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Paying for innovation

By Dave Birch posted Jan 9 2009 at 2:58 PM

[Dave Birch] So who, exactly, is going to pay for innovation in the payments field? Should individual stakeholders incrementally innovate or shoudl we make co-ordinated attempt to improve the payment system and share the cost? Should we regulate and let the market sort things out or should we try to constrain some of the paths through the roadmap. Hhhmmm. In this, as in so many things, Australia proves a useful case study. They had one of the first and best-developed EFT-POS systems in the world, but of late it has been looking a little antiquated.

Australia's central bank has criticised the nation's four largest commercial banks for shirking on investments in payment systems technology, resulting in a lack of innovation and neglect of systems like EFTPOS.

[From RBA criticises payments innovation: News - Hardware - ZDNet Australia]

This is, of course, the very same Australia that capped interchange fees, so reducing banks income from cards and therefore reducing their incentive to invest. The results are not surprising. If we use online payments market share as a proxy for innovative new products, then the result has been a steady loss of market to more innovative competitors.

Research from Nielsen Online has tagged PayPal as the most preferred online payment method in Australia and the UK. There are more than 141 million PayPal accounts worldwide. In 2007 more than $47 billion in payments were processed by the service.

[From The Better Banking Blog: PayPal vs Credit Cards]

In Australia, it was the merchants who were the winners. They obtained reduced merchant services charges because of reduced interchange and, broadly speaking, pocketed the difference. Was this what the regulators wanted? It's hard to imagine that this is the case, so the lesson to be learned here is (surely) that we need a clearer vision of what we want before we set off, if you see what I mean. If we want some real innovation, then simply focusing on interchange isn't going to deliver anything.

So who should pay? The Economist recently noted that history seems to show small firms prospering following recession because large firms cut back on innovation, retreating to the core business. I've no reason to suspect that banks will be any different: it will be competitors who pick up the thread of innovation and deliver new products into the payment marketplace. In the "old" days, this didn't matter to the banks because they could simply wait until someone else invented something that worked (eg, the ATM) and then buy. But will this be true next time around?Banks don't command the technology any more: anyone can afford it. That's why innovation is becoming so much more important to banks looking forward, and also why I was so pleased to hear from Frederic Baud that there is to be another BarCampBank London, and here's your invitation to it...

It's been a wild six months since the first London BarCampBank - the collapse of Lehman Brothers, sterling falling off a cliff along with the stock markets and even the man in the street talks about the credit crunch now - so we thought it was time for London's second BarCampBank. As before we will bring together technologists and industry insiders for a day of networking and discussion of the impact of emerging technologies on the financial space. So if you are an innovator, a disruptor or a professional of the banking and finance industry, if you are excited by or just curious about all the innovations that the new technologies could bring to the banking and finance world or if you want to present a project, confront your ideas or just echo lively debates with your own experience then you should definitely consider joining us at BarCampBankLondon2.

More info and the wiki for the event can be found at http://barcamp.org/BarCampBankLondon2

Registration takes place on eventbrite: http://bcblondon2.eventbrite.com/

Look forward to seeing you there.

These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]


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A large coalition of Canadian Retailers are lobbying the Government to regulate interchange. They have been very prolific in almost every offline/ online publication about the price gouging by the Processors.

You pose some interesting questions and what is happening in Australia because of gov't regulated interchange is interesting. I don't see how government intervention can help anyone, but that's a personal opinion.

Thank you for this informative piece. BTW: I had no idea how huge PayPal was for payment acceptance.

useful and transparent link for interchange

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