[Dave Birch] I happened to be at an OECD roundtable on innovation in developing countries and therefore had the opportunity to sit in on some fascinating discussions about the relationship between research and development (R&D) and innovation. My reason for being there was to suggest some ways in which developing countries innovation efforts could exploit the mobile phone and, in particular, mobile payments. I hope I was able to communicate effectively just how financial inclusion can transform the lives of the poorest people by using a couple of examples from over at the Digital Money Forum blog, including the very (to my mind) innovative organisation that is sending people work (translating from tribal dialects) via SMS and paying them via the phone as well. My point was that people are themselves very innovative, and the mere existence of a working payment system allows them to exploit their innovation: there's no inherent need to connect R&D around new products and services to the payment system, and there's no need to the developers of the payment system to try and imagine for themselves all of the possibilities. Apart from anything else, they'd be wrong! Why would payments guys like me have any special insight into the new businesses that the users might create?
But what did come through from the various discussions that I was involved with is that whatever innovation takes place around payments there is a long-term downward cost pressure on the mass market payment systems that means that their ability to earn transaction revenues is going to be limited. Thus, long-term business models for the providers of payment services must be more sophisticated.
Taking on board this kind of thinking to payments suggests that innovation around value-adding will deliver better long-term results for banks than will innovation around the commodity provision of payments. How to stimulate this at national and international level is more about appropriate regulation than it is about promoting, co-ordinating or subsidising R&D because lighter and more specific regulation of payments that avoids the complexity and expense of banking regulations will allow new entrants to explore opportunities and some categories of new entrants, such as transit operators to pick an obvious example, have business models that contain many factors besides earning transaction revenue (such as reducing the costs of managing cash, cutting down on fraud and so forth). In the developed world, many observers think that it may be loyalty and customer intelligence but, as I discussed at the Financial Services Club recently, there are actually quite a few categories of potential value-added service that are ripe for innovation. I'm referring to areas such as electronic cheques, remittance and e-invoicing services, mobile integration, fraud management, dispute resolution and so on.
We need innovative providers of payment services to develop these value-added services and there is no reason to suspect that the requisite innovation can only come from the incumbents. Therefore, my main recommendation was to address the regulatory structures to foster competition and innovation in payments quite separately from banking. In this respect, I think that the EU's model -- by which I mean, largely, the provisions of the Payment Services Directive (PSD) -- is actually quite useful. I put this idea forward in response to a question about regulation in CGAP's Mobile Banking and Microfinance Group on LinkedIn, so if you have any observations on this line of thought please do log in and join the discussion there.
Perhaps the most important use of money - It saves time.
Author W. Somerset Maugham (1943).
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