Payments innovation can be disruptive, but not yet
Over the course of several decades, the introduction of plastic has been one of most notable innovations in payments from banks.
However, the last few years have witnessed a steady stream of new payments innovations from the likes of Apple, Venmo and Google. Most of the innovation is “sustaining” in nature, meaning they’re important for growth of the industry, but they’re not entirely “disruptive.” Yet.
Analysis of the payments industry through the lens of Disruptive Innovation Theory tells us these entrants don’t pose a disruptive threat to the incumbent cohort of issuers, credit card networks and acquirers, primarily because the incumbents, Visa, Mastercard, First Data, are prepared to compete in all segments of the market. Further, the technologies enabling entrants’ business models can also be used by incumbents as sustaining innovations, allowing them to retain control of the value network that serves customers.
A truly “disruptive” innovation, on the other hand, redefines the trajectory of performance by bringing products and services that are not as good as those currently available but provide other important benefits, such as simplicity, convenience and affordability. Typically, such innovations require new value networks whose business models are distinctly compatible with that of the disruptor.
Consider the innovation of photocopiers, which entered the space occupied by offset printers in the 1970s. Initially, they performed poorly by comparison. But over time, the products improved and ultimately replaced offset printers for nearly all photocopying needs.
This level of disruption has yet to materialize in payments.
But it is important that as the payments terrain changes, incumbents be mindful of the challenges posed by entrants. Here are four things to keep in mind: watch out for new players that utilize a different business model from your own; understand the “Jobs to Be Done” of customers and be mindful of entrants that can address (and control) all their needs – functional, social and emotional; be aware of poorly performing technologies that could emerge as a disruptive threat in the future.
Blockchain technologies, for example, are currently poor performers, but have the potential for disruption if they continue to improve over time; make efforts to address areas of nonconsumption. Cash is a prime example. While electronic payment usage is clearly on the rise, there are circumstances where cash is still preferred (think technophobia, safety concerns, lack of ATM access). Don’t wait for disruptive innovations to emerge; target areas of nonconsumption now.
The Theory of Disruptive Innovation offers powerful insights for anyone seeking to use innovation for competitive advantage. Adhering to its rules can be immensely beneficial for both incumbents and entrants as they battle for the future of payments.