Innovation in payments: there's strength in numbers

In recent years, the payments industry has transitioned into a consumer centric and topical industry, led by many well-known global brands. This has introduced challenges, but none more so than new, and ever increasing, customer expectations and demand for innovation. Organisations can attempt to meet these expectations alone, but stand a far greater chance of success by partnering with others, perhaps across different industries.

When is innovation successful?

The components of a successful innovation can be viewed quite simply as new ideas, which are timely and have a purpose. An idea doesn’t have to be inherently pragmatic or practical, but it does need to align to a demand, and a mechanism for deriving value. If any of those three components are lacking, the likelihood of the innovation being commercially successful is greatly reduced.

In established markets, more and more organisations are building strategies for innovation (60% have an innovation strategy, twice as many as in 2009). This collective drive to prioritise innovation is increasing competition, resulting in organisations needing to consider new approaches to innovation if they want to stand out or, perhaps, to consider collaboration as innovation partners.

How is this relevant to the payments industry?

The payments industry is worth £75 trillion, and enables businesses and consumers to pay each other.  It achieves this through traditional methods, such as cash and cheques, and through electronic methods such interbank clearing and settlement services, card payments and digital payments. Until recently, payments was an industry which, whilst necessary to facilitate trade, was widely regarded as the back-end infrastructure that no-one worried about unless it stopped working.  In recent years however, it has become an interesting, exciting and well known industry, with well-known brands like Apple, Google and Facebook entering the fray.  This has inspired significant innovation and change, which has dramatically shifted consumer expectations – and driven changes in demand.

How have consumer expectations changed?

The seismic shifts in the payments industry can be considered through the lens of consumer payments. In the last 10 years, card payments have gone from requiring signatures with slow and relatively insecure authorisation methods, to contactless and mobile payments which are quicker, easier and more secure. Credit and debit cards now serve multiple purposes – for example, substituting Oyster cards on the London transport network. Digital payment methods (e.g. Paym –person to person payments using mobile phone numbers) are now widely available and delivering consumer-centric ways to pay people, supported by collaborative initiatives like Faster Payments.

Each of these innovations is making payments quicker, easier, and simpler; and consumers have now grown to expect this. It is no longer expected for payments to take days, or even hours. Even new consumers in emerging markets come with high expectations. For instance, consumers in emerging markets, for example many countries in Africa, have jumped straight from cash to digital and mobile payments, or even virtual currencies like Bitcoin. Their outlook is not constrained by long term participation in an industry propped up by legacy systems. There is no reason to expect this trend to falter.

So how can businesses keep up with the ever changing demands from consumers?

Individual organisations (either in the payments industry or other sectors) will struggle to keep up with ever rising and changing consumer expectations on their own. Consumers want the same overall outcome, but measure success using an ever greater and more challenging set of metrics – mobility, speed, transparency – and these trends are now cutting across multiple industries. Consumers still need to pay, but they want to pay using mobile apps; consumers still need to shop, but they want to shop in person and online – sometimes simultaneously; consumers still need a bank account, but they want to see their balance from their mobile, updated in real time at the point of sale. Achieving these outcomes requires collaboration from more than just one organisation, and often across multiple industries. Payments firms don’t generally have shops; mobile phone companies aren’t usually banks; retailers don’t typically own a global payments network.

We’re starting to see this partnering in some areas. For example, the R3 consortium of around 40 banks looking at applications of Blockchain is now looking for non-banking partners to drive itself forward; and MasterCard partnered with EE last year to deliver a Cash on Tap product. But, most partnerships are driven within markets. For instance, -payments processors partnering with Point of Sale hardware manufacturers or mobile app developers (Visa and Square – a mobile POS product; MasterCard and eThor – a POS API).

Organisations are usually very protective of their brand and their consumer base, and this restricts their natural tendency to collaborate and partner across industries. Large established organisations can struggle culturally with start-up partnerships, and likewise small start-up businesses want to compete in major markets but struggle with scale and resilience. Other industries can be seen as a threat to established consumer bases rather than an opportunity.

My perspective is that collaboration and partnering is essential and poses the greatest opportunity for innovation across and beyond the Payments industry.

Organisations that operate alone are limiting their opportunity for successful innovation. If organisations consider cross-industry partnerships, the opportunity for successful innovation should only increase. Partnerships can open new markets, enable businesses to reach new consumer groups, help deliver change more quickly, but above all else, help organisations access a wider consumer demand.

The firm that takes a bold step to collaborate more closely with another industry stands the greatest chance of delivering disruptive innovation.

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