Five Tests for Innovation

Payments 3.0

One thing about the future of payments is assured: The flood of new payments-system ideas won’t slow. This is due to the convergence of four developments in the payments ecology:

1. Software-development tech­nology that allows anyone to code a new payments system;

2. The ability of apps to do what used to require firmware or hardware;

3. Regulators who are hands off about or actively encourage innovation;

4. A generation of consumers who prize innovation and are early adopters.

Given that these factors all but guarantee a continuing flow of new payments systems, established participants including banks, card schemes, network operators, investors, and regulators must become adept at analyzing any new payments idea and deciding if they should get involved with it, just keep peripherally aware of it, or safely ignore it. How can payments professionals conduct this sort of triage effectively, quickly, at the scale required, and for the least expenditure of resources?

Using environmental-scenario scanning methods pioneered by the research firm SRI International, the Institute for the Future in Silicon Valley, and the Massachusetts Institute of Technology’s Media Lab, a methodology can be deployed with confidence that, while it may allow a few bad ideas to attract one’s attention, is unlikely to miss good ideas. The methodology involves the following five tests:

Degree of Novelty. Contrary to expectation, more novelty is not always better. There is a sweet spot between a new payment method being simply an old one in new clothing and its being so far from what is familiar as to seem incomprehensible or untrustable. This test ranks the new idea from a low of its being just another way to make an existing kind of transaction to a high of its requiring payors or payees to believe in an opaque new technology or governance regime. One could cite the digital wallet that holds only your existing credit cards as towards the left tail of the curve and cryptocurrency systems near the opposite tail.

No Requirement for Merchants to Buy New Hardware. New ideas that integrate into existing transaction platforms, like PayPal, for example, and do not require merchants to buy anything are a pure play on this criterion. By this test, Apple Pay mostly qualifies but for the requirement for merchants to get equipped for near-field communication (NFC), which might be its Achilles’ heel. That it is hard to come up with an example of a system at the other end of this test points out how unlikely it is that a new payment method dependent on major hardware purchases would survive. On this test block-chain methods could be high-scoring depending on the level of merchant integration required, if any.

Transparency of Clearing And Settlement. People need to know how the matching of payor and payee will happen and when the transfer of value will occur. While clearing and settlement would seem to be more important to the payee, instrumented pilots of new mobile-based payments methods show payors seeking to confirm if their account was debited and for the right amount.

Conversion To a Common Medium of Value. Ninety-nine percent of transactions are made in specie or can be seamlessly converted to specie at low cost. The history of new payment concepts is littered with non-specie ideas like “Dallas Bucks,” tire-store dollars, and the grand-daddy of artificial currency, S&H Green Stamps. All eventually failed, as I expect will most, if not all, of the current ones that do not provide easy specie convertibility at stable rates. Only people ready to gamble are going to leave their money locked up in a format that might become worthless.

Understandable by the Average Adult. Although the youth market embraces many new payment methods, if the concept is too complicated to be comprehended by the average adult, its market is limited to an age cohort with less to spend. We in the payments business are not the right test market for this one. Focus groups conducted with average people are the only way to know if what seems simple and obvious to the inventors makes any sense at all to those who will make the invention succeed or fail.

Using these five tests, participants in the payments world can isolate the new ideas that most bear watching, participating in, and investing in.

George Warfel • george.warfel@edgardunn.com