The holy grail for any business is sustainable competitive advantage. In the fast-moving payments market, where we are seeing the challenge of near-constant technology-led change, this can appear both elusive and far-fetched. Here, we explore the changing dynamics of the payments market and look at some of the key factors in determining competitive advantage.
Establishing a firm position on shifting sands
The card payments industry is ruled by volatility and uncertainty. Accelerated, continuous and multi-facteted change is creating challenges for all in the payments market. When looking to establish competitive advantage, it is necessary to navigate a confluence of technological innovation, disruptive new market entrants, new payment vectors and increasingly discerning customers which is transforming a sector which has previously never seen such constant momentum.
So, is it possible to create sustainable competitive advantage in payments?
Strategy thought leader Michael Porter maintains that competitive advantage occurs when an organization acquires or develops an attribute, or combination of attributes, that allows it to outperform its competitors. The theory is that your advantage is assured once you possess these attributes.
However, many argue that competitive advantage is transient, as companies built on the premise of sustaining a single competitive advantage can’t react to short-lived opportunities in more volatile and uncertain environments.
Writing in Forbes magazine, leadership innovator Steve Denning contends that “sustainable competitive advantage simply doesn’t exist” except where it is “generated by government regulation”. Strategy expert Rita Gunther McGrath claims that we need “a new playbook to compete and win when competitive advantages are transient.”
The net result is that clinging to a single competitive advantage is often the downfall of market leaders because they are slow to change business models that become outmoded due to changing market dynamics.
The dynamics of the evolving payment market means no single participant can control its direction or progression. It means those seeking a competitive edge, especially one which is dynamic, fluid, easily actionable, scaleable and cost-effective, must explore new models.
Searching for the holy grail
When you examine how technology and regulation have changed the payments landscape, a number of clear themes emerge.
Payment choices has multiplied exponentially with every passing decade. We’ve gone from an era when magstripe cards were the most sophisticated offering in the market to the current plethora of payment options to facilitate mobile, cloud, biometric, wearable and Internet of Things transactions.
Huge technological advances such as tokenization, chip technology, geolocation services, alternative payments models, mobile and the ease-of-use of cloud technologies are bringing new challenges for incumbents and driving new payments patterns amongst customers.
More choice in payment methods, product sources, form factors and platforms creates more complexity for those in the marketplace, especially when it comes to managing and integrating both legacy platforms and new products.
Changes in consumer behaviour are a huge driver in widening and deepening the range of payments’ transactions. Customers are more likely now to migrate from provider to provider in search of both the best user experience and the most cost-efficient platform so loyalty is difficult to maintain if your customer base find an advantage elsewhere.
Consumer expectations for convenient and frictionless payment experiences, combined with constant process innovations, have created a dynamic market with challenger technologies rife in every delivery channel.
More choices for the consumer immediately creates more complexity for the payments service provider. You have to ensure clarity, consistency and quality across all interaction points.
New regulations, such as the second payment services directive (PSD2), have enabled a wider range of non-bank firms to participate in the marketplace and are eliminating the structural barriers which artificially sustained competitive advantage for many existing banking players.
Competitive threats, new opportunities to partner, and new outsourced technology models can now come from both known and unknown entities. New entrants enabled by regulatory reform and technology can enter any part of the market with what are often viewed as compelling and disruptive propositions.
They may initially offer cheap substitutes to capture low-end customers, but can gradually move upmarket to win higher-end customers. As customers can change payment habits in seconds in response to social media or other pull factors, existing payments models can be decimated overnight. The same innovations can be harnessed by larger players and used to deliver new solutions to existing customers to stay ahead of the game.
What does this mean for your payments business? Clearly, depending on traditional forms of competitive advantage, such as price and spend rewards, in an environment as dynamic as payments is inherently not sustainable. You need to rethink how you respond and adapt to increasingly frequent waves of change without knowing which iterations will last and which will quickly dissipate. You need the ability to continually adapt to new sources of competitive advantage.
A new model for competitive advantage
So how do you make sure your organization is ready to react to market changes?
Organizations need to re-calibrate how they respond to consumer needs and retain a competitive edge. If you can’t sustain competitive advantage in the traditional way, you need to reinvent advantage by shaping your organization to continually bring innovation and new products to market faster, more cost-effectively and at a higher quality than your competition. Success will come from meeting the needs of your customers better than anyone else.
While such challenges represent the constant cycle all CEOs and CTOs face, there are ways of improving our ability to prosper in this battle by taking a different and better approach than the competition. Few of us would like to prove the veracity of Michael Porter’s maxim: “if all you're trying to do is essentially the same thing as your rivals, then it's unlikely that you'll be very successful."
Your organization needs to re-orient itself towards the key stakeholder: the customer. You must be attuned to changes in direction and demand to be able to continuously deliver fresh ways to challenge the status quo. This requires a fundamental re-think of your organizational processes and, in all likelihood, a new set of skills.
If your organizational processes are aligned to continually discovering new needs and building things that customers actually want, you can begin take control of your own destiny and really understand which technology trends are worth adopting and which are not.
Blue Ocean Strategy’s Kim Chan and Renee Mauborgne make a compelling argument that “success will not come from battling head to head with competitors, but by creating powerful leaps in value for both your firm and consumers, rendering rivals obsolete and unleashing new demand”.
We’ve all read about banks who have spent millions of dollars on P2P, NFC and blockchain initiatives that haven’t delivered a long-term user base. Arguably, some of these initiatives are nothing more than thinly-veiled advertising or brand building exercises.
For those who don’t have such budgets at their disposal, IT service delivery models are required to allow you to respond to change without breaking the bank, in every sense. Agile development, and service-oriented architectures, are key to being able to be responsive in an economical way.
Competitive advantage occurs when you take a decision to do something your competitors are not doing because you see a clear path to get new innovative products to market faster, more cost-effectively and of a higher quality than your competition. If you can feed these responsive IT architectures with customer-oriented programmes designed to deliver real and lasting value, you have the basis for creating sustainable advantage.