Disruption in Payments: Opportunities and Challenges

Advancements in computing and mobile technologies have provided the impetus to create new payment mechanisms. Furthermore, non-bank providers, e.g. Venmo and WeChat Pay, social media WeChat’s payments arm, play an increasing role in the provision of payments that has traditionally been the domain of banks. For example, Visa, MasterCard, American Express, and Discover had greater than $6 trillion in U.S. purchases in 2018 up over 10 percent from 2017. In the same period, Alipay initially created for online shopping similar to PayPal, and WeChat Pay in China generated over $37 trillion. Comparisons across countries are difficult for many reasons but these figures illustrate the potential for fast-paced adoption and usage of new payment mechanisms.

A core function of any banking system is the provision of payments. However, a greater number of non-banks are becoming part of the payments landscape. Payments can be made via fiat or crypto currencies, bank credit or deposits, or funds transfers on the books of non-bank payment providers. Most of the focus of this article will be on technologies aimed at improving intermediated retail payment transactions either by increasing their reach, convenience, merchant sales, or decreasing costs for end-users or payment providers. In this article, older payment innovations are compared and contrasted with newer ones. Eight necessary attributes for successful payment innovations are identified and discussed. While there have been extraordinary technological advancements that will lead to significant changes in the way we pay for goods, the basic attributes necessary for successful payment innovations has changed little.

Chakravorti and Kobor provide a framework to study the creation and adoption of innovations by payment providers and processors. The authors identify several motivating factors for banks and nonbanks to invest in payment innovations. In addition, they discuss the evolutionary process of payment innovations from inception to commoditization and recognize that innovations differ in the time necessary to evolve from proprietary technology to commoditization. Finally, the authors consider a snapshot of various payment innovations at different stages of development. The authors’ main conclusions are the following: Payment innovators are more likely to be successful when they target niche markets. Banks often use innovations to add value to a bundled product offering. Payment networks and processors leverage their connectivity when creating or adopting innovations.