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Why invest in payment innovations?

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  • Sujit Chakravorti
  • Emery Kobor

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.

Suggested Citation

  • Sujit Chakravorti & Emery Kobor, 2003. "Why invest in payment innovations?," Emerging Issues, Federal Reserve Bank of Chicago, issue Jun.
    • Handle: RePEc:fip:fedhei:y:2003:i:jun:n:eps-2003-1b
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    Cited by:

    1. Marc BOURREAU & Marianne VERDIER, 2010. "Cooperation for Innovation in Payment Systems: The Case of Mobile Payments," Communications & Strategies, IDATE, Com&Strat dept., vol. 1(79), pages 95-114, 3rd quart.
    2. Chakravorti Sujit & Roson Roberto, 2006. "Platform Competition in Two-Sided Markets: The Case of Payment Networks," Review of Network Economics, De Gruyter, vol. 5(1), pages 1-25, March.
    3. Catharine Lemieux, 2003. "Retail payments innovations and the banking industry," Emerging Issues, Federal Reserve Bank of Chicago.
    4. Catharine Lemieux, 2003. "Network vulnerabilities and risks in the retail payment system," Emerging Issues, Federal Reserve Bank of Chicago.
    5. Sujit Chakravorti & Victor Lubasi, 2006. "Payment instrument choice: the case of prepaid cards," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 30(Q II), pages 29-43.
    6. Paul E. Kellogg, 2003. "Evolving operational risk management for retail payments," Emerging Issues, Federal Reserve Bank of Chicago.
    7. Tara N. Rice, 2003. "The importance of payments-driven revenues to franchise value and in estimating bank performance," Emerging Issues, Federal Reserve Bank of Chicago.
    8. Tara N. Rice & Kristin D. Stanton, 2003. "Estimating the volume of payments-driven revenues," Emerging Issues, Federal Reserve Bank of Chicago.

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    Keywords

    Payment systems; Clearinghouses (Banking);

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