By now, we have seen enough fintech payments disruptors that we should be able to draw conclusions about which ones will succeed and which won’t. Are there heuristics that indicate which innovations will succeed, and which will likely fail due to miscalculations of market demand and how best to meet it?
In my experience assessing payments innovations for banks, investors, and regulators, a routine that seems to work well asks six questions about any proposed way of doing payments:
1. What is the magnitude of improvement over current ways of paying?
2. How many payors and payees need to be signed up to achieve critical mass, both functionally and economically?
3. Is it clear that it is trustworthy and why it is?
4. Which current payments providers does it threaten?
5. Is how it works easy enough to understand that a prospective user can comfortably imagine himself using it? Does it work perfectly the first time one tries it?
6. Does the business model reward all parties, both persons and institutions, sufficiently to make it worth taking the risks required to switch to it?
Some examples where recent past or current payments innovations either do or don’t pass these hurdles serve as both a test and a demonstration of this method of making a quick, initial assessment of how likely it is that a proposed payments system will succeed.
Let’s see how well four models of new payments do on these measures.
Financial-institution owned and operated payment apps
Magnitude of improvement? Medium; some not usable in all payment scenarios.
Number of participants needed for it to add value? Rises as a function of the number of FIs participating either directly or via an exchange, not the number of users.
Seems trustworthy? Strongly, due to institutional branding.
Threat to current systems? It is the current system, just made more convenient.
Intuitive? Can be, but surprisingly it sometimes isn’t.
Rewards all players? Dependent on the sponsoring FI’s distribution of the rewards.
Mobile payment apps from non-financial institutions (Apps that trade a token or marker redeemable within the app’s network of users or that can become fiat currency via a bank outside the scheme.)
Magnitude of improvement? Not a lot.
Number of participants needed for it to add value? A big hurdle to overcome.
Seems trustworthy? Highly dependent on the reputation of the provider.
Threat to current systems? The one or two that gain mass participation could be.
Intuitive? Not always.
Rewards all players? Usually the scheme owner-operator gets the revenue and profit.
Magnitude of improvement? Large.
Number of participants needed for it to add value? A big hurdle for retail payments; not as big for corporate payments’ fewer payers and payees.
Seems trustworthy? Not at first.
Threat to current systems? Potentially to corporate payments networks. Unlikely to threaten consumer payments.
Intuitive? Distinctly counter-intuitive.
Rewards all players? Yes.
Faster versions of current bank-mediated payment systems.
Magnitude of improvement? More so for corporate payments than for consumer.
Number of participants needed for it to add value? Transaction volume, not participant numbers, is key.
Seems trustworthy? Yes.
Threat to current systems? Most will be deeply embedded with current institutions.
Rewards all players? Yes, when there is multiparty ownership of the scheme.
An observation that has come from conducting dozens of these analyses is the old product-marketing nostrum that people don’t buy the product, they buy the experience of buying the product. One could go so far as to venture that a system that rates high on all of the overt criteria, but fails at this customer-experience criteria, would struggle to succeed.
Designing experiences is crucial for success in payments. How can one measure if the designed experience is working? We have found that an accurate indicator of the success of the experience design is simply the number of abandoned transactions, a statistic that has proven to be either the clarion of success or a death knell in analyses done across dozens of new payments ideas.