded by card, P2P solution over the ACH rails, card as a mobile wallet),” the jury states. “Dedicated B2B solutions, e-invoicing and non-bank international transfers will drive innovation in general commercial payments.”
However, the jury’s 2011 report does highlight the importance of innovation in general in payments, particularly as new mobile devices and smartphones offer new and more efficient channels through which banks can transact with their customers, and how non-banks like Travelex Global Business Payments are able to compete with the banks in the area of cross-border payments, making them more efficient and less costly, without having to confront the legacy issues that impede incumbent banks. As the jury points out:
"Traditional payments organisations struggle to compete with new entrants in 2011, they are sometimes the creators of their own problems; internal staff not only fail to champion innovation, but often actively stifle it in favour of legacy business models and operating in their comfort zone.”“The barriers that are set by many banks are impossible to surmount... but not even their existing business lines would pass these tests. That is why they are in danger of losing significant market share,” the Global Innovation Jury commented.
Coupled with that is the budget constraints most banks face. Do they pour investment into new more innovative forms of payment or do they spend the minimum on ensuring they are compliant with new regulations.
One thing is for certain heightened regulation will force banks to be more innovative as traditional payment revenues will be eroded and customers are looking for value-added services over and above traditional payments. Where banks often stumble though is that they need to establish a business case for everything they do; and that is likely to stifle not encourage innovation.
Global Innovation Jury:
“Opportunities are often over-analysed. With many innovations you just cannot predict how customers will react, so you have to make the developments and then hope for the best; that just isn’t how banks work.”
Image provided by Pixomar.
Date Posted:15th February 2011