(6 minutes reading time)
Question of the day (I)
Let’s introduce a new type of post category: “Question of the Day”. Typically I will address questions – and my take on the answers – raised in conversations I have which could be of interest for others as well.
Earlier this week I spoke to an old friend who had just returned from a business trip to the USA to discuss various business development opportunities on two sides of the big point. He was wondering why certain types of innovation are typically initiated in the USA and not in the EU (or ROW). He pointed at PayPal as an example. Whether this a factual truce or only his impression is up for debate.
I think I understand where his question is coming from and at first glance would agree to the gut feel expressed with this question that the conditions in the EU for innovation especially in payments are less favourable. But once you start thinking about it various inroads are possible:
Thesis 1: “The USA is more innovative then EU in general”
Much can be said on the vibrance of the USA society as compared with the ageing EU. It seems an acceptable generalization that the attitude to innovation and towards accumulating knowledge is embedded differently in these societies. But if we could measure – and define – innovation in a meaningful sense my feel is that the gap is less big as many suspect in real world terms.
That said starting up companies, getting it financed and being able to attract the most talented people to new, hence risk prone, companies is more easy in the USA and this creates a much better growing bed for startups. This is a very visible development.
Thesis 2: “The USA is more innovative then EU in payments”
If the measure of innovation is the amount of initiatives in payments then this thesis is easily accepted. But innovation for innovations sake is not what we are after. It is all about the results. How many of all the initiatives have come to any meaningful fruition?
I think an on-line payment service like iDeal (on-line payments integrated with customers on-line banking) is a pretty good example of a plain but very effective on-line payments method. Not flashy innovation but real customer and merchant benefits in on-line payments all the same.
Implicitly it is taken for granted that “more innovation” will also – almost automatically – result in superior and more advanced services. Looking at the payments practice this does not seem to be the case.
Thesis 3: “The payments landscapes of the USA and EU are intrinsically different”
Often it is forgotten that the USA markets have differences with other markets. Innovations which are important game changers in the USA are pretty useless in the EU.
Example Square. To create a dongle for phones and tablets to make POS terminals out of them is a disruptive development. But not in the EU: not using “swipe” any more but use EMV chip-cards. Just a silly example, but the differences are not only technological but also found in infrastructure, regulations, user preferences, payments value chain lock in, standardization etc. etc.
Thesis 4: “There is more need to be more innovative in the USA then in the EU for payments”
A real driver for innovation is the urge to solve a persisting problem. If debit card schemes are arranged for on a national basis (one card can be used everywhere!), are low cost for all involved (while comparatively less profitable then credit cards for banks and payment processors!) what would then be the advantage for both payer and payee of “payments innovation”; read fragmentation? What will Coin – just forget that they are swipe based also – have to offer for people who actually only have one or two payment cards in their wallet anyway?
Thesis 5: “Europe is more dependent on banks to innovate in payments, banks are notoriously bad places for innovation though”
In Europe the banks in combination with MasterCard and Visa have pretty much cornered the payments landscape. This is also embedded in all types of laws and regulations. The Payments Service Directive – introduced with SEPA – defines roles for payment providers and payment processors and not for “banks” but in practice it is the type of companies who perform and control much of the payments landscape in Europe. Also the main payments infrastructures are controlled by banks and even conglomerates of banks. The infrastructure created over the years is heavily skewed to the banks. This has had serious advantages but for creating innovation and new services this is a barrier not easily overcome.
In the EACHA meeting in Frankfurt in July 2012 Professor Juergen Bott of University of Kaiserslautern showed his results on an extensive study about the ability of banks to innovate in payments: banks are organizations which are in essence not the best birthplace for innovations: payments are never top priority, nor does it create a relevant parts of their returns, it does not attract the high potentials, banks tend to preserve the existing over potential new developments etc. etc.
Thesis 6: “In Europe companies, especially banks, can more easily cooperate to create common services then in the US which is a big plus for social services like payments.”
Traditionally industry collision is dealt with differently in the USA (allergic) as in the EU (genetically passed on). The EU has applied more Anglo-Saxon type of rules over the last decade and companies have become more aware of the boundaries of collision. But still banks cooperating to create and deploy services is the norm.
Payments are social products, hence industry collaboration creates better services. With payment services that are essentially to be used between payer and payee regardless of the specific bank they are affiliated with this is a big bonus. Even with less innovative power the end-result can therefore be a more effective and cheaper payments landscape.
In the USA payments are predominantly seen as commercial services where (individual) companies are leading. In EU payments are predominantly seen and regulated as social / community services even though EU banks erroneously think they live in the USA as they tread payments as bank owned commercial services.
The creation of full reach in EU for payers and payees is a type of innovation lost on most but it has far-reaching effects for the ability for all to pay all in the EU. This is also “innovation”.
Thesis 7: “Specifically PayPal could only be created in the USA”
To me, the real innovation of PayPal is the use of email as the basis for transactions. As an important “side effect” Paypal can be used for P2P transactions. With a banking structure and the bank-number system behind it arranged for at country level with the bulk of the payments done between payers and payees within the borders of of the same country there was no need to use the email environment in EU. In my view the lag of clear initial user benefits, combined with the reluctance of the banks to have a new player enter their gated community would have been to big a hurdle to start PayPal in the EU. I am glad though it did in the States though!
Sometimes the right conditions are met in the east, sometimes in the west and maybe sometime in the future even in the south.
NB “Question of the Day”: Typically I will address questions – and my take on the answers – raised in conversations I have which could be of interest for others as well. For all questions of the day so far go here.