Institute For The Future

Lightweight innovation for credit card companies

 

 

My colleague Anthony Townsend recently wrote a thoughtful report The Future of Lightweight Innovation for IFTF’s Technology Horizons program. The report is currently available only to clients, but Anthony has blogged about the report on several occasions. You can catch some important insights

here . He makes a compelling case for porting lightweight innovation model which has evolved in the web industry to other industries, including those that rely heavily on capital intensive R&D.  

 

I have been looking at the financial industry lately which is an extremely closed and capital intensive industry making it a perfect test case for lightweight innovation. Let us begin by looking at the credit card industry.  From a customers and retailers perspective, the credit card industry is slow moving and extremely inefficient. Even today credit card companies charge per transaction – they take a cut for every transaction when the customer pays using a credit card. The model is akin to the phone industry model from the past when people paid by the minute for long-distance (within the US) phone calls with even different rates for different cities. On top of it, it can take from 1-3 days to receive the payment after the card has been swiped. Writer Daniel Roth gives a great explanation of the business model of the credit card industry in the Wired.

 

 The banks and credit card companies have spent 50 years building a proprietary, locked-down system that handles roughly $2 trillion in credit card transactions and another $1.3 trillion in debit card transactions every year. Until recently, vendors had little choice but to participate in this system, even though — like a medieval toll road — it is long and bumpy and full of intermediaries eager to take their cut. Take the common swipe. When a retailer initiates a transaction, the store’s point-of-sale system provider — the company that leases out the industrial-gray card reader to the merchant for a monthly fee — registers the sale price and passes the information on to the store’s bank. The bank records its fee and passes on the purchase information to the credit card company. The credit card company then takes its share, authorizes all the previous fees, and sends the information to the buyer’s bank, which routes the remaining balance back to the store. All in all, it takes between 24 and 72 hours for the vendor to get any money, and along the way up to 3.5 percent of the sale has been siphoned away. 

 

 Credit card companies have been extremely efficient at protecting their monopolies, even though the system is flawed, inflexible, inefficient and archaic. But lightweight business innovation models especially on the mobile phone are posing serious challenges to credit card companies.  A case in point is Palo Alto-based start-up 

Bling nation . The company has a sticker that can be glued to a cell phone turning into a money transaction money. Bling nation is currently working with local banks and retailers. The biggest plus for retailers is that they don’t have to pay per transaction instead they can pay a monthly/annual charge. Similarly, Jack Dorsey’s (one of the founders of Twitter) start-up

Square transforms a cell phone into a credit card hub with no monthly fees or contracts. 

 

There is certainly a lesson in understanding disruption here. Small companies like Bling Nation and Square that don’t have access to large business fortunes, but some investments from venture capitalists or angel investors, can disrupt closed business models and systems that large companies like Visa have built over the years. Before you dismiss this remember everything big starts small. It was not long time back that Google was just another start-up and not the Internet giant that it is today.  The biggest challenges to the old business models and closed financial systems are increasingly going to come from small start-ups. Since it is becoming easier and cheaper to bring new innovative technologies to market expect the monopolies of credit card companies to be shaken up in the coming decade. At the same time, the ubiquity of smart phones and mobile Internet means that there is a group of ready users who can use the technology without any investment at their end.