Believe it or not, the current US Presidential nomination process has thrown up a passionate debate about the nature of money, and particularly whether it is 'sound' or not. Voters are frustrated and fearful about the economy. Politicians (with no economics training) are arguing that in these uncertain times we need a currency backed by something 'real' like gold. This seems oddly backward-looking in the era of the internet. It begs a question: what sort of money do we need to fuel the economy of the 21st century?
So when you do a card payment, the shop owner can be certain she's getting paid because the card terminal does a real-time authorisation out of your card account ('value now'); but the payment system actually moves the money early the next business day morning or, for some payments, the morning after ('funds later'). Payments made on the weekend are the same in that value (authorisation) is still now, but the system only actually moves money between financial institutions on weekday mornings – which could be 2 to 4 days later. By the way, 'value now, funds later' is a lot better from the shop's perspective than 'promise now, funds later' – which is how a personal cheque works. In the good old days of branch banking, most people couldn't check their account balance outside business hours. Nowadays we all have much better information about our accounts through widespread ATM networks, internet banking and phone banking.
Here at APCA we have been thinking about network innovation a lot lately – not least because the Reserve Bank is also thinking about it, in their Strategic Review of Innovation in the Payments System. There is a lot of management theory on innovation: diffusion of innovations, disruptive and sustaining innovation, even plenty of recent thinking about clustering of expertise and innovation networks (not the same thing as innovation IN networks, by the way). But none of the theory I’ve read so far really grapples with the special problems of services that have a network effect – ie where the number and kind of other users of a service affect its attractiveness to any one user. Payments is a classic network service – merchants want to accept a card with the biggest possible issued base (or perhaps issued to lots of high net worth people); consumers want a card that is accepted in every shop near their home, and so on.
Mobile payments must be the most heralded innovation of all time. We have been talking about it for 10 years or more, and still don’t have a reliable definition, let alone a clear, widely-accepted process flow. Mobile payments' can be: - A text/SMS direction to a stored value service; - A transfer or top-up of airtime (air minutes) between mobile accounts; - A charge on your phone bill; - A contactless (near field communication or NFC) card transaction initiated from a mobile device, either by a chip that resides inside the phone or a sticker attached to the outside; - An internet payment executed from the mobile using any number of web-based services; or - An app-driven service for 3- and 4-G phones using a range of wireless connections. All of these are in operation, somewhere in the world. Do we need them all here in Australia? Probably not, but in the vibrant world of retail payment innovations, that's probably the wrong question. Rather, we might ask "which one(s) can win in an open, competitive marketplace?"
I would like to borrow a theme from Jim Collins, the management researcher and writer. His two best-known works, Built to Last and Good to Great, are evidence-based studies of what makes commercial organisations outperform over the long term. APCA’s own core principles – our values, purpose, unique positioning, member benefit proposition and vision – were developed using the Collins framework. You can find them on our website. Collins has the luxury of something to measure: he looks at relative increase in total shareholder value of listed companies against competitive peers over long periods of time. Then he tries to work out how the top performers got there in the first place, and how they stay on top. These days there is plenty of debate over the validity of this method but its influence on corporate strategic thinking is undeniable. Unfortunately, neat quantitative measures of achievement are not generally available for payment systems. But the long-term, structural orientation of Collins’ work aligns well with broader payments system evolution: how does the industry build a payments system that will stand the test of time, and respond to the unknowable challenges of the future? It’s not about any one strategy or programme, but the overall structure, culture and orientation.