Why the Payments Industry Needs a Catalyst to Drive Payments Innovation

I’ve explored how invisible engines drive innovation and transform industries. I’m now going to explain how they will do that in the payments industry. This entry explains why the payments industry needs a catalyst to ignite innovation.

There is an intricate set of systems and enormous group of businesses that are involved in payments. They range from the companies that print paper checks, to ones that make the point-of-sale terminals where you swipe your debit card, to banks that operate depository accounts, to clearing and settlement networks. At the beginning of 2010 this industry involves many different computer systems, each with a software program, that have been through brute force forced to interoperate with each other. Consider what happens when you swipe your card. The terminal sends your card information along with details of the transaction to a switch. That switch, which may be operated by a variety of payment players, has a software program that decides what to do with the transaction. It will send it on to a merchant processor that will keep track of the details of the transaction and act as an intermediary with a clearing and settlement system which will contact the bank processor that acts on behalf of the bank that issued the card or possibly the bank itself. Many software programs running on numerous pieces of computer hardware are involved in the various steps in the process.

What we have just described is one “rail” in the payments system—the one for credit cards. While this may vary by country, in the United States there other rails for debit cards, paper checks, electronic funds transfer, and other “tender” types. Now suppose that you are an entrepreneur who has come up with a great idea that involves incorporating payments into your application. This innovation could be something as simple as a software program that helps small businesses accept payment in multiple ways and integrate these payments into basic accounting software. To succeed, you would have to integrate your application into the many software platforms that are used for the many tender types taken by businesses. That is such a daunting task—one involving substantial money and time not to mention the cooperation of the other businesses that handle payments—that you might well give up.

This is a perfect problem for a catalyst to solve. Massive transactions costs make it hard for payments entrepreneurs and payments users to get together. A software platform—perhaps in the cloud— can lower those costs by investing in linking to the multitude of software programs that handle various elements of payments. By exposing APIs, this software platform then makes it possible for entrepreneurs to quickly integrate into most relevant aspects of the payments business. Such a software platform is analogous to Windows which among other things enables software applications to work with the multitude of device drivers that work various hardware peripherals such as computer hardware, printers, and cameras.

A great deal of innovation can be unleashed once these APIs are exposed. Entrepreneurs won’t need to replace hardware at the point of sale; they will just need to develop applications that work with platforms that connect to the hardware. They will be able to achieve massive distribution quickly thereby making it easier to ignite their businesses. With that they will be able to obtain scale more quickly and lower costs. It will be possible to roll out innovations to many channels simultaneously by porting apps between different platforms or using APIs for platforms to connect to multiple channels.

In the next entry I will describe a platform that sits on top on the rails I’ve just described and helps developers of new payments businesses access the messy plumbing of the payments system right down to the point-of-sale devices at retailers. Then I will describe how PayPal, Amazon, and others are creating software platforms for online transactions. These platforms help developers of applications, say for the iPhone, easily integrate payments. And finally I will explain how other players in the payments business—the networks, processors, banks, and others—can use the software platform model to drive innovation.

Innovation in payments will, in my view, be driven over the next decade by software platforms that facilitate a vast ecosystem of applications. And there’s going to be competition over who provides the best APIs (and underlying code) to support applications. One of the things we’ve learned about software platforms is that they have huge network effects. The platform that gets more applications and users will get even more applications and users. That doesn’t mean that only one software platform will survive because each could differentiate itself by catering to different needs of developers. But it does mean that it is unlikely that more than a handful of payment platforms will survive. The race is on.


David S. Evans is an economist and a business advisor to payment companies around the world. His recent work has focused on helping companies create, ignite and profit from payments innovation. He is the originator of the Innovation Ignition Framework® , a tool provides a systematic way for companies to evaluate and implement innovative ideas and achieve critical mass.


Invisible Engines Series


I. The Invisible Engines that Drive Innovation and Transform Industries

II. How the iPhone Invisible Engine Provided a Catalyst for the Mobile Phone Industry

III. The New Age of Invisible Engines: How Software Platforms Will Drive Growth in the Next Decade

IV. What’s in the Cloud for Payments?

VI. Can IP Commerce Create the Apps Store for Payments?

VII. PayPal X’s Global Payments Development Platform