The challenge of creating a new payment type

By Dan Glessner

Few would disagree that innovation is necessary in order for companies to thrive. If you have been following the mobile payments space, it seems a week doesn’t go by without a new solution being announced. This implies an enormous amount of industry innovation; however, almost all of these new solutions are focused on creating new ways to pay which utilize existing payment types, primarily credit or debit cards. This post looks at these “new ways to pay” and contrasts them to “a new payment type.”

A new way to pay

There are now 899 mobile payments companies listed on an Angel website.  The majority of these companies have created a new interface (e.g., smartphone app) to enable a new way to pay using existing payment types.  Typically, bank debit or credit cards or prepaid cards from Visa, MasterCard and American Express are used for the payment type.

The most visible—in terms of U.S. media coverage—new mobile payment solution, Apple Pay, also enables a new way to pay (i.e., in-store for iPhone 6 users). While Apple Pay innovations have been focused on the NFC and security technologies built into the iPhone 6 to enable an improved consumer payment experience, this new product still utilizes existing card-based payment types. Apple Pay Support provides a detailed payment options list here for participating U.S. issuing banks.

Outside of the U.S., there are even more mobile-payment products. This CGAP blog post states the mobile-payment industry may be in the unusual state of “reverse innovation” due to more innovation happening outside of the U.S. For example, this GSMA site tracks the hundreds of mobile money projects taking place in countries with significant unbanked populations.

The huge majority of mobile money projects are driven by mobile network operators and are somewhat of a natural progression of consumers purchasing “minutes” for their mobile phones. Safaricom’s M-Pesa in Kenya is recognized as the most successful MNO-led mobile money implementation. In large part, this has been due to: 1) the central bank of Kenya enabling MNOs to provide banking services, and 2) the fact that Safaricom had almost 80 percent market share in Kenya, which helped to create the needed “network effect.”

A new payment type

In contrast to new ways to pay, a payment type can be chronologically understood as follows:

  • Cash (metal coins and paper money have been used since around 600 BC)
  • Checks (first used in the 9th century, but greater usage in the 20th century before declining)
  • Credit or debit cards (introduced in the 1950s; plastic cards with magnetic stripe or chip)
  • Digital cash (Introduced in the 21st century; all-digital versions of regulated fiat currencies)

As I’ve written before, there is confusion around terminology used to describe digital cash versus cryptocurrencies, but the most significant difference is that digital cash is regulated by a country’s central bank versus cryptocurrencies which are unregulated (e.g., bitcoin and others).

Creating a fundamentally new payment type is more challenging than creating a new way to pay. Not surprisingly, a much smaller number of companies are innovating to create a new payment type. As you can see from the above chronology, true innovation in payment types happens MUCH less frequently.

That said, we believe the effort focused on payment type innovation—to develop a new, fully regulated digital cash payment type—is worth the effort.  Digital cash leverages the benefits of modern technologies to avoid the problems associated with cash and provides a new, lower-coast payment type.

Yes—it is MUCH harder to create a new payment type versus a new way to pay, but we think it is worth the effort. Let us know what you think.

Dan Glessner is CMO of Quisk, Inc., a Silicon Valley-based start-up that partners with banks and merchants to enable anyone to use their money without needing cash or cards.

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