Payment Innovations in Modern Life
Technology goes beyond border. Advances in technological innovations have made things easier including remittance of payments within and outside country and continent borders, in addition to presenting complex challenges in security and issues related to competition amongst the firms or companies venturing in these initiatives.
Innovations in most areas are welcome more easily if they support and base on the existing systems and traditions for doing things. This makes the migration from one innovation to another somewhat unpredictable and need to watch for the success of emerging systems as basis for future systems. Globalization and cross-border trade is being made easier with advent of technological systems that allow transactions between people, or even states.
In addition to this, technology may even be more welcome in future in remitting of payments since it encourages elimination of paper-work systems of exchange, spending of more time doing business, cutting the cost for companies who find need for virtual employees and cutting other related business costs.
However, the investment in this field faces related challenges such as security issues, need for standardized payment and systems of transacting which may not be easy to achieve since each country or region has a particular tradition.
Although banks have been the leaders in the payment and other processes involving business transactions, innovations are letting other non-bank entities venture into and explore options that bring competition in the banking sector.
These services are accompanied by other added facilities that may make the non-banking institutions better than the banking institution. In addition, individual skills and strategies may make some companies to beat others in the competition. Therefore, it may largely depend on the companies’ strategies and skills to venture and penetrate the market through adoption of current innovations and systems.
These systems include the online peer-to-peer payments (P2P), electronic bill presentment and payment (EBPP) and account aggregation and may be inter-linked with services innovations. The payment innovation may be grouped in two: technological and service innovations. Innovations that are technologically oriented seek to change the existing technological system in a positive way.
Changes in the service innovations may follow suit by changing the existing service and processes for providing payments. Mostly, technological innovations follow research and careful look into the existing methods, services also may follow suit but adoption of innovation in both sectors may be as a result of proper management and leadership.
Leadership and management are necessary to implementation of upcoming technological and service innovation. Again, quick or slower adoption may be governed by laws and regulations relating to payment and other business operations.
More people are finding the means to transact online which may be as a result of increased behavior of surfing the internet and finding alternative means of transacting which are easier and more affordable. A survey conducted by Ipsos Research commissioned by PayPal showed that shopping over the internet was about 87% for those who shop online once per month. 82% of goods involved travel goods and services in the e-commerce business.
Online Payments across the border also face the challenge of differing laws and regulation pertaining transactions. This paper will examine the general issues relating to payment innovations, its principles, associated factors, implications and challenges and how Paypal has managed to beat competitors in this field. The paper will also give a limelight on what is to be expected as concerns payment innovations.
Security and other investment issues
Technological innovations are advancing at a high speed and posing a danger of lack of secure deals and transactions not only in payments but also in internet business as a whole. Companies that invest in payment innovations will need to stay ahead of these evolutions in technology so as to counteract issues of security breaches.
In a panel held during the Chicago Fed conference held in September 2006, while discussing issues related to secure payments in innovations held that those involved in these transactions may themselves initiate security breaches since they may not be aware of the security protocols in the very dynamic digital world. Security threat is being advanced because some current trend involves organized internet crime.
Therefore, it is imperative for a company that wishes to stay ahead in the field of payment innovations to invest in fighting crime to an extent that their operations remain secure for customers and for the sake of their businesses. Internet transactions experience instances where users may be tricked to flush out payment information through phising, pharming and spamming.
More over, insiders in a company may also represent a sizeable threat to payments and this makes it more complex to attack. Companies will need to invest in securing payments through appropriate edge technology, ideas and equipment. This is because customers will be expected to become more concerned in the security levels of transactions than in the future and this may make the business loose customer trust.
In order to strengthen their security system, PayPal devised a two-factor authentication where after entering the password and login identity, users would be prompted to input another six-number key. Loss of such a key would require credit card or bank account number listed in the account belonging to the user. The secondary key prevents a third party from compromising the account without access to the initial login information.
In addition, the panelists in the aforementioned conference saw the need for regulators in the payment industry to collaborate with the participants in the industry. There also calls a need for companies to invest in working out relationship between themselves and security firms so as to venture into proactive from reactive plans in preventing internet-based and other forms of payment security crime.
The requirement for advanced investment in the payment industry is necessitated by the possible greener future electronic payments.
Since technology is evolving fast, companies will have to invest in innovations so as to be able to develop, innovate and utilize technology that offers what the customer desires-fast, secure, reliable, flexible and compatible means of payments. Since for example all people in the world may not possess bank accounts, prepared cards may present a simpler and better electronic means of remitting payments without establishing a commitment with the banks.
Companies choosing to invest in payment innovations when they are having attractive technologies which may not necessarily be customer based may reap high returns on such investment.
Apart from the associated higher risks, these companies will have a chance and experience to shaping, and managing the development of products. Another strategy includes investing at latter stages where, for example, a firm may acquire another existing firm and develop the products while relying on the stakeholders to the acquired firm.
These companies do not encounter high risk than in the latter case. Companies that want to stay ahead in payment investments must invest in technology that is unique, strong management, expertise, and strive to achieve customer focus (Jankowski).
PayPal was a result of merger of X.com and Confinity in 2000. The two dealt with internet financial services and email payments. PayPal was using CAPTCHA to avoid fraudster’s activity of accessing them through automatic systems.
Since eBay had made Billpoint-which it acquired in 1999-to only deal with payments, PayPal advanced better in auctions and by April 2000, it experienced more than a million auctions. PayPal had begun to compete with eBay in payments. PayPal which is an eBay Inc company enjoyed about 60 million accounts in 190 markets and seventeen currencies around the world in 2005 according to a company website.
PayPal was acquired by eBay in 2002 for $1.5 billion. PayPal strategies included signing up with merchant firms in order to provide them with its services. These firms included big companies like Apple Computers for iTunes Music Store and Overstock.com. The company offers advantages of virtual services which include elimination of many procedures involved in other means like clearing out checks, and waiting for paper transfers to be made.
These may be reasons why it is therefore preferred to other similar service providers like Western Union Financial Services Inc. These technologically savvy services come with speed in their carrying out.
In 2004, the company realized a total payment volume of $19 billion and had a faster expansion of 44% in the same year as compared to that of Visa, 14%. In addition, the company extended to offering credit in the year 2004 through GE Consumer Finance.
It would be wrong to say that investments in the payment innovations are purely driven by existing technologies or customer needs. What is necessary to note is that for a careful scenario, the three, together with other factors must combine to benefit mostly the banks or the investing non-banking institutions.
In fact, in a capitalistic economy, the driver to adoption of technologically-savvy innovations in payments is driven by the run for the benefits that the investing party will reap after investing through cheaper means, global or local expansion that may result in increased customer base, lesser labor among other means.
The initial arrangements may involve reduction of operating cost, or the cost of doing business with the current practice and the need to adopt efficient procedures, processes and machines or equipments. Luckily enough, the investor must take into account the needs of the customers or clients for his plans to succeed.
The company cannot want to invest in ventures that will only give it the reputation of being ahead technologically unless it sees some expected future benefits in terms of many customers and putting customer trust forward. The challenges that faced them that time included target by fraudsters fooling members to reveal account information through emails, expansion ventures as well as adjusting the antifraud measures for example relating to disputes between merchants and buyers.
The revenue for the company was about 1 billion dollars in 2004 and increased by 47% and $582 million in the first quarter of 2008. One strategy involves collaboration with merchants whose payments are serviced from their bank accounts thus eliminating credit-card charges fee and processing fees that could be associated with similar services from competitors.
Thus by availing cheaper alternatives, they are able to attract customers and be preferred more than their competitors through the hybrid funding. These merchants sell a range of products. PayPal estimated that its merchants incurred lesser losses from their services than the rival firms offering online electronic credit cards i.e. losses amounting to 0.17% and 1.8% of revenues of Paypal and online electronic credit card providers.
In addition, Paypal could accommodate large amounts of balance that would not be reduced through credit account bills and at the same time, too large to put in the pocket (Robert, 2005).
In the United States, the company operates as a state-by-state money transmitter and, although it is not grouped as a bank it is regulated by some rules and regulations that govern the financial industry in the United State whereas it may be recognized as a bank elsewhere in Europe.
Companies may aim to achieve more customers by adopting payment strategies that involve technological development that are differentiated from the competitors and/ or additional products and services not offered by other competitors.
PayPal’s strategies have been named as follows; offering mobile payments, across-border expansion, and becoming a bank in Europe in 2007. This has been the reason for their reaching of more customers, ability for customers to use more currencies in transactions and PayPal’s becoming more preferable (Skinner, 2008).
Paypal’s future could be shaped by the existing and emerging competitors in the field of payments. These include banking institutions some of which emphasize development of innovations for use in-house, in addition to small banks that purchase the products and use them.
The larger banks which may be ahead in potential to developing innovations in services they offer and development of the current practice may give PayPal a good run for their money. Other potential competitors are the non-bank data processors whose work is to process information related to payments and may partner with other financial institutions to offer services like clearing of checks and processing of ACH.
Other possible competitors include firms which may be willing to expand their scope of the services they offer so as to find the advantages in payment investments.
These include companies which offer services related to banking sector like MasterCard and Visa who already have established customers in various places around the world and may be willing to respond in an attempt to resist loosing these customers, or as a result of aggression to gain more market and the accompanying profits.
Google also launched a service that concentrates in e-commerce, which would give Paypal competition. Yet PayPal might be preferred for reason that it allows storage of funds in accounts, a service which Google does not (Kim, 2008).
Innovations timeline depicts the phases or process a payment or any form of investment may undergo during its development. An innovation in payment may arise and penetrate the market successfully until the supplier introduces a similar process or product that is not able to differentiate. This is called the timeline of such an innovation.
During this period, the practitioner who adopted this innovation may reap highest profits or benefits. Profits margins may latter decline and further deteriorate until a non-differentiable product or service is brought into the market. As discussed earlier, some companies may prefer investing in early innovations and wish to carry the risk involved (Lazear, 1990).
Yet the benefits which may be accrued may include having a competitive advantage over other firms willing to invest in mature innovations. Once they invest in these technologies, these companies may protect or delay entry into the innovation by their partners as much as possible to continue enjoying the competitive advantages.
To protect the innovation at initial stages, companies may acquire patent protection, copyrights and trademarks. Such companies may benefit through selling these rights. For example, IBM which acquires an average of ten patents per work day and earns income as licensing fees (more than $1.5 billion) (Jones, 2000; Bennett, 2002).
However, a danger lies in that this may slow down the process of improving the innovation in question since it may delay acquiring of the innovation by other firms and thus slowing down the in-setting of the second phase of the innovation where competing companies would be compelled to bring initiatives in the existing tactics.
Consider a case where a company has adopted a new technological innovation in payment and acquires a patent to protect its adoption by other companies. This means that other companies may require, as necessity to apply the technology sets in, to invest more in research and development to either discover or then improve the innovation, or to seek better ways of bundling services and products to achieve better profits.
Time may be spent as this takes place, therefore increasing the time which the firm that initially invested in incoming innovation enjoys the associated benefits which it would however not have enjoyed.
This may be conceived as a disadvantage on the side of the customers who would be delayed to enjoy the advantages accruing from developments in the payment business such as lower prices due to earlier onset of competition and bundling of services and products.
However, further improvements to the technological innovation by other firms such as product and service bundling may be forced by the need for the aforementioned firms to respond to demands in order to retain customers and continue being competitive.
This may again accelerate developments in the payment innovation differing with the initial feeling that companies entering the leading phase first in the adoption of young innovations may deter such development in the innovation. In addition, the investing companies may experience learning curves and lead times at initial stages as means of competitive advantages over the partners (Levin et al, 1984).
Such initial competition erodes with the entry in competition by firms who are willing to adopt to more mature technology, having been developed by firms that invested it at initial stages, or resulted in its success to a point that the competitors who did not invest in the innovation need invest in them now so as to reap the benefits and/or stay competitive.
In other circumstances, conditions may force the firms which did not invest in payment innovations in the initial stages to follow suit which also according to (Dosi, 1988) may motivate technological change. Since mostly banks had the trend to retain their innovations in-doors but now many have abandoned this trend, they may also be forced to adopt the innovation if it raises some technical requirements.
These conditions include the need to retain customers and brand image. More development may force the now investing firms to look for ways to improve the payment innovation, offer it at a cheaper price, or bundle it with products, services and pricing schemes. In this stage, since such companies may be looking for means of survival, the customer may benefits from their activities.
The timeline for PayPal, for example, is only in its second phase since there are competitors who are coming up to give it a chase in the online payment business. Therefore, it can be expected that the customers in the online payment investment may benefit more as upcoming companies lower the charges for the services to either enter the market or continue retaining their customers who may choose cheaper alternatives.
However, since such a venture involves attachments between the company and customers which the latter may not easily terminate or be willing to, the battle may be expected to be fiercer.
Particularly, since the current situation provides a rich ground for acceptance of online electronic payments that are cheaper and easier and quicker to make, the battle field may be more settled on the upcoming users of internet services who are not attached to any existing payment providers in this field.
The possibility of an investing firm developing the existing payment innovation technology already being utilized by another firm and which may result to advantages being realized by the customers may be indicated by the example of Charter One Inc., who set out to add more value to the online banking service which had initially been adopted in 1995 by Wells Fargo.
This was by introducing EBPP and wireless account access. After sometime, the once celebrated as an innovation, after being adopted by competitors may step to a stage where companies have to adjust to regulate its cost and service.
These may be seen as tactics of survival adopted by individual companies so as to survive or remain at the top of the market. Whereas some able firms may move to acquiring other firms who have already adopted an innovation that is working. This we can consider the earlier developments by eBay and PayPal in the initial stages of PayPal development although it may have been spurred by other things rather than purely payment innovations.
As discussed earlier, eBay had acquired Billpoint and turned it to concentrate in the payment venture, but with PayPal’s good performance as a company dealing with auctions, it was acquired by eBay. Yet the acquiring of PayPal-a niche innovation-by eBay may have been spurred by the existing demand for small merchants and individuals who were not willing to accept payments through credit card while dealing with eBay.
PayPal became one of the first companies to facilitate payments through the web, between customers that could be somewhat limited by geographical separation. Other institutions in the field of payment business may respond by lowering their costs.
As mentioned earlier, innovation may present risk-taking but in an effort to reduce or counter possible risks in the long-run coupled with demands of the innovation being adopted itself, companies may be forced to invest further in research and development, more recent equipments, skilled and experienced staff and management.
These investments may also come with risks. Again, this may force banking institutions in the industry to seek interventions which may include forming joint ventures with other firms, collaborating with technology firms to use their technologies in the market which may again be spurred by the need of these technology firms to reduce costs related to market research and trying out these technologies in the market.
The idea of full exploitation of technological and service innovation from initial stages may be only theoretical or may be influenced by multiple factors. The path to adopting technological innovation may not be as simple and certain as in the face of a theorist, but is real to the practical person or organization.
Again, since we are now living in times where development of technology are moving too fast, there are likelihood that one innovation may never be fully utilized to the final stage. Companies may find themselves switching from one innovation to another seeking to stay ahead of the market.
In some other cases, companies may compete in setting paces in the market for almost similar innovation that may eliminate or reduce the advantages for initial adoption of any in this era of fast development in technology.
Since the idea of trying to run for advantages for initial-stage innovations also may involve adopting technologies that are not viable, companies may make losses or invest much in making sure that the adopted technology becomes viable even at the initial stages.
This may be the case particularly for companies who may not have invested in market research before adopting the technology, and as a result of poor management. After adopting, companies may realize the adverse effects, but because of the costs related to initial investments, they may opt to continue injecting more skills, ideas and funds into improving the already adopted innovation.
In the case of online payment innovation, companies will need to overcome barriers in law and regulations that differ in various countries in addition to security threats. Take an example of the issues of security as relating to online banking by PayPal.
As mentioned earlier, in 2004, the company was faced with the need to overcome the impact of the fraudsters to the business in addition to competition from other companies already in the business that time.
Again, consider a case where an incoming innovation may encounter low or no market demand even at initial stages, and then instead of the firm which had ignored investing in an already existing relatively young innovation trying to continue investing in the most current innovation by improving such an innovation, it opts to adopt an already existing relatively young innovation earlier exploited by another firm.
Since we are living in times of very fast improvement in technological systems, it is assumed here that these are the complex decisions current managers and business officials encounter in performing their duties.
In a way, the management will have to organize or reorganize the company to adjust as a result of adopting technology that comes with other requirements. In addition, weak niches resulting from low demand as a result of poor forecasting, ineffective marketing, being very far ahead of market and poor development of the product may be experienced after an innovation has been adopted.
A company will therefore need to adopt the necessary measures to change this trend. Let us consider the case where during the initial stages of introduction of EBPP innovation which experienced low demands. This may slow down the whole process of adopting an innovation right from the first stages. Continuing with the then present low demand and lowering the cost of the offers.
In such a situation, players may be forced to expand their marketing scope and other survival tactics. As a result of low demand in the market by customers, technological innovations may receive low or no acceptance by other business firms.
Such a continued trend may spur more innovations as technologists seek to improve the negative aspects of the lowly-demanded technology or as management of the firms that have already adopted it make changes in strategies and processes.
On the other hand, adopting innovations in services and processes may be a more complex thing than meets the eye since it may mostly involve making of decisions by management. Coupled with other external regulatory demands such as those requiring an organization to act in a socially responsible manner, process and service adjustment may be harder tasks as may be conceived in the theory.
The company management may find itself making related decisions too early or too late as a result of the associated expectations and fears. Therefore, as a result of such demands, any company may find itself switching from one management change to another.
In conclusion banks and non-banks are being facilitated to offer easier, faster and better services through the emerging technologies. Payment innovations have been explored by banks and non-banks. The process of innovation adoption may be complex than presents the theory. Payment innovations have evolved to go beyond borders. Payment innovations may be grouped in technological innovations and service or processes innovation.
Companies may be forced to invest in payment innovations because of arising needs such as need to counter fraudsters, improve the already adopted innovation by other firms, or because of demands by the already adopted technological and service innovations.
These kinds of investments include experienced workforce and management, tools and equipments and processes. Since all adoptions are tied to management and its decision or influence, complexities may arise. These may include belated or early decisions pertaining adoption of innovations. Payment innovations may meet low demands or high demands in the market.
Companies may wish to invest in various stages of innovations that are emerging to reap the benefits associated. Companies investing early in the initial stages may realize competitive advantages to other firms, and may seek to protect the innovation through acquire of such innovation through copyrights, patents and trademarks which they could sell to earn more income.
Other companies may enter the market and reduce the advantages as a result of competition which forces players at many times to lower cost of offering the services. In addition, the second stage may be characterized by acquire of firms by others who have already a working innovation, or partnerships with technological firms.
Other innovations may present needs for extra efforts which include improvement of the product on offer in order to realize benefits. On its part, PayPal may expect future challenges in the business due to competition.
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Dosi, Giovanni (1988), “Sources, Procedures, and Microeconomic Effects of Innovation,” Journal of Economic Literature, September, 1120-1171
Jankowski, Carrie. “Investing in payment innovations: Risks and rewards”. Chicago Fed Letter. .
Jones, Del (2000), “Businesses Battle Over Intellectual Property,” USA Today, Final Edition, Aug. 2, B1
Kim Peterson. A close look at PayPal. 2008.
Robert D. Information Technology: Paypal Spreads Its Wings. 2005
Skinner Chris. Paypal’s Tenth Anniversary. 2008.
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