[Dave Birch] When we talk about innovation, are we necessarily talking about technology? Of course not: there are key people skills associated with organisational innovation. These were well-summarised in a recent Harvard Business Review post.
The first skill is what we call "associating." It's a cognitive skill that allows creative people to make connections across seemingly unrelated questions, problems, or ideas. The second skill is questioning — an ability to ask "what if", "why", and "why not" questions that challenge the status quo and open up the bigger picture. The third is the ability to closely observe details, particularly the details of people's behavior. Another skill is the ability to experiment — the people we studied are always trying on new experiences and exploring new worlds. And finally, they are really good at networking with smart people who have little in common with them, but from whom they can learn.[From How Do Innovators Think? - HBR Editors' Blog - Harvard Business Review]
One point that shines through here is that innovation requires connection between different constituencies. We need to find skills outside of the payments industry to help us move on.
As it often turns out, the “tyranny of the experts” - those of us who know all the reasons things just can’t be done the way the market seems to be demanding - are responsible for restraining innovation rather than fostering it. Sometimes, we just know too much and seek to “manage” (reduce or eliminate) risk - where that risk is a core component of the actual market opportunity![From How Tolerance for Risk Can Really Affect Outcomes — Payments Views from Glenbrook Partners]
There's another point worth amplifying, and that's about the nature of innovation itself. if we look at the last couple of decades in the card industry, we may feel as if we've seen tremendous innovation, but it's actually been quite limited (what new products have been delivered on the back of chip and PIN, for example?). Now, we have to be careful in critcising, because the payments industry cannot be changed in unconstrained ways. Regulation, for example, needs to be there and it must inevitably impact innovation, although that does not necessarily mean that it impacts in bad ways. And I think it's wrong to blame
There isn't any innovation whatsoever in the basic product--credit. That's always been the same. Instead, innovation has taken place in two ways. First, there's been quite a bit of innovation in pricing structure. For example, the 0% teaser rate. Great for some folks, but it only works economically if there are enough suckers. This sort of price structure innovation should require regulatory approval. I would lump rewards programs into that category, as bundling is a pricing move.[From Credit Slips: Credit Card Legislation]
That's not true everywhere, because in some countries there are other kinds of credit products that are successful (such as instalment cards in Turkey, for example) but the point is taken. Having found a product that was profitable, there has been little incentive to invest in alternatives. This is not a criticism but a recognition of the industry dynamics. Even without innovation in the basic product, though, there has been some innovation in the packaging and delivery.
This is things like CapOne's CardLab, which lets you choose whether you want a picture of your cat, your dog, or your kids on the card. Really not a meaningful consumer benefit or innovation. This is just changing the packaging of the product, but the product (credit) is still the same. There's also innovations that consumers don't see--things like improved security measures. I'm less concerned about requiring regulatory approval for this sort of innovation--my sense is that it is basically consumer welfare neutral or perhaps positive, although the specifics matter (e.g., loss allocation rules for fraud might fall into the pricing bucket).[From Credit Slips: Credit Card Legislation]
Actually, I wouldn't be entirely negative about the state of the sector because there have been some innovations (eg, disconnected debit) from that direction that have not had too much impact to date, but could yet have a major impact on the industry structure. I however, agree, with the premise of the article which is that (as per the HBR point about looking outside the industry, noted above) that we need to look to outside.
There has been a lot of innovation in the payment space, but it has been from non-credit products: PayPal, Obopay, Green Dot, etc... Simple payment instruments or systems that lack credit components don't pose nearly as many consumer welfare issues as credit payment systems. Whether there should be regulatory approval for non-credit payment systems is separate matter, although I would suggest that there would be benefits from having a single federal regulator for money transmitters, rather than 50 state regulators.[From Credit Slips: Credit Card Legislation]
This is an obviously sensible suggestion, and I might go even further and say that the Fed should adopt something along the lines of the EU's Payment Services Directive (PSD) to provide umbrella light-touch regulation for payment organisations that do not carry out any banking functions, and specifically do not carry out the core private banking function of credit creation. Which brings me on to my main point: perhaps the most radical innovation driver in payments today is regulation, not business or technology.
The PSD came into force at the beginning of November and a related revision of the electronic money regulation will come into force in 2011. I am not saying, by the way, that the European approach is perfect. It isn't.
European member states are implementing the PSD in a completely inconsistent manner which threatens to derail the progress of the Single Euro Payments Area (SEPA). Certain member states were particularly cited as at issue more than others, with Germany and Italy seen to be actively blocking progress whilst France and Spain are viewed as delaying the process. On a more positive note, participants do expect new payments institutions to gain market share... and that these changes have motivated many banks to look for more innovative services for their clients, particularly around corporate information services, e-payments, m-payments and e-invoicing.[From European Payments: A Land Of Confusion]
What I am saying is that the idea of the PSD is sound, and other regulators find it a useful guide. Along with the PSD, which hopes to stimulate competition in the payments market but creating the new regulatory category of Payment Institution (PI), the European Commission is also revising the Electronic Money Directive.
The E-Money Directive has failed to help establish a market for virtual currency and will be replaced with a set of less onerous regulations. The replacement E-Money Directive will come into force at the end of this month. The European Council and European Parliament published the replacement Directive in the Official Journal of the European Union on 10th October. It will come into force 20 days after publication and must be transposed into national law by the EU's 27 member states by the end of April 2011.[From EU Directive makes it easier to print e-money • The Register]
This revised E-Money Directive will lower the capital requirements for e-money issuers, thus making it easer for competitors to move into that space and the hopefully create innovative new products.If we look at the payments industry as it is now, can this kind of innovative thinking actually make any difference? After all, the banking sector is notoriously conservative and it is just not realistic to expect the kind of innovation we see in other areas. And this is a fair point: as James Garner (author of ) said when we worked at Lloyds TSB:
We can't implement anything quickly. There are too many moving parts in a bank for anyone to be anything but deliberate with what we do.[From BankerVision: You have to work in a bank to know how to work a bank]
But if they started planning now, they maybe banks could have something ready to go in 2011, perhaps new products and structures able to take advantage of both the PSD and the new EMD together. Perhaps this is a way to break through, as the standard business school case study of First Direct and Direct Line illustrate. Create a subsidiary and use that to exploit the new technology within the new regulatory constructs. When you start from scratch, using the new technologies, you can build something radically different to the "parent". And when the new technologies are as powerful as mobile, there ought to be ample scope for genuine transformation.
Imagine you are a bank with no branches or ATMs, almost three million customers and only 195 employees in total. This is eBank in Japan,[From E-bank Japan sets mobile banking example | 13 Oct 2008 | ComputerWeekly.com]
I wish some of our public services could be redeveloped in this mould! But the serious point here is that the relationship between banking and payments deserves to be questioned. I don't have to reference to hand, but I recall a Federal Reserve study back in the 1990s that said that there is no economic theory to support the provision of payment services in the mass market by retail banks. I also happen to know that at least two UK clearing banks have already applied for Payment Institution (PI) licences, which suggests that both banks and non-banks will begin to compete in this space and also that banks may have determined that in order to deliver low-cost solutions then a PI subsidiary may be a better solution that a payments division or department.
This more radical approach to payments innovation (ie, using new technology but inside new regulatory structures) could provide a way to energise it both in the context of the "traditional" providers and new entrants.
Perhaps the most important use of money - It saves time.
Author W. Somerset Maugham (1943).