Why Invest in Payment Innovations

Abstract

Abstract In this paper, we provide a framework to study the creation and adoption of innovations bypayment providers and processors. We identify several motivating factors for banks andnonbanks to invest in payment innovations. In addition, we discuss the evolutionary process ofpayment innovations from inception to commoditization recognizing that innovations differ inthe time necessary to evolve from proprietary technology to commoditization and some maynever evolve completely. Finally, we consider a snapshot of payment innovations at differentstages of development. We compare proprietary versus nonproprietary innovations and theirprofitability. Our main conclusions are the following. Payment innovators are more likely to besuccessful when they target niche markets. Banks often use innovations to add value to abundled product offering. Payment networks and processors leverage their connectivity whencreating or adopting innovations. Chakravorti: Senior Economist, Federal Reserve Bank of Chicago, sujit.chakravorti@chi.frb.org. Kobor:Independent Consultant, ekobor@cox.net. We are deeply indebted to industry participants who shared their generalknowledge and their specific business plans with us on a confidential basis. We also thank Bob DeYoung, Ed Green,Ranjay Gulati, Paul Kellogg, Cathy Lemieux, Tim McHugh, Fred Miller, Tara Rice for helpful discussions. CarrieJankowski and Sue Parren provided excellent research assistance. The views expressed are those of the authors anddo not represent the views of the Federal Reserve Bank of Chicago or the Federal Reserve System.

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