The Payment Company as a Platform

There are many good reasons for companies to provide products and services around a platform. Some of the benefits of doing so is to build a strong ecosystem and to embed the products and services in the value propositions that the right customers want to obtain to solve specific problems. There are some insights on how to enable the right strategies for the digital payment platforms for the payment companies to achieve their business strategies.

Scope

The blog post will analyze and setup the requirements for how a payments companies can approach the digital payment platform in their strategizing processes.

Elements of a Platform

The future of payments involves the digitalization of currency and provides the means for exchanging currency between a payer and a payee. The digitalization of currency involves a technology stack that involves the possibilities to ensure the transport of data between stakeholders, technical endpoints and the ability to uphold a ledger of the transaction. Kazan & Damsgaard (2013) presented a framework for digital platforms and they did apply it in their analysis of payments companies. The first part of their article identified components of the digital platform, and they applied a model by Hagiu & Wright (2011) for what Kazan & Damsgaard (2013, p. 5) identifies as a multi-sided platform (abbreviated MSP). The elements of the digital payment platform are:

  • Platform design.
  • Technology design.
  • Business design.

Kazan & Damsgaard (2013) identifies in addition to the three above components that an MSP has to facilitate direct interaction in order to be truly multi-sided (Kazan & Damsgaard, 2013, p. 5).

Regarding the platform design Kazan & Damsgaard identifies “Describes open and closed systems, and how complementary products are distributed” (Kazan & Damsgaard, 2013, p. 5). Furthermore, the technology design is defined as “The applied technology based on evolutionary or revolutionary hardware strategies” and lastly is business design identified as “Market-entry strategies through bundling products and leveraging an installed user base (envelopment attack). Alternatively, through Schumpeterian innovation, which is more radical, but rare to achieve.” (Kazan & Damsgaard, 2013, p. 5).

Design strategies

Kazan & Damsgaard (2013) identified four different design strategies for the digital payment platform:

  • The open and free approach.
  • The closed and moderated approach.
  • The open and moderated approach.
  • The closed and free approach.

The four approaches for strategies for the digital payment platform have their characteristics for how the payment company can involve the ecosystem to use the platform.

The open and free approach is according to Kazan & Damsgaard (2013, p. 6) charactized as “allows third parties to alter and adapt the system for their needs”.

The closed and moderated approach is in direct contrast to the open and free approach as Kazan & Damsgaard identifies “The closed and moderated approach is the opposite of the latter, representing a closed system with centrally organized” (Kazan & Damsgaard, 2013, p. 6).

Kazan & Damsgaard (2013, p. 6) identified a third approach they name the open and moderated approach, which the characterize as “The open and moderated strategy is fusion of the aforementioned platform schemes, where third parties get involved in the system development process; however the distribution of software is also centralized.”

The last approach, the closed and free approach, is characterized by Kazan & Damsgaard (2013, p. 6) as “is applied by platform providers, which are allowing developers to build application on top of their system, without seeking any authorization. However, access to, or modifications of, the core system are not permitted”.

Strategies for Advancing a Competitive Advantage by the Platform

There are many different approaches for advancing the competitive advantage by applying the needed infrastructure for a platform. This blogpost deals with four approaches:

  • Outpacement strategy.
  • Superior product strategy.
  • The innovation strategy.
  • The foundation strategy.

The outpacement strategy is all about applying the strategy for an open and free platform. Other businesses will be able to develop products that embeds the product and as such makes the platform more valuable as a business asset for the platform owner and for the service consumer. In Porter’s generic strategy model (Porter, 1985) it can be both within the cost-leadership and the differentiation strategy. In order to achieve this form of strategic pattern the payment company will have to open up for APIs the market actors are looking for and make the APIs generally available. Scope of communication with market has to be broad and the sales and marketing scope has to focus on communication with many different communities for spreading adoption. Pricing for access to the APIs would have to be reflected.

Superior product strategy is within the closed and moderated approach. In order for the company to survive it has to produce products of a higher perceived value. In Porter’s framework (Porter, 1985) it would be named the differentiation focus strategy. The payment companies trying to establish this particular strategy pattern has to ensure communication and sales for a specific community. As such knowhow of the customers and their needs are key for this strategy to prevail, and the company would have to engage a sales and marketing team that are able to ensure sales for with high-touch-point with the customers.

The innovation strategy is for companies that have the resources to spend time developing innovative products that the companies will continue to deliver to the customers and continue to moderate elements provided for the platform together with identifying additional products that have to be either upgraded, replaced or all together eliminated from the platform. In Porter’s generic strategy framework (Porter, 1985) it will be the differentiation focus strategy or the differentiation strategy. This company delivers a platform that ensures the end users and direct customers innovative top-of-the line services. This type of company is able to sell products to the customers purely on the “wow” moments of the customers.

The last strategy is related to establishing a platform that will work as the foundation. The company provides the platform and opens it for other companies to develop solutions for it, but as such they do not moderate content for the platform and as such the providers and customers cannot expect the platform provider to deliver anything else than the foundation. This approach is in Porter’s framework the cost leadership or cost focus strategy.

Conclusions

The approaches for establishing platforms e.g., for the payment companies can enable different forms of competitive strategies and competitive advantages by using their digital platforms to enable payments for other companies or organizations.

The payment companies must team up with the right people and the right setup to reach the right clusters or communities that can and will embed their services in their products or subscribe to the services in order to enable features and capabilities. The digital payment companies have to enable the digital platform to receive, manage and process services and requests from its customers and the customers customers.

Companies that prefer the closed and moderated strategy would have to enable a superior amount of resources in creating innovation results that attracts customers to the digital platform. For these companies a need to balance innovation and user-experience and continuously deliver services of greater perceived value for the end-users.

Sources

Kazan, E. & Damsgaard, J. (2013). Towards A Framework of Digital Payment Platform Design: A Comparative Study of Four European Solutions. ITM Communications 2013/2.

Porter, M. E. (1980). Competitive Strategy: Techniques for Analyzing Industries and Competitors. London: The Free Press.

A Keynote on the Future of Money: Smart Money

Professor, Dr. Jonas Hedman, Ph.D. presented his view of five scenarios for the future of money, where the scope of “smart” money was dealt with. The keynote took place at Nets Denmark. It is worth to note that smart money is according to Hedman money that can be programmed for specific purposes.

Before Hedman presented the five scenarios for the future of money, then Hedman defined the concept of money as: “Money is a trusted system”. Though Hedman is of the opinion that the current money system is not particular smart since it enables unintended usage. From this perspective Hedman presented for the audience the history of the money system and how it has evolved over time. One point that Hedman made was about the introduction of the credit card and debit card had to some extent stopped the evolution of the money system, at least to some extent. Currently an evolution has occurred according to Hedman: The crypto-currencies such as bitcoin and the central bank supported currency the “eKrona”. The scope of the “eKrona” is to replace the current physical currency in Sweden and that led to five scenarios that Hedman asked the audience to consider:

  1. Pocket money.
  2. Welfare money.
  3. Anti-money laundering.
  4. Corruption and the misuse of money.
  5. Taxation in real-time.

Some of the presented scenarios made the audience react regarding upbringing of children, the role of the state in a democratic society and planning of the economy.

Hedman did predict that it is very likely that the Nordics are among the first nations who will go all in on the digital currencies. Regarding the usage of the smart currency the value adding activities where among the misuse on a personal level, but also on a societal level. This led to some discussion regarding the value adding perspectives of the “smart money”, and Hedman mentioned that regardless of how the individual sees money, then budgeting, savings, planning etc. is about trade-offs in order to achieve an objective.

Furthermore, Hedman mentioned that he was of the impression that the Danish national bank was rather conservative compared to the Swedish when it came to the visions for the monetary systems and forms money might have.

Conclusions

All in all, a thought-provoking presentation that Dr. Hedman gave at Nets Denmark the 16th of May 2019, though it seems like most of the perspectives applied by Hedman were about how to limit the use of money and not as such on the enablement. The value adding activities should be in scope for future research not just how to limit the usage of money.

Ecosystems and Partnerships for Future Payments

Partnerships with payment companies can enable companies in other industries to be innovative and create competitive advantages for them to thrive. The partnerships can be enabled through various approaches. One of these approaches is a loosely coupled set of partnerships where the companies applies some of the services from the parent company. Another form would be to consider the payments companies a potential platform for the other companies to interact with. The third alternative would be to consider the payments company an open ecosystem. The different approaches leads have different types of strategic couplings between the individual payment company and the businesses (and organizations) that make use of them.

Payment companies are good examples of companies working as platforms and that enables the business possibilities for their customers and by that enabling the customers to create winning strategies to obtain better positions at the market. E.g., why should a webshop develop its own unique APIs to integrate with MasterCard or VISA platform, if a payment company can provide secure APIs and a state of the art fraud detection system? As a consequence this blogpost deals with the payments company as seen through these three archetypes.

The Payment Company as a Partner

A partnership is one of the strongest forms of business integrations among companies. A great example of this is when companies applies the other organization as a part of a strategic plan to enhance existing products and develop new products and services. The partnership models enhances the relations among two organizations and businesses while it might undermine relations for the company to other companies. An example of company is Nets (Nets 2019) which communicates about the possibilities of partnerships to its customers.

Partnerships will usually be a combination of a contract, mindsets for the executives of the company and the foundation through business processes and IT-platform. E.g. a webshop prefers to make use of its bank to transfer money from a to b, though it could gain a better deal by scanning the market. This is due to the convenience and to the mindset of the business owner (strategic level). This delimits the company to some extent to identify new possibilities.

The Payment Company as a Platform

In order for a payments company to become a platform it has to provide secure channels for communication and exchange of data on payments and transactions.  The payments company can provide products where multiple consumers are able to use on product or sell their products via the platform. By acting as a platform the payments company provides a framework for which its users can interact. In order for the payments company to become a relevant platform they will have to continue to invest in innovation and development (and operations). Usually the innovation and development will only come from a single source, which will become a constraint for the payment company acting as a platform. The payments company has to be on the forefront of innovation and constantly embed services and products that can become a competitor. This approach is well known within the software development industry and to some extent it will be possible to achieve competitive advantage through becoming a platform, but most major platform companies are struggling to continue to stay relevant for their customers. Examples are Facebook and the old Microsoft and to some extent the current situation for Apple. Relevant platform companies starts to open for customers, suppliers and competitors and through that approach staying relevant and strengthening their position.

The Payment Company as an Open Ecosystem

Proactive payment companies can enable competitive advantages through implementing open ecosystems. The open ecosystems enables the payment companies to embed their products and services in a multitude of products and services. Likewise will the open ecosystem enable the payment company to fuel innovation through applying different services, technologies and channels to bring to stay relevant and win the competition. Banks have usually been secretive regarding what is happening “behind the counter” and “within the box”, but with the current European legislative on banking, the banks would have to expose APIs and data regarding the customers’ accounts. This means  new companies can combine data on behalf of the consumers and enable better financial services, without the bank. Similar businesses such as insurance companies (e.g., life insurance companies and pension funds or money-transfer companies like PayPal, VIPPS and Western Union, DIBS) can provide applications, apps and portals that enables their users to transfer money, digitize invoicing, purchase goods and stay protected in a digital economy.

The challenges of being an ecosystem is to establish the infrastructure for collaboration across organizational boundaries. Likewise, is one of the challenges to deal the needed mindset are uphold among the executives and owners of the organization. In case executives and middle managers are not able to uphold the mindset, the company will reverse to either partnerships or the platform archetypes.

Conclusions

The three archetypes are relevant for both domestic as well as multinational companies operating in the payments industry and finance-industry. The three archetypes are relevant regarding how the company can align itself with trends on its geographic markets and how it can deal with competitors and customers alike.

The current trend is for companies in the payments industry to go for partnerships, but within a few years it will become more likely that companies will move towards the open ecosystems since companies working with embedding its services (and value chain) into products that enables other companies can essentially become essential for competition and markets. Platform companies are able to win for now, though essentially the platform thinking will delimit the individual company to misunderstand trends and not being able to renew itself. Examples from the software industry would be Facebook or for that matter the old Microsoft. Facebook is currently not able to renew itself for the “anti-SoMe” trends in current Western societies.

Sources

Nets. (2019). From our very DNA we’re open to partnerships.  URL: https://www.nets.eu/perspectives/Pages/From-our-very-DNA-we-are-open-to-partnerships.aspx