Why is it that innovations are created by non-banks?

At SIBOS 2004 in Atlanta, Heidi Miller of JPMorgan delivered a keynote address that is still discussed to this day. This is because she asked four critical questions of us:

• Why do we make things so complicated for our clients?
• How can we help our customers become more efficient and productive, when our own back offices are so expensive, fragmented, outdated and 'non-interoperable?
• If we can send a secure message to any company over the internet, why should we pay SWIFT to do it for us?
• If we truly aspire to be leaders in the payments and securities industries, why is it that so many innovations in this business are pioneered by non-banks?

Now, I am not intending to review the progress we have made in these areas four years later, although I might come back to it nearer the time of this year’s SIBOS in Vienna, but I am going to pick up on one of these questions: innovation.  Innovation is the focal point for so many discussions with banks right now.

Banks are suddenly discussing innovation everywhere, and trying to work out whether it is a process, a science, a quirk or a revolution. For example, if you review the annual reports of the Top 10 American banks, the use of the word innovation has doubled in frequency since 2001 to an average 6.5 appearances per report these days. Equally, almost every bank has a Head of Innovation today, tasked with finding out how to make the bank a ‘thought leader’, ‘differentiated form the pack’ and ‘clearly on the leading-edge’.

These heads of innovation try to stir up the executive with new ideas: a passion for fashion, a neck for tech and a dash for cash. I know, let’s offer all of our customers a credit card that can also be an iPod. No, give everyone a contactless keychain. Or maybe get the bank launched into Second Life and become a virtual bank.

All of these ideas are worthy and worth exploring, no matter how mad you think they are, as without experimentation and trial, banks will stagnate. And yet, how many serious innovations are there out there, and how many have really come from within the industry?

This was a question posed recently by my friend, John Chaplin. 

John is known for his work in the cards arena on SEPA and advisory work with First Data, and he recently decided to ask a global panel of payments experts, including myself, about our views on innovation. 

His definition of innovation is that it involves more than just turning a new concept into a commercial success, more than just technology and more than just an evolution. It is taking an idea and transforming that idea into a commercial business model that is successful, determined, can be implemented and proves itself to be worthy.

The experts came from nine different countries including Denmark, Dubai, Finland, France, Malta, Norway, Slovakia, UK and USA; and all experts have lived or worked in multiple countries. Previous and current employers include Co-operative Retail, Deloittes, DNB, First Data, Honeywell Bull, IBM, Link, MasterCard, Moneybox, NCR, Nordea, Tietoenator, Tower Group and Visa. 

Here’s what he discovered. 

Who innovates first?

We all stated that new entrants and technology providers are the innovators in payments, not banks, processors or payment schemes. Why? Because “existing major players have invested too much in either shared or individual infrastructures to want to make major changes and, in many cases where the existing business model creates good profitability, why take the risk to change things?”

Aha! So Heidi Miller’s premise holds true with the global industry expert panel.

Why are banks innovating or trying to innovate anyway?

Mainly for revenue generation and new client acquisition. These are clear drivers, although they are closely followed by cost reduction as a focus. However, reinforcing the former point, several experts believe that new entrants innovate first because they see the opportunity to create a profitable business by either undercutting the incumbent or creating new opportunities to generate revenues by offering a different service into the market.

Which region is the most innovative?

The panel felt that Asia is the most innovative payments region, followed closely by America. Europe and other regions lag. This is because Asia (and Africa to be honest) are creating radical changes through mobile technologies, remittances and other services, especially, China, Japan and Korea. That does not mean that the USA is lagging, but the America’s focus more on internet services, with PayPal mentioned often as a major innovator. 

Europe is viewed as being too fragmented and held back by the baggage of legacies to be innovative. For example, one expert’s comment was: “Sorry about that mediocre score for Western Europe. SEPA’s great, but ten years in the making seems more like evolution than innovation.”

Hmmmm ... a little over the top if you ask me, but might be right. In fact, the panel went as far as to say that SEPA will reduce innovation. This is because, in the short-term, innovation will suffer as technology investments are focused upon the modernisation of legacy infrastructures. However, the panel did at least admit that, in the longer term, SEPA should create an environment in which innovation will increase.

Where will innovation start: low value or high value payments?

On this point, all of the panel were clear that low value payments are where innovation is focused. This is partly because you can experiment more here but it is more down to the fact that, with higher value payments, the risks of innovation are higher and you do not want to jeopardise high value payments through innovation therefore. It is also because lower value payments are perceived to be more inefficient and therefore a clear target for innovation. 

The survey asked several other questions, such as: 

• How will lower interchange impact innovation?
• Where will innovation be targeted?
• Is there one innovation which would particularly benefit the payments industry?

But the one I thought was interesting to note is whether the panel could name any firms who would lead innovation on payments. Here’s who they came up with: Amazon, Apple, Equens, First Data, Google, MasterCard, PayPal, SIA, Tencent QQ and Visa.

The survey was commissioned by the Glasshouse Partnership, a corporate marketing agency. If you would like to see a full copy of the survey, just let me know.

Anyway, going back to Heidi Miller’s speech, it is interesting to see how insightful her words were, in light of the survey mentioned above. Here’s what she actually said:

“Wouldn't you think that banks should be facilitating payments transactions for e-Bay? We have the customer relationships. We have the accounts. We have the clearing and settlement systems. In fact, Pay Pal transactions ride on the very same systems we banks have spent billions of dollars building. And yet the banks lost the deal, despite our natural advantages … Kudos to PayPal for their creative innovation. And to Checkfree in electronic bill payment. And to ADP and Paychex in Payroll Processing. And to First Data in merchant processing. And to Radianz in IP network connectivity. Shame on us. We repeatedly allow ourselves to be disintermediated. By the time we have barely gotten ourselves organized, nimble new competitors have staked out their superior claims.”

So maybe not that much has changed in four years?