One of our research initiatives at Glenbrook this fall has been exploring innovation in electronic payments - how payments innovations happen, the characteristics of the most important drivers of them (including the impacts of key people, industry structure, and any important technologies) that enable innovations, and how to best measure and define their success.
One way to measure success - a measure that's naturally of particular interest to investors in payments companies - is whether and how wealth has been created as a result of the innovation. Looking back at wealth creation in payments over the last several years, there are really only a couple of truly standout US examples: PayPal (before its acquisition by eBay) and MasterCard (with one of the most successful initial public offerings this year).
PayPal's innovation was using a classic Clayton Christensen "entry from below" strategy - to provide payment services to individuals and small merchants who might not otherwise have been able to qualify for a bankcard merchant account with a traditional merchant acquirer. MasterCard's wealth creation wasn't the result of innovation in markets or technologies - but, rather, innovation in governance and, curiously, ownership.
In thinking about innovation in payments, it's striking that while there's been a lot of talk about the high costs of merchant card acceptance, etc., there's been no successful emergence to date of a "low price" payments player. Where's the Wal-Mart or Southwest Airlines of payments? Where's the Dell, the Ikea, even the ING Direct of payments? How about the Intuit of payments - radically changing the economics of payments in the same way that Intuit completely changed the ecosystem of tax preparation? Will Prosper and Zopa emerge as stunning examples of revolutionary changes in consumer lending that displace banks - or end up just being "science fair" experiments?
This month's Harvard Business Review has an article titled "Strategies to Fight Low-Cost Rivals" by Nirmalya Kumar, a professor of marketing at the London Business School. It's one of the best articles I've read about how incumbents need to think about the potential emergence of low-cost rivals. I enjoyed the following commentary from Kumar's article:
Many price warriors don’t figure in listings of the biggest companies, but they have created wealth—and pots of it. Look at Forbes’s list of the world’s richest people in 2006, for instance, and you will discover that 12 of the top 25 billionaires made their fortunes by creating (or inheriting) low-cost businesses. They include Sam Walton’s five heirs, whose combined net worth was estimated at $80 billion, Aldi’s Theo and Karl Albrecht with $32 billion, IKEA’s Ingvar Kamprad with $28 billion, Mittal Steel’s Lakshmi Mittal with $23.5 billion, Dell’s Michael Dell with $17 billion, Zara’s Amancio Ortega with $14.8 billion, and Wipro’s Azim Premji with $13 billion.So, where is the first new payments billionaire of this century going to come from?