Planning for Disruptive Change is an Imperative in the Payments Industry

Navigator Edition: September 2012
By: Marco Mazzonetto and Joel Van Arsdale

“It is not the strongest species that survives. It is the one that is the most adaptable to change” Charles Darwin.

Many aspects of the card payments business have remained relatively unchanged for twenty years. Sure we saw the migration to EMV, the emergence and growth of e-commerce, and the integration of loyalty and branding partners, each a significant evolution, but the business of issuing a consumer card or processing a payment for a merchant in a POS environment looks relatively similar to what it did in 1990.  The same will not be said about the next twenty years, or even the next decade. The innovators dilemma, a theory developed by Clayton M. Christensen, states that incumbent businesses can be destroyed by disruptive innovations because these disruptions tend to be low-end or small in scale at their inception (therefore uninteresting to incumbents), but in the long-run, they come to represent entirely new orders of business allowing new entrants to overtake incumbents. There are a number of disruptive forces at work in consumer electronic payments and it behooves all payment services providers, both consumer and merchant facing, to both understand and have a plan to adapt to them.

E-commerce is hardly new, but its impacts as a force of disruption have become more readily apparent in recent years. In the U.K. this year, the majority of all card payments will be card-not-present transactions (with the majority of these being e-commerce) and effectively all of the card growth is now coming from e-commerce. PayPal has clearly been among the pack of innovators which have used the e-commerce disruption to steal market share and to establish a strong competitive position. PayPal’s success arose primarily because the company exploited a series of niches ignored by incumbents. First among these was U.S. P2P payments (which PayPal positioned for with a simple and easy digital solution while incumbent banks rested with yesterday’s solution – checks); second was payment acceptance services for micro-businesses (which legacy bank providers considered too risky); third was security concerns related to card e-payments in various markets and customer segments (in Europe in particular), and fourth was cross-border e-commerce (again, mostly for small business). In each of these four cases, the incumbents failed to recognize that this market niche was significant and attractive in the long run, or they simply failed to prioritize action. PayPal, with an arguably basic and simple solution, has built several billion dollars of shareholder value by exploiting these opportunities created by the disruption of the internet and e-commerce.

More recently, Square (and others emulating Square), has taken a solution which some incumbents deemed unsafe or unnecessary and created a company worth several billion dollars. Square’s value proposition is to use a standard smart phone to enable card payment acceptance, with the process and service merchandising surrounding the technology representing some of the greatest innovation. Incumbents in payment acceptance viewed micro-merchants as too risky or of too little value to pursue, when in fact, it is a sizable customer segment, but one which requires a different way of marketing and operating.

Finally, M-Pesa in Kenya and other Sub-Sahara African markets has used simple, mobile text-based services to penetrate deeply a segment of unbanked customers which traditional banks struggled to serve. Sixteen percent of the Sub-Sahara African population now uses mobile money transfers. African banks have fought back against this disruption, with some success, primarily using politics and regulation to position themselves in the mobile money value chain (arguably hindering the development of simple and elegant solutions in the process). Specifics aside, the M-Pesa example reinforces that engaging in traditional banking in many parts of the world is simply not appropriate relative to customer needs, and that it is the non-traditional, the disruptive competitors that are most likely to innovate and thrive.

As shown in Figure 1, mobile phone technologies are just one among many potential forces of disruption at work in the marketplace. Completely different generational behaviors, cloud-based technologies, and new market entrants, among others, are all forces re-shaping the payments marketplace and creating risk for incumbent product and service providers.

Figure 1: Forces of Disruption in the Payment Industry
Source: First Annapolis Consulting research and analysis

Today’s incumbent payment product and service providers must be prepared for change. This task is made difficult by traditional ways in which companies plan for the future and by the underlying curse of the innovators dilemma. Most companies have strong annual and medium-term planning processes, but these processes generally fail to consider longer-term disruptions. The traditional approach to strategic planning consists of setting goals, developing a strategy, planning for major investments, and developing budgets on a one to three year basis. This planning considers incremental changes in market conditions (macro-environment, major changes to competition, foreseen losses of customers, etc.) but it rarely considers disruptive change and long-term positioning. Management teams also too often lack the incentive to look beyond their own business unit, product, or customer segment. Unfortunately, with traditional planning, companies are naturally reactive (and typically late) to disruptive change when it happens, rather than taking advantage of the openings created by it.

Scenario-based planning focused on disruptive forces helps management take into account a more dynamic and longer-term view of market conditions and how to optimize the positioning of the company in the long-term. This type of planning process forces management outside of their daily duties and comfort zones to think about a future world which is uncertain and dramatically changed. Beyond just thinking about the future more distant and different, a scenario-planning based approach helps to engrain a degree of awareness and flexibility into a company’s strategy which traditional budgeting and strategic planning do not. Even if the scenarios envisioned never come to pass, management benefits from the creative experience and new ways of thinking about the business.

First Annapolis has developed a three-phased approach to assist our clients with scenario-based strategic planning:

  1. In the first phase, we work with management to brainstorm and to organize the management team’s thinking on forces of change. What is changing or could change that would dramatically impact our business? We then work with management to understand the nature of each of these forces – is it hype? Is it reality? How will it impact us? Etc.
  2. In the second phase, the objective is to further understand, prioritize and focus the planning by developing disruption scenarios. Forces of change typically do not act in isolation and the scariest scenarios typically involve several forces acting in concert to disrupt a marketplace. For example, it’s not just the release of the Google Wallet that could be disruptive; it’s the combination of changing consumer usage patterns, integration of services with mobile devices, and creation of new services and business models on top of a Google Wallet that could prove disruptive to payment service providers. At the culmination of this second phase of planning, management has a short-list of scenarios which focuses on those which are most disruptive.
  3. In the final phase of planning, we work with management to develop strategic responses to the disruptive scenarios. This involves first diagnosing the impact (financial impacts, geographic impacts, customer segments, etc.) and the probability of such an outcome (along with key drivers of this probability). Secondly, we help management to develop an improved sense of awareness about how and when disruptions are developing (for example, you will know the scenario is potentially real when consumer adoption hits __% and when Visa and MasterCard do XYZ). Lastly, management should develop strategic responses to each disruptive scenario outlining an executive level strategic roadmap (what new acquisitions, products, partnerships etc. will position the company to minimize the damage or to take advantage of the disruption?).

Figure 2 is a highly simplified example of a disruptive scenario that could have been predicted and planned for five years ago. This is an over-simplified example, but hopefully the point is clear. Strong, forward thinking scenario based planning can be a strong tool for positioning a company for long-term success and to prevent major disruptions to current business models.

Figure 2: Simplified Example of a Disruptive Scenario
Source: First Annapolis Consulting research and analysis

The payment industry is set for material change in the next decade and visionary leaders should ensure that their organizations are prepared for tomorrow’s disruptions.  Scenario planning for market disruption can be an effective tool for positioning a company for future success.

For more information, please contact Marco Mazzonetto, Manager specializing in Merchant Acquiring and European initiatives,; or Joel Van Arsdale, Partner specializing in Merchant Acquiring and European initiatives,

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