A recent article in a major business publication ranked the top 20 most innovative companies in the world. Not one major payment industry brand name made the list.
However, a recent study we conducted found technological innovation is a critical competitive tool for leading financial institutions in the global payments market. Innovation can enhance competitive advantage and profitability for those who know what technological innovation to pursue and how adoption varies across geographies and demographics. These are fundamental to exploiting the right strategy for any innovation.
Our study found that most financial institutions tend to resist investing in technological innovation. Instead, they focus on the profitability of their current business models while monitoring market developments to see which initiatives are getting traction. Only then will they commit to a course of action. Following the Internet boom/bust, many financial institutions have disbanded incubators and are less aggressive in investing in unproven technologies, especially where the business case is uncertain.
Despite institutional reluctance, there are financial institutions that have committed to innovation. J.P. Morgan Chase, for example, recently started deploying its contactless "blink" cards in the United States, highlighting "continuous innovation" as one of the five key initiatives to drive profitable organic growth. The first merchants to accept contactless cards are retailers that value transaction speed, such as 7-Eleven, KFC and Walgreens. Other issuers launching contactless products include Citibank and American Express.
Still, what is behind this negative attitude and resistance toward innovation, and what can be done to change this?
We know that a majority of financial institutions lack the right performance metrics and incentives to understand the current profitability of their payments business, and the potential for growing the profitability of their payments business through innovation.
There are many ways to generate successful innovation. However, very few financial institutions have structural processes or incentives in place to foster innovation. Such processes are simple and require four basic activities:
Observe: Develop a deep and detailed understanding of the current user situation, and where people live and work.
Brainstorm: Encourage off-the-wall ideas, and learn from experts or the experiences of other organizations, as well as from errors.
Prototype: Create proof-of-concept and looks-like/works-like prototypes.
Implement: Conduct a test-market launch with market analysis and refinement.
While the process for innovation is fairly straightforward, ongoing industry conditions make innovation a challenge, such as the need to work as part of a consortium to overcome the critical mass issue, convince regulators that cooperation is not anti-competitive, ensure against significant fraud risk, and be in compliance with rapidly changing rules and regulations.
It understandably is difficult to shift the risk-averse culture of a typical financial institution into an innovation-focused organization for payments. But it is a fairly simple exercise to monitor the appropriate performance indicators for your payments business, and to set up the internal processes and incentives to maximize these performance indicators.
Not only is this a good business practice, but you may also discover that innovation can improve your position in the competitive environment. In the final analysis, any enhancement that allows you to get a jump on the competition and provide value for customers and stakeholders will justify your investment in innovation.
Pascal Burg and Ken Howes are directors at Edgar, Dunn & Co. in London and San Francisco. They serve in advisory roles with clients in international payments, retail banking, new technologies and products, and global card initiatives in emerging markets. Burg's e-mail address is pascal.burg
(c) 2006 Cards&Payments and SourceMedia, Inc. All Rights Reserved.
Authoritative analysis and perspective for every segment of the payments industry
Authoritative analysis and perspective for every segment of the industry
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