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Fintechs have ended the trickle-down era of payment innovation

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Twenty years ago, payment innovation was driven by large incumbent firms. Larger banks and payment companies drove innovation first; regional and community banks benefited after.

Call this a “trickle down” version of payment innovation, which is akin to most technology adoption in that era. Large organizations went first, then midsize organizations, and finally the smaller organizations. This model worked for bank customers too, since they had no voice in the matter. Whatever banks offered was all they expected. And sometimes, as in the case of ATMs, it took decades for broad adoption to take hold.

The demise of the paper check is another example: Deluxe Corp., the largest check printer, predicted the decline of the check many years before it actually occurred. The first month fewer checks were written than the previous month was July 2001. Deluxe had a contingency plan, having acquired several electronic payments businesses to hedge declining paper check revenue. While Deluxe was planning for the decline of the paper check, it underestimated consumer preference for debit cards. When check usage dropped 44% between 2003 and 2012 it wasn't a slow decline, it was a precipice. Consumer power emerged.
But now, large banks no longer drive innovation. These organizations were slow to understand the internet, and slow to bring forward new payment models for online commerce.

Consumers needed payment platforms that could handle internet purchases—quickly and securely. And they wanted to be able to conduct person-to-person transactions. Meanwhile online retailers weren’t too happy with the interchange rates charged by banks.

Both consumers and retailers alike desired faster payment resolutions, better access to online systems, and lower cost payment vehicles.

With shifting demands from bank consumers due to the new online dynamic, opportunities were naturally created for innovative payment ventures. Some moved quickly to enter the market.

Recently, the emergence of more innovative payment approaches are shaking up the market. Bitcoin, for example, is technology-driven—versus market-driven—and offers something new, simply because the technology enables it. However, Gartner’s Hype Cycle for technology adoption places bitcoin squarely in the promotional camp, not adoptive. Good payment systems are built on trust, security and regulation. Bitcoin hasn’t achieved critical mass as an unregulated payment platform.

Who or what will drive payment innovation in the near future? If the two choices are financial institutions, or technology organizations with a better understanding of consumer needs, it may be a toss-up. Financial institutions don’t seem to be willing to concede when they have so much revenue at stake. And what’s more, they’re able to acquire innovators in tech payments.

With large customer bases, innovative technology, fast business biorhythms, and the will to take more risks, I’d put my chips on well-managed banks with deep payment expertise. Or, you can put your chips on the next successful payment startup, if you can discern who that might be—or just watch these banks and their next payment acquisitions.

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