Banking on disruption
[Dave Birch] I enjoyed Peter Hinssen's funny and well-delivered keynote at the International Payments Summit 2012. Peter wrote a book called "The New Normal" and he was talking about the behaviour of what we now call "digital natives". He caught my eye at one point when he mentioned Motorola, and this reminded me about something I'd been discussing with someone else in another context, to do with helping one of our financial services clients to improve their track record in innovation.
In 1994, the dominant global provider of mobile handsets was Motorola: its shares were trading at an all-time high and it was seen as an outstanding innovator and even described by a senior consultant at A. T. Kearney as "the best-managed company in the world"[From Why Nokia's Collapse Should Scare Apple - Patrick Barwise and Seán Meehan - The Conversation - Harvard Business Review]
That's the thing about technology-based innovation: it doesn't follow the smooth distribution of best practice that is the realm of management consultants. If you're in a technology-based business, then you need new technology and you need to keep bringing it to market.
For many decades, Motorola has been a paragon of U.S. technology prowess. It has been in the forefront of developing new industries by spending heavily and very productively on innovative research and development projects. In just three short years, CEO Ed Zander has reduced this once proud technology powerhouse to a shadow of its former self.[From The Unmaking Of Motorola - Forbes.com]
As recently as 2000, Motorola was in the top 10 US companies for patents issued. Yet by 2005, it had fallen to 34th and the company had tried to make up for the difference by buying companies with patents instead. Motorola was seen as being well managed, but it wasn't.
So its not like Moto was in a bad industry, they were definitely a diamond in the rough, that was just VERY BADLY mis-managed, as I've chronicled here on this blog for example many times.[From Communities Dominate Brands: Another Death in the Bloodbath: Google Buys Motorola Mobility]
How can this be? How can a company appear to be well-managed according to all of the measuring sticks in the management consultant's toolbox yet actually be so badly managed that its market share collapses?
Motorola missed most of these market trends, was slow to invest in digital (it was a classic victim of the innovator's dilemma),[From Why Nokia's Collapse Should Scare Apple - Patrick Barwise and Seán Meehan - The Conversation - Harvard Business Review]
Ah, the innovator's dilemma, so named after Clayton Christensen's excellent book on the topic. What this means is that market-leading organisations can find it very difficult to invest in bringing new products and services to market, because it will always be better for the stock price to spend the money on marginal increases in market share on existing, profitable core products than to experiment with new stuff. Then, when it's too late, it costs too much money to buy back into the market.
In Europe [and] North America the market share of credit card payments in e-commerce [is] 40 percent, but is expected to fall down by 2015.[From The Paypers. Insights in payments.]
The market share of credit cards in e-commerce a decade ago was about 95%, for comparison. Instead of coming up with new payment systems for the online world, the industry kept on shoehorning credit cards into e-commerce. As Motorola's co-CEO said himself back in 2009:
Success is one of the biggest impediments to growth. It can reinforce a traditional way of doing things. A hit product (such as the RAZR) can mask the brutal reality that more work needs to be done.[From Motorola and Fannie Mae: What Went Wrong - BusinessWeek]
Indeed. If you are a large bank, for example, it is very difficult to invest money away from core business. And there's also the problem that organisations such as governments and banks are inherently conservative, unwilling to exchange the certainties of reaction for the uncertainties of revolution (even when their position makes no economic sense). This makes them see problems in the wrong way.
Last Friday, Congressman Jesse Jackson Jr. (D-IL) took to the floor of the House of Representatives to decry the iPad as a job killer, as people are using the device to read books rather than buy them from bookstores.[From Lesson to Congress: iPad Doesn’t Kill Jobs, Government Does - Gary Shapiro - The Comeback: Innovation Economy - Forbes]
But wait a minute: surely books were destroying jobs in the scribe industry, and scribes were destroying jobs in the storytelling industry. I think Jessie Jackson Jr. should attack the problem at source: we need to stop people from reading and writing!
You just can't apply this kind of thinking. The music industry was never able to do the equivalent, nor were newspapers and nor will many other industries. Peter was certainly right to call for new thinking in banking and financial services in general. But I think Peter missed one important aspect of the innovator's dilemma as it applies to banking: regulation. Banking is a very heavily-regulated business, as it should be. Innovation in banking needs to be slow and measured. We need to know whether it will lead to systemic collapse or benefit society. The degree of regulation changes the rules so that the innovators dilemma simply doesn't apply in the same way.
Not so payments. This is where the innovator's dilemma applies today and where the incumbents need to take seriously the idea that if you don't disrupt yourself then someone else will do it. There's no need to be afraid of change and the opportunities that it will bring, but there is a need to embrace some fundamentally new ways of doing things. What we need to do is to separate payments farther away from banking, so that payments can be disrupted and ask some reasonable questions, such as "do we use great new technology like Android and NFC to emulate the payment cards we introduced in 1949 or do we use it to do something new?".
At the prosaic level, I think this means that, for example, EMV 2.0 shouldn't be anything like EMV 1.0. EMV 2.0 shouldn't be about PANs and expiry dates, terminals and GPOs: EMV 2.0 should be about identity: it should be about establishing a "payment identity" from a "payment institution", about authenticating that payment identity and about communicating the relevant data around the payment between the parties. And it should preferably do so in a wider identity management context such as NSTIC. But that's a topic for another day.
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