Incumbent vs. disruptor smackdown

[Dave Birch] The excellent Payments Forward series of afternoon tea debates continued with some delicious green tea with honey, some first-class carrot cake complete with marzipan carrot on top and a first-class discussion about the nature of competition in the payments industry.

This time the debate was about (essentially) banks and non-banks in the payments sector. The motion was “This house believes that banking incumbents can keep non-banking disrupters at bay in the new payments paradigm”.

• For the motion:
• • Graham Peacop, Managing Director, The UK Cards Association
  • Sean Gilchrist, Managing Director, Digital Banking, Barclays Bank
• Chaired by: Roger Alexander, Director, Accourt
• Against the motion:
• • Jon Prideaux, Chief Business Officer, BOKU
  • Stewart Roberts, Managing Director UK, iZettle

Forum friend Jon Prideaux, well-placed to deliver perspective because of his many years at Visa Europe as well as his role at Boku, went for the jugular by pointing out that all of the inventions claimed by banks were made by other people and that banks are already nothing more than a thin veneer over services provided by third-parties who are non-banks. He said that banks are “johnny-come-latelys” in payments who never wanted to deliver such services for more than the elite and that they will move away from payments again in the future. He may have been a little harsh in places, but surely there’s a grain of truth to this?

Sean Gilchrist highlighted the historic position of banks and reminded us that (I paraphrase) while people may not like banks they do trust them. He also pointed out that banks actually do have a historic track record in innovation. I might add on behalf of Sean that Barclays in particular have a track record to be envied: the first ATM in the UK, the first credit card (Barclaycard), the first mass roll-out of contactless, the introduction of PingIt and so on. Does this means that banks can continue to be the innovators? PingIt is definitely food for thought. Matt Kingdon, from our friends at WhatIf (an innovation consultancy based in London) writes about the PingIt case study in his new book “The Science of Serendipity”, contrasting the “traditional” programme management approach to developing new products in the banking sector with the “war room” approach that Barclays adopted to get PingIt into the market in a very short time. Barclays put marketers, technologists, lawyers and others all in the same room and told them to get on with it. Maybe it is the exception that proves the rule, to hopelessly misunderstand the old saying. I hope I’m not treading on any toes by deliberately contrasting the development of PingIt with its spiritual progenitor, the Payments Council’s mobile front-end to FPS (which is now due to go live in 2014) and the RBS iPhone 4 payment app that went live a week after the iPhone 5 launched.

Graham Peacop emphasised the incumbents historic ability to adapt and innovate but also introduced the issue of regulation. Obviously, the purpose of the evening wasn’t to talk about regulation in particular, but I think that the regulation will resolve this debate — technology cannot. When he said, by the way, that the UK has no successful P2P solution, he must have annoyed PayPal. I used it twice today, and it worked perfectly both times (as did iZettle too).

Stewart Roberts, who again has considerable experience of the “conventional” payments world as well as roles with disruptors, focused on the “few tortoises versus hundreds of hares” approach. He seemed to be saying that the timetable for banking innovation is so at odds with the rest of the business world that it simply cannot deliver the services that they require.

I thought it was interesting that the issue of whether banks are in payments for strategic reasons or whether they (as Kevin Coles said) had fallen into them came up again in the questioning. The assumption is, I think, that payments are a gateway to banking and that without payments relationships, banks will find it harder (i.e., more expensive) to develop banking relationships but this may well an outdated perspective. After all, as a customer I’ll still go to the bank for a loan, even if I use a payment institution for transactions, right?

My undercover agents at the event tell me that in the end the disruptors won the debate, although everyone knows that the reality will be more nuanced. Jon, in passing, referred to the new regulatory regime in Europe and, as I said, I’m pretty sure this will be the driver that shapes the emerging competitive landscape. At the Smartex Smart Payment Forum I chaired last July, I remember Adrian Cannon from Edgar Dunn giving a presentation on the challenges to innovation in payments. He focused on regulation as a significant barrier to change (the results of an Edgar Dunn survey of payment professionals showed that they still felt regulation was the single most significant issue facing their organisations), and he was absolutely right, but I thought it was interesting that he also talked about the “freedom to innovate”.

There is a “third way”, to use an infamous phrase, that I think can provide the freedom to innovate in a sound regulatory framework. A bank could create a payment institution / electronic money institution subsidiary and put it at a distance to foster a different corporate ethos, more focused on innovation. Even the banks who do make the strategic decision to stay in the payments business might be tempted to do so through such non-bank payment institution subsidiaries (while some of the non-bank entrants will go down the PayPal route and get banking licences). Either way, at least there will be some real competition, and that will be good for the rest of us.

These are personal opinions and should not be misunderstood as representing the opinions of 
Consult Hyperion or any of its clients or suppliers