No U.S. bank and only one payments processor made a recent listing by Business Week of the world’s 100 most innovative companies.
This was embarrassing to say the least: In a business in which revenues are relatively fixed and operating margins thin, and the best way to make money is to refine operations, you’d expect that any top 100 innovator’s list would be littered with the MasterCards and CheckFrees of the world. But only Capital One Bank (# 37) represented payments processors on the list, and only three banks made it—Australia’s Macquarie Bank (#62), Holland’s ING Bank (#68), and Spain’s BankInter (# 86). No payments vendor appears anywhere, although Woolworth’s made the list at #75.
Adding to the disgrace was the fact that there seemed little reason for it. Boston Consulting, which conducted the research for Business Week, asked 1,700 top executives—including chief information, financial, and operating officers—which companies seemed to them to be most innovative. Since any changes in a supplier’s computer system would have been brought to their attention so they could adjust accordingly, people like that would have been aware of any such events, and that awareness should have affected their judgments.
The fact that no payments processors and only one U.S. bank made the list strongly suggests that the people responding to the list hadn’t heard much from their payments processors in at least a year, the inference being that at a minimum, companies like First Data Corp., Fiserv, or Bank of America aren’t engaged in the same level of continual improvement as the companies that made the list.
Even Boston Consulting was at a loss to explain the apparent lapse: “My guess is it’s a perception issue,” says Jim Andrews, the Boston Consulting senior vice president who was responsible for the research. The list was created by asking those 1,700 senior executives—worldwide—who came to mind when the issue was posed, he says, adding, “I’m not sure their payments processor, or even their credit card company, necessarily comes to mind relative to organizations” such as Google and eBay—list members which near-daily tell customers about upgrades and changes in how they’re doing things.
What’s causing this sorry state of affairs? Perception, agrees George Thomas, executive vice president of the Clearing House Payments Company LLC. “People don’t even know who we are— we’re the plumbing,” he says. “We’re in a dull business. It’s exciting to us—it’s held my interest for 25 years—but it’s not to anybody else. Most people take payments for granted.”
Thomas says the main reason for the lapse is money. Primary payments channels—the ACH or ATM networks, for instance—are so entrenched that replacing them would not only be a tremendous headache, but also hugely expensive.
A good example, he suggests, is the $10 billion bill the European Central Bank has sent to Europe’s banks as their contribution to the Single Euro Payments Area (SEPA). And in fact, creating an entirely new payments channel—especially since the current avenues work perfectly well—could hardly pass some cost-benefit analyses. The exception: Some sort of government mandate to spend the money in the name of a higher good. This was the case with the estimated $600 million spent by all parties to create the Continuous-Linked Settlements Bank, which clears and settles most of the world’s currency transactions.
“All the innovation is in the user interface. The core processing doesn’t change, because it’s too hard to make the changes,” says Thomas. “All the constituencies that would have to be involved to make that change have to participate and spend the money, so what companies like PayPal are doing is trying to innovate on top of the existing payments systems.”
Even his own company’s innovations, which he concedes build upon the existing payments infrastructure, take long times for adoption, he says, because the constituencies resist change. Corporations, he notes, still rely on checks for most payments, despite some inroads made for the ACH network by companies like his.
True enough, says Dan Schatt, a senior analyst at Celent Communications. He agrees that many of the issues arise from perception, but says there’s also a fair amount of inconvenient truth to the list. “Most of what payments companies do is a matter of saying ‘me too,’” he says.
Another problem: Protecting the status quo, says Schatt. “Look at how Visa is rolling out its mobile platform,” he says. “They’re so concentrated in ensuring that there’s complete control over the payments stream, from the issuer’s perspective, that they kill it.”
The real problem for payment companies, though, is that however inconvenient or expensive it may be to innovate in the payments space, it’s still necessary; otherwise, over time, the alternative is to go out of business.
“What this (list) tells me is that companies like First Data are really dinosaurs,” he says. “They are being disrupted. They are not fast enough to go into this new space, nor do they have an innovative culture.”
The full Business Week list can be found at www.businessweek.com/magazine/content/06_17/b3981413.htm (Contact: Boston Consulting, Jim Andrews, 617-973-1382; The Clearing House Payments Company, George Thomas, 212-612-9200; Celent Communications, Dan Schatt, 650-627-8897)