[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.
