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...by David Evans, PYMNTS.COM 10/24/09
Invisible engines drive innovation and transform industries. They made personal computers indispensable, glued boys and men to their video game consoles, and turned the mobile phone into a device that may be able to do just about anything except wash the dishes. And they are about to revolutionize payments — accelerating the pace of innovation, providing new services for consumers and merchants, and making new sources of profits available. I want to tell you what these magical invisible engines are, and why they are going to transform the payments industry.
What's an Invisible Engine?
Invisible engines are software platforms that create a virtuous circle between developers that write applications and end users who want to use those applications. Developers get a set of tools that makes it easier for them to write applications. Suppose there's some service like writing pixels on a screen that all developers need to do. Rather than having all developers write code to do that, it is more efficient to write code once that all developers can use. So software platforms reduce the duplication of effort across developers. That makes it cheaper for developers to write applications for that platform. There's a further benefit and its enormous: end users get a single place they can go to for running the many applications that they want to use.
There's a positive feedback loop between developers and end users. Developers want to write for software platforms that have a lot of users. Users want to rely on software platforms that provide a lot of applications that help them. More developers, more users; more users, more developers. That's the virtuous circle.
Successful Software Platforms
Microsoft is the grand master of software platforms. It has made a huge effort to court developers since back in the DOS days. It spends a lot of resources making sure there's code in Windows that helps developers. It also tries to get developers to use new features that Microsoft comes up with for Windows. As a result there are tens of thousands of applications that work with Windows. And of course there are hundreds of millions of users.
When it comes to browsers though, Firefox turned the tables on Microsoft. Firefox turned its browser into a software platform. It made it possible for developers to write applications that worked with Firefox. Those applications started attracting users. And before long, Firefox took an enormous amount of share away from Microsoft's Internet Explorer browser. Developers have written more than 5,000 free add-ons for Firefox. Today, this browser has almost a quarter of the browser market and is actually the leading browser in Germany and several other countries.
Then there's the iPhone. You all probably know the story. Apple made the invisible engine in the iPhone available to developers. Today Apple has more than 85 thousand apps available in its stores. Those apps have been downloaded 2 billion times. For lots of people those apps are more important than the phone. They help people do everything from update their Facebook page, make a Skype call, and find nearby restaurants. Many of those apps do things that are related to payments. I'm going to come back to that because it is very important.
Facebook is another example. In all these cases invisible engines have unleashed massive innovation. That's because anyone anywhere can come up with a great idea. They don't need to get some committee or the head office to sign off on what they are doing. They can just do it. And the provider of the software platform can rely on people from all over the world to identify new opportunities for using the platform.
Could payments unleash the same forces of innovation? My answer is a resounding yes. Not only can it happen. It is already happening. It is starting softly but will soon reach a crescendo.
The Ugly Side of Payments
Before I tell you more let's take a quick look at innovation in the payments industry.
I know many of you probably think that you're very innovative. And I'm sure you are. But face it: payments is a very stodgy industry. We're still paying with cash 2600 years after the Lydians introduced coins in 600BC. Ok, so we moved from metal to paper but big deal. Checks have been chugging along for about 700 hundred years. And we're still paying with plastic cards 50 years after they we're introduced. We're still using magstripes 30 years after that dumbest of computing devices was added to the back.
The payments industry is like an enormous ship. It is very hard to maneuver. A significant part of the reason for this is the technology that underlies this industry. It's like a Rube Goldberg contraption that works really well so long as you don't want to change anything. Starting at the bottom, more than 45 vendors supply the point of sale equipment and there are nearly 1,000 software systems on the market which get incorporated into the point of sale systems. Then we have the processing platforms. FDC has between four and ten of these depending on the type of payment. TSYS has two, just for credit cards. Chase Paymentech another two. And that's just for cards. If you look across all tender types we have is a mass of incompatible software and hardware. This horrendous maze of plumbing works really well for consumers and merchants on a daily basis. Just don't try to do anything new. Or, if you do, be prepared to spend a ton of money. You would need a lot of programmers to get your technology to work with the contraption that has been pieced together over many years. The challenge is so daunting that many innovators stop when they realize the sheer complexity of interconnecting with this maze of software. Others don't even try.
Invisible Engines for Payments
That's changing.
Let me begin with the iPhone. It is driving a new wave of innovation. The phone itself is nice. But it is the invisible engine in the iPhone that has unleashed developers.
One of the most exciting developments comes from IPCommerce. Over the last several years they've developed a software platform that sits on top of the American payments system. Underneath it lies the Rube Goldberg plumbing that I mentioned earlier: all those incompatible software programs that are used by processors, switches, point of sales devices, and so forth. This is sort of like Windows which allow you to use thousands of peripherals easily.
Application developers can plug into the IPCommerce platform. They then get access to the payment system plumbing underneath. That can save developers millions of dollars and months of programming effort. That savings of time and money often makes the difference between having a dream and a viable product. This is also sort of like Windows which allow you to use thousands of applications easily.
This has already unleashed a wave of innovation. And in a myriad of different places and applications that businesses and consumers interact with today. In the physician's office thru a Software as a Service POS that can image checks, debit health savings accounts and take a regular old credit card; for receiving payments securely on an iPhone; electronic invoice presentment and payment within the Microsoft Word application; kiosks that tie to reward and loyalty point systems; disbursements of affiliate advertising monies and accounting applications that can deposit paper checks remotely at the bank.
There's another way to drive innovation through invisible engines. The networks could turn themselves into platforms by opening themselves up to developers. Let me give you an analogy. AT&T used to have an essentially closed mobile platform. There was no easy way for developers to write applications that leveraged the power of the mobile network. Now developers can write applications on the iPhone which in turn works exclusively in the United States with AT&T's mobile network. That has benefited AT&T in part because a lot of these applications drive data usage.
Visa has already made a step towards opening itself up selectively as a platform. Of course Visa has good reasons to be careful about who it lets plug into its network. I don't see them hosting developer conferences like Apple with thousands of unwashed programmers trying to come up with new ideas. But for Visa and other networks making their platforms selectively available could spur innovation just because the handful of developers that come up with something stand to make huge fortunes from the sheer scale of these enterprises.
Directions of Innovation
What directions could these invisible engines take the payments business? Well the beauty of these waves of innovation is the mystery. Some developer will come up with something that we couldn't have dreamed of. I am willing to make a general prediction. We will see more services realize synergies from combining payments with other technologies. Location-based shopping services is an example. By combining the geo-location and subscriber credential capabilities of a smart phone an application could “push” a message to a consumer that a nearby retailer will accept their credit card issuer's reward points (as a currency) for purchases in the store. By leveraging the synergies between these systems a retailer gets more foot traffic, the issuer gets a new transaction and the consumer is rewarded. But alas…
Today's payment industry is in my view like the computer industry was in 1979. Back then people were extremely impressed with mainframe computers and all the incredible things they go do. They were technical marvels. They made so many business and scientific tasks so much easier and provided great efficiency. But the operating systems for computers weren't really geared for writing applications and innovation therefore wasn't very rapid. Then the PC revolution led to a massive number of developers around the world trying to come up with great ideas. That has spawned whole new industries. The payments industry can be very proud of what it has accomplished in the last sixty years. But we're standing at the dawn of a new era of innovation in this business. One that will be driven be invisible engines.