[Dave Birch] Forecasts of future events are heavily influenced by present circumstances. That’s why predictions are usually wrong. It’s hard to transcend current assumptions to obtain genuine insight. In the world of banking and payments, we are no different. Chris Skinner said:

Maybe I’m wrong … but I cannot think of one, bank-created innovation that has then permeated other industries. C’mon. I must be wrong. Give me one that banks created and is now seen in airlines, retailers, or elsewhere. Ah … hold on, here’s one. The ATM. The ATM is now in airports as self-service ticketing machines, and also in retailers as self-service checkout terminals.

I hate to argue with Chris (not really — we rather enjoy a good argument), but it’s the other way round. The ATM as we know it today was invented by at baggage handling company!

However, the modern, networked ATM was invented in Dallas, Texas, by Don Wetzel in 1968. Wetzel was a department head at an automated baggage-handling company called Docutel. In 1995 the Smithsonian’s National Museum of American History recognized Docutel and Wetzel as the inventors of the ATM.

[From Automated teller machine – Wikipedia, the free encyclopedia]

Still, Chris is raising a worthwhile point for discussion. I think it’s related to the so-called “curse of knowledge”, a phrase used in a 1989 paper in The Journal of Political Economy, means that once you’ve become an expert in a particular subject, it’s hard to imagine not knowing what you do. What this boils down to — and I can’t imagine I’m being at all controversial by saying so — is that when it’s time to accomplish a task those “in the know” get it done the way it has always been done, stifling innovation as they traverse the well-worn path. In a field as conservative as banking, this makes the “The Innovator’s Dilemma” even more difficult. It’s compounded by the highly regulated nature of this industry: while the incumbents may well moan about their regulatory burden, it acts as a moat against invaders.

Anyway, back to the curse. Psychologist Elizabeth Newton conducted an experiment on the curse of knowledge at Stanford in 1990. She gave one set of people, called “tappers,” a list of commonly known songs from which to choose and they had to rap them out with their knuckles. A second set, the “listeners”, were asked to name the songs. On average, tappers predicted that listeners would guess correctly half of the time. It turned out that only 3 out of 120 guesses was correct. To the tappers, the song is clear and they couldn’t imagine the listeners not getting it. Perhaps it’s why engineers design products for other engineers and managers have trouble convincing the staff to adopt new processes and so forth. But there’s another factor, surely: the people who run banks and payment networks and so on have grown up in a business based on one set of technologies, and those technologies dictated particular business models. Sooner or later, technological change has to come, and that will inevitably mean new business models. This is a point made by the people at Revolution card:

What I wanted to do was create a payment platform that leveraged modern technology and the Internet essentially so that we could give the power of how to transact back into the consumer’s hands and back into the merchant’s hands. The opportunity to start clean with a whole new operating system and technology with 2007 solutions and architectures built in, it’s just an advantage.

This is true, and there must come a point where we get rid of the men with red flags and shift to a new mode of thinking. But it’s very, very difficult in our business. Let’s just remind ourselves where the money comes from. Retail payments in the U.S. generate almost $200 billion of annual revenues overall and well over half of the typical retail banking unit’s total risk-adjusted revenues. Approximately 70% of these revenues are associated with the interest spread and fees generated from consumer and small business current accounts and credit cards. The remaining 30% derives from a combination of transaction revenues, including card interchange, debit interchange and PIN fees and ATM charges. So if a bank has a few dollars spare, it’s always going to earn more money from lending those few dollars out than from some new-fangled payment mechanism that it might be able to charge a penny a transaction. It’s the innovator’s dilemma wearing lead boots.

Microsoft didn’t invent Google, BT didn’t invent Skype and the BBC didn’t invent YouTube. There’s no reason why we should expect or demand that banks deliver innovative new payment mechanisms: what we should demand is competition. As Leo van Hove mentioned in his excellent Wall Street Journal Europe piece (“Regulating in the Dark“, 3rd January 2008) on the unexpected consequences of regulatory intervention into the European payments market (in this case, the Commission’s ruling on MasterCard), this is what regulators should be focused: stop the cross-subsidy of cash from electronic instruments, allow retailers to pass on the costs of different payment instruments if they want to (so that consumers can make informed choices in a market with price information) and promote competition between instruments and networks. Competition, not regulation, is surely the path to real innovation.

These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]


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