Jan 3, 2006

Creating competitive advantage through a holistic approach to payment

The Economist Intelligence Unit recently surveyed 100 senior executives in banks across the globe on the topic of payment systems. One imperative emerges from the survey: banks increasingly believe that they must take a holistic approach to payments in order to be able to lower their cost base, protect wallet share, retain customers, and develop profitable products. The survey shows a clear shift in payments governance, with many banks expecting in the next three years to acquire a payments “czar” to supplement or replace heads of separate products and business lines.

Michael E. Porter, one of the world’s leading authorities on competitive strategy, has this to say in an interview about banking strategies: “What surprises me is just how inefficient and siloed the whole payment system still is. Different companies process debit cards, credit cards and checks. There are many fragmented parts cobbled together. It’s difficult to integrate data across the client and really understand a financial institution’s or retailer’s position. While First Data Corp. is big, they are built from acquisitions that have never been integrated. So even the industry leader is siloed.”

The payments industry is not the only one in which a holistic approach is increasingly seen as a major factor of success. The trend can be seen across many high tech sectors. In today’s networked world, gadgets can’t just do their own thing but have to talk to one another. Your iPod talks to iTunes software on your PC, which talks to the iTunes website. The trend is clearly present within the global payments infrastructure: think of how a smart credit or debit card talks to a payment terminal, which talks to an acquirer's payment authorization host, which talks to the issuer's host.

Many of the features provided by networked gadgets depend heavily on the types of conversations that are possible between them. If the conversations support a rich vocabulary, the devices speaking to one another can support a richer set of features. In a networked world, product features are directly dependent on the richness of the conversations possible between objects. Apple’s creativity and ability to get truly innovative products to market is legendary. One of the reasons they are able to innovate over and over again is that Apple controls the full environment, making its own hardware and software and depending as little as possible on outsiders. Steve Jobs clearly believes that in a networked world, the conversation between gadgets is better if Jobs has scripted both sides of it. “One company makes the software. The other makes the hardware … It’s not working,” Jobs says in an interview in an October issue of Time magazine. “The innovation can’t happen fast enough. The integration isn’t seamless enough. No one takes responsibility for the user interface. It’s a mess.”

This type of vertical integration isn’t supposed to work, but obviously there are cases where it does. In many high-tech market sectors today, each company specializes on one gadget, letting other companies develop other gadgets, and all of them working together with industry associations to define how conversations occur between them. You can see this very clearly in the PC industry, as well as in telecommunications and banking. Since most companies focus on their own single gadget within the overall infrastructure, and since the conversation between gadgets is defined at an industry association level, most innovation happens within each individual gadget, with much slower innovation happening between gadgets. So the few companies that have a holistic grasp of the infrastructure, like Apple in microcomputers, are able to quickly innovate in deep ways that are out of the reach of many other players.

Most payment technology providers do not have a holistic grasp of the overall smart card based payments infrastructure. Smart card vendors know how to program smart cards. They understand a little less about terminals, even less about payment authorization systems and less again about switching, clearing and compensation systems. Not to speak of payment card marketing. Similarly, payment processors do not develop POS terminal software, or smart card software, and depend entirely on terminal and card vendors to do their part. So payment processors end up with heterogeneous networks with different features and functions depending on each terminal’s idiosyncrasies. Think about this bizarre situation: each POS vendor’s payment application has a unique look and feel and can appear extremely different from one platform to the next. Each platform displays different messages, all for the same function. There are many ways to start a transaction, such as ‘Insert card’, ‘Card not inserted’ or ‘Swipe/insert card’. There are many ways to alert the operator to a problem with the terminal, such as ‘Paper jam’, or ‘Paper ERR: Wait’ or even cryptic messages like ‘Error 200’.

While payment authorization systems vendors, POS terminal vendors and card vendors can each innovate within their own environment, their creativity and ability to react quickly at the holistic, systemic level is very limited.

In a similar fashion, banks which are actively involved in merchant acquiring have a more holistic view of payment than most other banks which have focused predominantly on card issuing and have neglected their acquiring activities. Banks involved in merchant acquiring are able to enhance the moment of payment faster, because they are able to define what happens at the moment of payment and how a payment transaction is experienced by the cardholder and the merchant. A bank with a holistic grasp of the payment function can deploy innovative enhanced payment features much faster than other banks.

Welcome is perhaps the only payment software vendor with developers that specialize in smart card technology, POS terminal technology and host systems, all under the same roof, all within the same organization, and all able to talk to one another quickly without needing to involve outside organizations. This becomes an important competitive advantage when, for example, the conversation between the smart card, the POS terminal and the host needs to evolve in order to support new features.

Welcome’s people are rightfully proud of the innovations they are bringing to the payments industry. When software engineers come together from across all parts of the payments infrastructure, and work closely together as colleagues within the same organization, the deep teamwork provides excellent opportunities for brainstorming and cross-fertilization of ideas. This is a very fun thing to be a part of.

Economist Intelligence Unit white paper: “An enterprise approach to bank payments”
Refresher on Strategy
How Apple Does It, Time Magazine

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