An Innovation Imperiled: Attempting ‘The Big Idea’ at the Wrong Time

Replacing the Rubberband: How Payments Innovations that Once Failed Can Resurface and Thrive


The Rubberband Solution: How Payments Innovations That Once Failed Can Resurface

 > The conference call had the hallmarks of a slam-dunk investment: big-name venture capitalists, founders who had just defected from a legendary technology company and projections that added at least seven zeros to the end of every number in three short years.

And then there was the big idea, which promised to change the way consumers pay in America. It was the fall of 2000 and dozens of invitation-only calls were taking place daily as investors’ millions chased the next big pay-off. The company hosting this particular call was so new that offices hadn’t been located, bank accounts hadn’t been opened, nondisclosure agreements were not yet drafted and there was no prototype or even slideware to demonstrate the concept.

On this hastily called conference, engineers-turnedentrepreneurs spelled out their idea. Americans, they said, didn’t like bulging wallets of credit, debit and loyalty cards, and they would pay handsomely for an electronic device that would allow them to empty their wallets and not have to worry again about cards being stolen. Pointing to the Palm Pilot — the iPhone of its day — the founders talked about how Americans would pay hundreds of dollars for this secured PDAstyle device and $24.95 a month for a way to have a blank card issued at the touch of a button. In their vision of the future, the consumer was in charge and ready to pay. In their telling, the brands of Visa, MasterCard and even big name card-issuing banks no longer mattered. They figured that about 10 million Americans were ready to trade up for this electronic wallet that had not yet been named.

After a few minutes, the founders took questions from the virtual gallery. “What,” asked one investor, “are you replacing?” The founders answered by talking about how elegant and easy to use the device was, and stressed the power of its innovation. The investor wasn’t arguing those points, but he simply wanted to know what consumers currently used to manage their plastic.

The answer came from another would-be investor. Just last week, he shared, he was in a long line to check in to an airport hotel late at night. Every time he looked to the head of the line at the check in desk, travelers were either pulling out wallets an inch-thick with plastic or reaching in a briefcase to retrieve a brick-sized bundle of cards that were held together by a rubber band.

“Did you say a rubber band?” asked one venture capitalist.

In that moment, would-be investors “got it” — that the millions of dollars sought by the project’s founders were intended to replace perhaps one of the most low-cost, ubiquitous and useful tools of all times that had successfully helped consumers manage their bundles of payment cards for the last three decades.

And almost as if on cue, investors began dropping off the call, leaving only a chorus of beeps and chimes in their wake as they exited for another pitch. The stunned entrepreneurs protested that there was more, but these investors had heard enough. In the era, ideas were vetted with an unforgiving speed that Darwin would appreciate. More on that later.

During the past generation, advancements in payments have resulted in new products, improved processes, changes in the way customers pay or lower costs of managing payments. But these advancements have succeeded because they effectively balance the tension between giving customers more control and maintaining the integrity of a secure system. The omnipresent rubber band, although valued at fractions of a penny and far from the most attractive card-management device, worked just fine for many consumers. The founders lost sight of what, exactly, they were attempting to replace and the resistance from more pragmatic investors followed.

But still, payments have always been a business driven by innovation. Sitting at the intersection of regulation, consumer behavior and technological advancement, the industry is constantly reshaped by the prospect of the next best idea. At the same time, the rate of actual change can be slowed as payments leaders balance innovation against a foundation of legacy technology; act as duopolies protecting existing business models; and yield to the reality that many customer relationships are bound by longterm contracts with clients who are loathe to pay for innovation.

Bear Markets, Bullish Innovation

Ironically, this downturn in the business cycle actually creates an environment that leads to greater levels of innovation at a reduced cost in the years ahead. As budgets are cut and smart, forward-thinking people are let go, these innovators create new ventures or join smaller, faster-moving companies who want to implement a single idea — the “Hail Mary pass” of innovation. As larger incumbents pull back, smaller players find traction by becoming their vendors.

Whether large or small, a company defines its approach to innovation through investments. Altamont Partners has tracked trends for investment in innovation across the industry for the past decade. Many companies report that between 4 to 8 percent of their budgets is spent on research and development opportunities, but most of that can be linked to how they account for functionality upgrades and investments in their internal technology. While these indicators are important, they often understate how money is spent and, more importantly, how decisions are made. Hidden in the P&L statements are hundreds of pilot programs designed to test new ideas, new products and new approaches. They can range from hundreds of thousands of dollars (to perhaps test a new marketing idea) into the millions of dollars range (when introducing a new product or pricing model).

But in challenging times when balance sheets are damaged, cash is tight and markets are uncertain, even the most innovative financial institutions or processors are challenged to maintain pilots. As a result, bold investments for the future are deferred. Indeed, through 2010, corporate resources are more likely to be shifted to acquisitions that build market share or represent innovative companies with pipelines that are full of new products. And again, larger players will retrench while the smaller ones find solid footing — a trend that investors will recognize to fund more ideas in the upcoming year.

This cycle is not without precedent. Consider the boom of a decade ago. Major financial institutions and payments providers were focused on the threat of Y2K. Budgets were built around upgrades to security of existing systems, and internal investment in innovation suffered. Simply put, innovation was outsourced to smaller players. In that environment, thousands of ideas were funded. And this, of course, brings us back to the tale of the rubber band. That company did find investors who provided seven figures of seed capital. A prototype was built, but the product never made it to market. The technology was smart, but the founders forgot that consumers historically have not paid for the ability to make or manage their payments. Last year, the patents and software were sold to an unidentified buyer. During that time, the smart phone became more powerful and affordable; global telecom networks began to deliver on the promise of true, real-time interaction on mobile devices; security became ubiquitous; and the economics of bringing a new idea to market relied more on smart application developers than brilliant venture capitalists.

If the rubber band idea were to come to market today, it would likely be an application on the iPhone. In fact, at least three companies have been formed in the past year in the United States and Europe to simplify payments and loyalty program management. Most are free to consumers or are paid for either by the telecom provider or the customer’s bank, which wants to lower customer service costs and enjoy the temporary advantage of being ahead of the curve. In barely a decade, the core of an idea — to give consumers control — became a reality. But the business model and technology behind it changed at least three times, just as a touch screen has replaced the rubber band for some.

About the Author: John Racine is founder and CEO of Altamont Partners, a strategic advisory firm to leading and emerging payments players. He can be reached at