Journal Article

Why invest in payment innovations?

Abstract: In this paper, we provide a framework to study the creation and adoption of innovations by payment providers and processors. We identify several motivating factors for banks and nonbanks to invest in payment innovations. In addition, we discuss the evolutionary process of payment innovations from inception to commoditization recognizing that innovations differ in the time necessary to evolve from proprietary technology to commodization and some may never evolve completely. Finally, we consider a snapshot of payment innovations at different stages of development. We compare proprietary versus nonproprietary innovations and their profitability. Our 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.

Keywords: Payment systems; Clearinghouses (Banking);

Bibliographic Information

Provider: Federal Reserve Bank of Chicago

Part of Series: Emerging Issues

Publication Date: 2003

Issue: Jun

Order Number: EPS-2003-1B