Electronic Commerce Research and Applications: Jun Liu, Robert J. Kauffman, Dan Ma

ELERAP 601 No.
of Pages 20, Model 5G

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Contents lists available at ScienceDirect
Electronic Commerce Research and Applications

journal homepage: www.elsevier.com/locate/ecra
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3 Competition, cooperation and regulation: Understanding the evolution

4 of the mobile payments technology ecosystem
7 Jun Liu ⇑, Robert J. Kauffman, Dan Ma
8 School of Information Systems, Singapore Management University, 80 Stamford Road, Singapore 178902, Singapore
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10
a r t i c l e i n f o a b s t r a c t
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13 Article history: The past twenty years have been a time of many new technological developments, changing business 30
14 Received 21 November 2014 practices, and interesting innovations in the financial information system (IS) and technology landscape. 31
15 Received in revised form 2 March 2015 They have led to the increasing use of prior innovations that have supported e-commerce, and that are 32
16 Accepted 2 March 2015
now being brought into financial services to support different kinds of improvements to core business 33
17 Available online xxxx
processes. This research examines recent changes in the payment sector in financial services, specifically 34
related to mobile payments (m-payments) that enable new channels for consumer payments for goods 35
18 Keywords:
and services purchases, and other forms of economic exchange. We extend recent research on technology 36
19 Competition
20 Cooperation
ecosystems and paths of influence analysis for how industry-centered technology innovations arise and 37
21 e-Commerce evolve. We explore the extent to which they can be understood through the lens of several simple build- 38
22 Financial services ing blocks, including technology components, technology-based services, and the technology-supported 39
23 Mobile payments infrastructures that provide foundations for the related digital businesses. Our extension of the prior 40
24 Paths of influence research focuses on two key elements: (1) modeling the impacts of competition and cooperation on dif- 41
25 Regulation ferent forms of innovations in the aforementioned building blocks; and (2) representing the role that 42
26 Technology evolution regulatory forces play in driving or delaying innovation in the larger scope of our modeling approach. 43
27 Technology ecosystems
28 To assess the efficacy of our approach, we use it to retrospectively analyze the past two decades of 44
innovations in the m-payments space. Our results identify the industry-specific patterns of innovation 45
that have occurred, suggest how they have been affected by competition, cooperation and regulation, 46
and point out some more universal patterns of technology innovations that offer insights into the devel- 47
opment of e-commerce. 48
Ó 2015 Published by Elsevier B.V. 49
50
51
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53 1. Introduction 2007). Some of them include the emergence of computer-assisted 65

program trading in the 1980s, the e-brokerage boom in the 1990s, 66
54 The history of the financial services industry has witnessed sev- and the elimination of floor trading at the exchanges (Gastineau 67
55 eral waves of product, service, and business innovations for ser- 1991). Some others are: the introduction of value-at-risk (VAR) 68
56 vices delivery that have changed the ways that customers and and risk-adjusted return on capital (RAROC), which were incorpo- 69
57 banks interact. Advances in information communication and tech- rated in financial risk management systems after the stock market 70
58 nology (ICT) have played an important role in initiating, driving crash of 1987 (Fama 1998, Saita 2007); and the widespread adoption 71
59 and shaping these innovations (Hatzakis et al. 2010). of Internet banking in the 2000s. More recently, and mobile pay- 72
ments (m-payments), high-frequency trading (HFT), Bitcoin, and 73
60 1.1. Understanding technology-led financial services and payments crowdfunding have been shaping the new high-tech landscape of 74
61 industry transformation financial services in the late 2000s up to the present (Aldridge 2013). 75
Various kinds of mechanisms for consumers to make payments 76
62 In some niche markets, the impacts of technology-based business have had elements of mobility for many years. For example, in 77
63 innovation have been transformational and far-reaching (Callado- 1946, the National Bank of Brooklyn, New York issued a ‘‘Charge- 78
64 Munoz et al. 2012; Steiner and Teixeira 1989; Wriston 1988, It’’ card program that allowed customers to access bank credit at 79
local stores (Bellis 2015). Then in 1950, Frank McNamara, Ralph 80
⇑ Corresponding author. Schneider and Matty Simmons created a credit card company, the 81
E-mail addresses: jun.liu.2011@phdis.smu.edu.sg (J. Liu), rkauffman@smu.edu.sg

Diners Club, as a means of allowing a customer to pay for lunch or 82
(R.J. Kauffman), madan@smu.edu.sg (D. Ma). dinner at a participating restaurant without having cash (Diners 83
http://dx.doi.org/10.1016/j.elerap.2015.03.003
1567-4223/Ó 2015 Published by Elsevier B.V.
Please cite this article in press as: Liu, J., et al. Competition, cooperation and regulation: Understanding the evolution of the mobile payments technology
ecosystem. Electron. Comm. Res. Appl. (2015), http://dx.doi.org/10.1016/j.elerap.2015.03.003
ELERAP 601 No. of Pages 20, Model 5G
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2 J. Liu et al. / Electronic Commerce Research and Applications xxx (2015) xxx–xxx
84 Club International 2015). The card required payment in full, month 1.2. Research questions, perspectives and analysis approach for 151
85 by month, for its use, and this ‘‘mobile credit’’ service grew rapidly m-payments innovations 152
86 through the mid-1960s in the restaurant, travel, hospitality and
87 entertainment sectors (Ma and Kauffman 2014). In 1958, the Bank In this research, we retrospectively analyze the evolution of 153
88 of America introduced the BankAmericard, which became the first mobile payments technology innovations in the past two decades 154
89 all-purpose, general-use credit card in payments history (Simon with respect to technological changes relative to market competi- 155
90 2007). In the early 1970s, the Bank of America relinquished control tion and cooperation, and government regulation. Financial ser- 156
91 of BankAmericard issuance to other organizations in the U.S., which vices professionals and analysts have a difficult time to explain 157
92 created National BankAmericard Inc. (NBI), and its licensing activ- the arrival of new technological developments, estimate the extent 158
93 ities expanded to other countries (Stearns 2007). Then in 1975, of their impacts, and forecast their future status. Hence, there is a 159
94 NBI and some of its affiliates created an independent organization strong need to understand how highly impactful technology-based 160
95 called VISA, which we know today as one of the leading credit card financial innovations were initiated and developed, and then 161
96 associations and transaction processors, and a provider of branded evolved over time. 162
97 credit, debit and prepaid card products to financial institutions. We address two fundamental research questions. What are the 163
98 The past twenty years from 1994 to 2014 has been a period of major forces that drive the evolution of technology-based innova- 164
99 high innovation in the development of payments technologies tions, such as mobile payments, in financial services? What are the 165
100 and solutions. The first big wave of innovations emerged when roles played by market competition, cooperation, and regulation in 166
101 Microsoft attempted to acquire Intuit to enter the Internet banking shaping the observed paths of evolution and the changing pace of 167
102 sector in 1994 (Fisher 1994). There was an intense period of technological transitions? 168
103 experimentation that occurred in parallel with Microsoft’s and
104 other firms’ investigation of electronic bill payment and present- 1.2.1. Technology ecosystems and paths of influence 169
105 ment, and these things supported the growth of industry-wide To answer these questions, we propose a financial information 170
106 interest in online payments. The subsequent rise of the online pay- systems (IS) and technology ecosystem approach that extends 171
107 ment services provider, PayPal, and the emergence of online bro- Adomavicius et al.’s (2008a) technology ecosystem paths of influence 172
108 kers further stimulated the growth of non-cash payments. The model.1 We consider issues that financial services decision-makers 173
109 growth of money market funds and other investment vehicles in and analysts face, as they think through what will drive the major 174
110 the shadow banking system – non-bank financial intermediaries changes in the technology ecosystem in the financial IS and tech- 175
111 that do not operate subject to the regulations of depository institu- nology landscape. We categorize innovations in three levels: the 176
112 tions – along with other problems with asset-backed securities, technology component level, the technology-based service level, and 177
113 derivatives and ineffective accounting practices contributed to the technology-supported business infrastructure level.2 The tech- 178
114 the financial crash in 2008 and the subsequent global financial cri- nology ecosystem perspective only considered technology supply- 179
115 sis. After the market downturn years of 2008–2011, companies side forces for innovations though. In this research, we offer an 180
116 such as Square, Softcard, Google, PayPal, and Apple Pay expanded extended view that incorporates market-side competition, coop- 181
117 their efforts to create and bring m-payments technology and ser- eration and regulation among a range of stakeholders in financial 182
118 vice innovations to the marketplace. services as important forces that jointly shape the evolution of tech- 183
119 A more formal definition of an m-payment is any payment in nology-based financial innovations. 184
120 which some kind of a mobile device is used to initiate, authorize
121 and confirm an exchange of financial value in return for goods
122 and services (Karnouskos 2004). Conceptually, an m-payment is a 1.2.2. Supporting theoretical perspectives 185
123 new form of value transfer, similar to other payment instruments Historical events and trends inspired some of our thinking in 186
124 that consumers can use, but that relies more on the advanced fea- this research, as did some of the well-known conjectures about 187
125 tures of mobile phones and the tokenization of a consumer’s finan- how technology performance improves and the alternative inter- 188
126 cial credentials (Pandy and Crowe 2014). According to a recent pretations of how changes arise in technology evolution. On the 189
127 Mobile Payments Industry Workgroup (MPIW) discussion docu- technology side, Moore’s Law suggested that technologies double 190
128 ment made available through the Federal Reserve Bank in the in performance every eighteen months, a 60% improvement per 191
129 U.S. (Pandy and Crowe 2014, pp. 2–3): annum (Moore 1965), but its prediction has been debated due to 192
subsequent empirical assessments (e.g., Tuomi 2002). In addition, 193
130 A token is a randomly generated substitute value used to replace Nielsen’s Law states that the telecom bandwidth available to users 194
131 sensitive information through a process called tokenization. When increases by 50% annually (Nielsen 1998). These laws are vague in 195
132 used for financial transactions, tokens replace payment credentials, their specifications, with many versions that observers believe 196
133 such as bank account and credit/debit card numbers. The ability to contradict one another (Sood et al. 2012). 197
134 remove actual payment credentials from the transaction flow can
135 improve the security of the payment and is a key benefit of tokeniza- 1
We presented these ideas in multiple conferences in the past, where we obtained
136 tion. . . . The key goal of tokenization is to protect the Primary useful comments as the basis for earlier and much less complete versions of the
137 Account Number, or PAN. A PAN is a 13 to 19-digit number embossed current work. They include an article that explored decision-making under certainty
138 on a plastic bank or credit card and encoded on the card’s magnetic for mobile payments (Kauffman et al. 2012, 2013a), followed by a more recent journal
article that proposes a new approach for continuous-time stochastic valuation
139 strip. The PAN identifies the card issuer in the first six digits, known
modeling for IT investment under uncertainty that incorporates a mean reversion
140 as the Bank Identification Number (BIN), as well as the individual process to capture cost and benefit flow variations over time (Kauffman et al. 2015b).
141 cardholder account (generally the final four digits), and includes a In addition, we have given presentations about the technology ecosystem view in
142 check digit for authentication. Tokenization eliminates the need for articles on high-frequency trading (Kauffman et al. 2015a) and mobile payments
143 merchants to store the full PAN on their network systems for excep- (Kauffman et al. 2013b, Liu et al. 2014) that are a basis for the present research article.
The present article is a unique piece of research, with new ideas on competition,
144 tion processing or to resolve disputes. Replacing PANs with tokens cooperation, and regulation context analysis that go beyond our prior work.
145 can reduce the financial impact resulting from data compromise, 2
Adomavicius et al. (2007, 2008a, 2008b) constructed three key building blocks,
146 theft, or unintended disclosure during disposal. While data breach including components, products and infrastructures, and focused on the general IT
147 prevention is the key to reducing the risk of compromise, tokeniza- landscape rather than the financial services sector, as we do here. We adapt their
150
149 approach to emphasize the services innovation perspective instead of the product
148 tion has the benefit of making the compromised data less valuable.
innovation perspective.
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J. Liu et al. / Electronic Commerce Research and Applications xxx (2015) xxx–xxx 3
198 There are also social perspectives that offer useful theoretical how technologies will evolve. These are likely to lead to market 263
199 explanations. A specific technology innovation will only be able entry deterrence to prevent innovators from participating, and 264
200 to be developed and implemented when there are consumers damage due to fierce competition that can impair the health of 265
201 who express demand for it. So the market must have a sufficient the payments sector in the financial services industry. 266
202 level of capability and maturity, and entrepreneurs must make Our ecosystem view recognizes multiple factors affecting the 267
203 the requisite effort and investment to push it forward to connect evolution of mobile payments technology innovations, and identi- 268
204 with consumers. fies several patterns behind the process by which one core tech- 269
205 In addition, one can think of an analogy between technology nology for payment services seems to replace another over time. 270
206 evolution and biological evolution in the manner that the different We connect technology evolution thinking to financial innovations, 271
207 perspectives of two well-known nineteenth century naturalists and propose a new perspective to master the complex relationship 272
208 were put forward. Lamarck (1815-1822a,b postulated that biologi- between them in the evolutionary process of technology-based 273
209 cal organisms extended their capabilities within their ecosystems innovation. The application of our extended analysis approach to 274
210 through generational adaptations to the environment. He believed the m-payments technology evolution contributes to research in 275
211 that they possessed the capacity to pass on specific characteristics the domain of electronic and mobile payments. Unlike prior 276
212 that were acquired and worked well during their lifetimes, leading research, we focus on payments innovations from an evolutionary 277
213 to the equilibrium of diversity that is observed in the natural world perspective, rather than a technical or a managerial perspective 278
214 (Stafleau 1971). A counter-interpretation is Darwin (1859) evolu- (Karnouskos et al. 2008).3 We collected data on key events that have 279
215 tion via survival of the fittest, which posits that diversity is the occurred during the past two decades in the payments industry. We 280
216 result of unexpected jumps and mutations that make individuals coded them, analyzed the underlying forces that drove their occur- 281
217 who fit better in their ecosystems survive over a longer period of rence, and identified their evolution patterns. Our results validate 282
218 time. A comprehensive technology ecosystem analysis approach the need to consider market forces, in addition to technology forces 283
219 ought to consider both views – the Lamarckian inheritance and (Zmud 1984). 284
220 environmental selection view, together with the Darwinian idea of This article is organized in the following way. Section 2 reviews 285
221 specific ecological niches and the mutation for fitness view – for theoretical perspectives related to technology evolution-based 286
222 analyzing technology innovation developments. thinking and analysis, and financial services innovations. 287
223 Technological progress has been suggested as a primary factor Section 3 presents the general modeling approach, connects it to 288
224 that drives societal evolution (Morgan 1877, White 1949), and the financial services industry, and defines the key constructs. 289
225 not just the evolution of narrower technology ecosystems. Section 4 discusses technology innovations in the mobile payments 290
226 Another view of technology evolution can be built on the extent sector, and presents an application of the extended paths-of-influ- 291
227 of information and knowledge that a society is able to process ence model that integrates a competitive and regulatory analysis in 292
228 (Lenski 1966), and how advances in communications can be lever- the m-payments context. Section 5 discusses how the different 293
229 aged for its dissemination. Still another view of technology evolu- accelerators and decelerators affect the pace of technology innova- 294
230 tion involves whether technological progress results in economic tion and evolution in the m-payments area. It also offers some 295
231 changes that achieve an equilibrium outcome, or the outcome is implications that are relevant for other financial IS and technolo- 296
232 path-dependent, and instead reaches one of several absorbing gies. Section 6 concludes with a statement of the main findings 297
233 states that are similar to unique Darwinian ecological niches. and limitations, and provides some thoughts about the general 298
234 This view is associated with evolutionary economics (Nelson and applicability of the perspective that we have developed to innova- 299
235 Winter 2009). tions in e-commerce. 300
236 1.2.3. Extending the paths of influence approach 2. Theoretical background 301
237 These different perspectives motivated us to extend
238 Adomavicius et al.’s (2008a) paths of influence model by incorporat- In 2008, in a special issue of Electronic Commerce Research and 302
239 ing the effects of competition, cooperation and regulation as a Applications that was intended to encourage new research on 303
240 means to explore technology evolution in the payments sector. mobile payments, the Guest Editors, Stamatis Karnouskos, Robert 304
241 This sector has a highly regulated yet competitive marketplace J. Kauffman, Lawrence and Pousttchi (2008, p. 137), wrote: 305
242 with extensive interactions among the innovators, adopters, and
243 regulators. To understand the recent developments in services, ‘‘Traditional payment systems dominate the domain of electronic 306
244 the influence of related technology innovations, and the resulting commerce today. However, most of them are coupled with too 307
245 structural changes in the payments industry, it is important that much overhead for the customer and lack of security for Internet 308
246 we analyze the historical background of changes in the payments transactions. Mobile payments, on the other hand, have been sur- 309
247 technology ecosystem. rounded by a lot of hype since the dotcom era of the 1990s, and 310
248 We will argue that market competition, cooperation, and although they were welcomed by some of the early adopters, not 311
249 regulation act as key accelerators or decelerators of industry all of the key technical components were in place to yield broad- 312
250 changes when new m-payments innovation have the potential to based success in the marketplace. Now, almost a decade out from 313
251 transform it. Some accelerators include the adoption of co-opetition the first approaches, the domain of m-payments is advancing 314
252 strategy by key stakeholders for business infrastructure innova- steadily and maturing, shedding the hype and the inappropriate 315
253 tion, new capabilities that arise from innovations in technology

254 components, the outcome of differentiation strategies for new 3
Some past works on mobile payments include Au and Kauffman (2008), who
255 technology services innovations, and the emergence of new strate-
looked at the emerging technology of mobile payments via the prism of economic
256 gic thinking from high-tech firms that become financial institu- theory. Another is Dahlberg et al. (2008), who provided a review of prior literature
257 tions themselves. On the other hand, the decelerators arise from based on behavioral, organizational, technological, processual and strategic perspec-
258 the defensive behavior of existing firms in the market, the tives, and suggested directions for future research, Kousaridas et al. (2008) developed,
259 increased complexity and uncertainty when multiple firms offer explored and analyzed a proposed architecture that supports mobile payments and
mobile banking. In addition, Schierz et al. (2010) empirically evaluated consumer
260 different technology solutions in the absence of regulatory guid- acceptance of mobile payments services. Finally, de Reuver et al. (2015) conducted
261 ance and technology standards, and a lack of understanding by case study research on an m-payments platform involving the issue of collaboration
262 investors who fund new and potentially high-risk ventures as to between banks and telecom operators.
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316 and wild visions of applicability, toward a real and practical alter- evolution. The evolution of technology-based innovations can take 377
317 native for future payment infrastructures for the wireless world of various paths within a technology ecosystem, so understanding 378
318 e-commerce’’. technological changes requires an integrated view of the con- 379
tinuous path that the change process traces over time (Boland 380
319 The earlier special issue sought to encourage authors to develop et al. 2003). 381
320 new theoretical background related to financial technology inno- Motivated by the lack of depth of insight available from 382
321 vation like m-payments for e-commerce. Our work continues in Gartner’s ‘‘hype cycle’’ perspective (Fenn et al. 2000), 383
322 this vein, and draws upon several streams of research on tech- Adomavicius et al. (2007) first proposed a technology ecosystem 384
323 nology innovation and financial services, technology ecosystems view to represent temporal development of innovations associated 385
324 and paths of influence, market competition and cooperation, and with different clusters of technologies. They defined an IT ecosys- 386
325 regulation. tem as a subset of ITs in the technology landscape, which are inter- 387
related to one another in a specific context of use (Adomavicius 388
326 2.1. Technology innovation and financial services et al. 2008b). An ecosystem represents three distinct groups of 389
technologies with specific technology roles: components, products 390
327 There is a rich literature on technology innovation, including and applications, and infrastructures. Driven by technological 391
328 Kondratiev’s (1925) innovation waves, Schumpeter’s (1939) S- changes, innovations happen in different technology roles, result- 392
329 curve innovation cycles, Drucker’s (2007) seven sources of innova- ing in the cross-level effects – paths of influence (Adomavicius 393
330 tion, and Rogers’ (2010) diffusion of innovation. However, relative- et al. 2008a). Adomavicius et al. (2012) empirically validated the 394
331 ly little work has focused on categorizing different innovations and existence of such cross-level effects and identified several patterns 395
332 studying their interactions. Zmud (1982) first characterized the of technology relationships in the context of wireless networking, 396
333 difference between new product and service innovations and pro- using econometric forecasts of the technology changes. 397
334 cess innovations. Robey (1986) then differentiated among three
335 types of organizational innovations: new product or service innova- 2.3. Firm strategy and market regulation 398
336 tions, administrative innovations, and technical innovations.
337 Swanson (1994) proposed a tri-core model for IS innovations: The impact of market competition on technology innovation 399
338 innovations confined to the IS task; innovations supporting admin- remains controversial among researchers (Sood et al. 2012). Does 400
339 istration of the business; and innovations embedded in the core competition spur and speed up innovation, or does it block and 401
340 technology of the business. Lyytinen and Rose (2003) further con- slow down its evolution? Some positive effects have been identi- 402
341 sidered base IT innovations, service innovations and system devel- fied in the literature. Given that technological innovations are cri- 403
342 opment innovations. Though these studies primarily offer an tical for the survival and success of firms (Anderson et al. 2006, 404
343 organizational instead of evolutionary view to innovations, they Banker et al. 1993), and that a firm’s returns from innovation at 405
344 can be used as a basis for us to classify technology innovations at the margin are significantly larger in an oligopolistic than a 406
345 different levels. monopolistic market (Fellner 1961, Scherer 1967), large firms tend 407
346 Innovations in financial services have been recognized as an to devote a massive amount of time, equipment, money and per- 408
347 engine of economic growth, generating market gains for the inno- sonnel in technology innovation. Competitive pressure encourages 409
348 vators and adopters (Tufano 1989), improving welfare for the soci- new innovations and improvement in products and services. In 410
349 ety (Frame and White 2004), and leading to revolutionary changes addition, competitive necessity (Goh and Kauffman 2013) and 411
350 in the structure of financial market and institutions (Merton 1995). compulsive sequences involving known and observed patterns of 412
351 On the other hand, financial services innovations can be a double- problem-solving that lead, step-by-step, to innovations 413
352 edged sword – they have a veiled relationship with catastrophic (Rosenberg 1969) encourage firms to fully realize the benefits from 414
353 events and financial crisis (Diaz-Rainey and Ibikunle 2012, innovations and trigger further breakthroughs that enhance their 415
354 Thakor 2012). value. Furthermore, the strategic entry of firms that aim to pre- 416
355 Most studies on technology-based financial innovations have empt the market and the co-opetition strategy that creates coop- 417
356 focused on their diffusion paths, the characteristics of adopters, erative alliances among rival firms will also spur the discovery of 418
357 and the consequences of innovations for firm profitability, social new opportunities and capabilities, as well as promote faster pro- 419
358 welfare and economic performance (Kavesh et al. 1978, Merton gress with technological change and service improvement 420
359 1992, Miller 1986). The literature rarely has concentrated on (Brandenberger and Nalebuff 1996, Teece 1992). 421
360 understanding the origins of innovations and how they evolve Negative effects of competition have been documented too. 422
361 though (Lerner and Tufano 2011). Our work attempts to fill the Several competitive strategies will likely result in the deceleration 423
362 research gap by retrospectively analyzing past innovations and of the development of technology innovations, and increase the 424
363 prospectively assessing future innovations, where there are oppor- uncertainty related to technology investments (Dixit and Pindyck 425
364 tunities for firms to take advantage of investment and market 1994, Mason and Weeds 2010). Examples include: an incumbent’s 426
365 opportunities. defensive strategy in response to the innovations brought by new 427
market entrants (Katz and Shapiro 1987); the emergence of multi- 428
366 2.2. Technology ecosystem and paths of influence ple technology solutions and standards that increase the market 429
uncertainty (Kauffman and Li 2005); and cooperative defense and 430
367 How technologies evolve is an important research topic. Prior resistance when innovations generate new technical problems 431
368 work suggests that technology evolution is a process of continual causing potential risks or change the market’s competitive status 432
369 improvement in the performance of a technology through novel quo (Ferrier et al. 1999). In addition, the leading firms in the indus- 433
370 recombination and synthesis of existing technologies (Henderson try often possess a large amount of resources, which put them at an 434
371 and Clark 1990, Foster 1986). Sood et al. (2012) showed that tech- advantage for being successful with innovations. This often allows 435
372 nologies evolve along step functions with multiple crosses as the them to continue to grow and dominate the next generation of 436
373 capabilities emerge, and there are huge spikes in performance after technology platforms, and has resulted in monopolistic market 437
374 periods of long dormancy (Tellis 2008). We adopt path dependence power that tends to deflect and de-power the efforts and incen- 438
375 (David 2007, Arthur 1994) and new growth (Romer 1994) thinking tives of other innovators (Arrow 1962). However, a lot of real- 439
376 to understand the dynamic process of financial IS and technologies world examples demonstrate that wealthy firms are not always 440
11 March 2015
441 able to maintain leadership, and sometimes they are even unable are interested in analyzing electronic payments solutions to deliver 501
442 to survive the next generation of innovation (Tellis 2008). For electronic funds transfer (EFT) services to customers, the related EFT 502
443 example, leadership in the mobile phone market moved from technology ecosystem will then include technologies such as 503
444 Motorola, Blackberry and Nokia to Google, Apple and Samsung. telecommunications, cyber security, credit cards, electronic 504
445 Regulation regarding competition policy, pricing, market entry, banking kiosks, and so on. 505
446 natural monopoly and public utilities also plays an important role
447 in shaping technology and innovation evolution (Blind 2012, 3.1.3. Financial IS and technology innovation at three levels 506
448 Stewart 2010). The impact of regulation on innovation and com- We define three different levels at which technology innova- 507
449 petitiveness in the market has attracted considerable research tions will happen within a financial IS and technology ecosystem: 508
450 interest. Swann (2005) investigated a number of British companies the component level, the service level, and the business infrastruc- 509
451 and showed that regulation can either nourish or obstruct innova- ture level. Table 1 summarizes the definitions, descriptions and 510
452 tion activities. Prior studies also found a negative correlation examples for technology innovations at each level. 511
453 between the intensity of product market regulations and the inten- The difference between component and service innovations is 512
454 sity of R&D expenditures in some countries (Bassanini and Ernst that the former acts as sub-units or sub-systems of the latter. 513
455 2002). Stricter regulations seem to have had a negative influence Innovators recombine or integrate existing component innova- 514
456 on services innovation in certain industry (Prieger 2002). In the tions, or modules involving multiple components, into service 515
457 financial services sector, financial institutions are closely connect- innovations to address customers’ needs. For example, credit cards 516
458 ed to consumer welfare, so regulators are extremely cautious about originally were an innovation at the service level for many EFT ser- 517
459 how disruptive technological innovations may change the market vices vendors. Credit cards also consist of a set of component inno- 518
460 (Dewatripont and Tirole 1994). Silber (1983) analyzed financial vations though, including: the magnetic stripe; Europay, 519
461 innovations and showed that about 30% were induced by regula- MasterCard and VISA (EMV) chips; and connectivity with an auto- 520
462 tion. Today though, regulators may find it more and more difficult mated clearinghouse (ACH) for transactions. As such, identifying 521
463 to keep up with the pace of technological innovation and market the context of use and defining the scope of the financial IS and 522
464 changes. When they do get a handle on it, it is likely that they will technology ecosystem should be an important first step. 523
465 have lagged effects to slow down the pace of technology evolution The distinction between business infrastructure innovation and 524
466 and innovation (Stigler 1971). In some key sectors, regulators often component innovation is that the former creates the basis but is 525
467 caution market participants that technology innovations might not necessary for the provision of services to customers. For exam- 526
468 create hidden dangers, or send misleading signals about the health ple, market-wide VAR-based risk management tracking systems, 527
469 of the market. Warren (2008) indicated that the inflexibility of which enable firms and regulators to oversee trading activity risks 528
470 financial regulations could hinder truly beneficial innovations. On effectively, are must-have infrastructure capabilities, and we can 529
471 the other hand, when regulation offers support for a technology hardly imagine any firm in the market operating without them 530
472 standard in some way, or provides a roadmap for a specific tech- today. Other examples of technology-supported business infras- 531
473 nology innovation, market uncertainty will diminish and its devel- tructure in the EFT ecosystem include short message services 532
474 opment will be accelerated. (SMS) and email capabilities. They are not operationally necessary 533
for electronic bill payments (EBP) and cardholder-initiated transac- 534
tions, though they may be helpful for communication between 535
475 3. Financial is and technology ecosystems
customers and financial services providers for mutual informed- 536
ness and account security. 537
476 We next introduce our technology ecosystem approach for
477 analyzing the paths of influence for mobile payments technology
3.1.4. Paths of influence 538
478 evolution, and integrate it with the extended competition and
Paths of influence are used to represent the impact of tech- 539
479 regulatory analysis.
nology-based financial innovations across different levels in a 540
financial IS and technology ecosystem (Adomavicius et al. 541
480 3.1. Modeling concepts 2008a). Technology innovation that happens at any level can affect 542
the subsequent innovations across the other levels. For example, 543
481 3.1.1. Technology ecosystem the success of the global adoption of smartphones and mobile apps 544
482 The technology ecosystem model proposed by Adomavicius et al. has helped to drive the development of mobile financial services 545
483 (2008a) emphasizes the organic nature of technology change and innovations, such as mobile banking, mobile payments, and peer- 546
484 evolution in the underlying technologies themselves, a supple-side to-peer money transfers. This illustrates how a technology innova- 547
485 perspective. An ecosystem consists of a population of interrelated tion at the component level – from feature phones to smartphones 548
486 technologies with specific roles and overlapping hierarchies. – can influence the development of new services technology inno- 549
487 These things represent a complex system of determinants for the vations at other levels. 550
488 evolutionary outcomes that are commonly observed in technology We use C, S, and I to represent the present state of technology 551
489 product and services settings. Rapid technology innovation and the innovation at the component level, service level, and business 552
490 uncertain outcomes associated with technology competition con- infrastructure level. An asterisk (⁄) represents the future state of a 553
491 tribute to the difficulty of predicting future technology evolution. technology innovation. In this way, we can analyze interdependen- 554
cies among technology innovations over time, address the 555
492 3.1.2. Context of use complexity of their relationships, and identify trends with how 556
493 Following the concept of a technology ecosystem and consider- technology innovations evolve. 557
494 ing unique features of financial services, we introduce the idea of a
495 financial IS and technology ecosystem. It includes a set of interde- 3.2. Impacts of competition, cooperation, and regulation on technology 558
496 pendent financial IS and technologies that work together in the innovations 559
497 operation and production of a specific financial service and may
498 also overlap one another. To define such a financial IS and tech- A financial services ecosystem is affected by multiple factors 560
499 nology ecosystem requires the identification of a relevant set of related to technology, market, society, and institutions (Hekkert 561
500 technologies within a specific context of use. For example, if we et al. 2007, Markard and Truffer 2008). As a result, modeling 562
11 March 2015
Table 1
Three levels of financial IS and technology innovation.
Innovation levels Definitions Descriptions Examples

Component Technology innovations that create the most Technology innovations at this level are The Internet, ATMs, and credit cards
basic building blocks of financial services. necessary for financial services to be offered innovations in the EFT context. The Square
and to perform their functions in ways that ‘‘dongle’’ that makes it possible to use a
create a service focus and customer centricity. mobile phone for credit and debit card
transactions.
Service Technology innovations that directly interact Technology innovations at this level include a Focal innovation: electronic bill payments
with customers, and provide access to a focal technology innovation and competing (EBP) in online banking. Competing
spectrum of financial services. technology innovations that may directly innovations: wire transfers, cardholder-
compete in the delivery of financial services. initiated transactions, third-party money
transfers, and electronic checks.
Business Infrastructure Technology innovations that add value to the Technology innovations at this level create a Short message services (SMS) and email
functionality or performance of financial basis for services provision, extend capabilities for EFT. Electronic
services, and create a product or service functionalities and provide other value-added communication networks (ECNs) for
delivery platform. capabilities and services to customers. electronic trading. Value-at-risk (VAR)
metrics tracking systems for financial risk
management.
Note: Even if various technology innovations (e.g., a PIN, a security token, a computer chip, etc.) seem to be at the component level for online banking, only certain innovations
may be necessary in the EFT context (the Internet, ATMs, credit cards, etc.).
563 technology-driven paths of influence alone is insufficient to tell the firms tend to invest in different technology solutions, resulting in 606
564 full story. Including the impact of firm strategy and government the appearance of multiple similar innovations in the market at 607
565 regulation on technology innovation, we define a set of new arti- almost the same time. Though differentiation encourages new pro- 608
566 facts that affect the technological changes: competitive forces that duct and service variety, the lack of a recognized standard creates 609
567 are spurring or stalling innovations, and regulatory forces that are uncertainty and limits mass adoption of a specific innovation. In 610
568 driving or delaying innovations. These forces often result in addition, high competitive pressures sometimes give firms an 611
569 changes in both observable and unobservable facets of value from incentive to push immature technologies into the market, increas- 612
570 innovations, including profit, social welfare, expenses, beneficial ing the innovation failure and market risks. These all will negative- 613
571 network effects, and goodwill (Au and Kauffman 2008). ly affect the adoption and diffusion of a truly valuable innovation. 614
There sometimes is also an impetus for a firm or a group of 615
572 3.2.1. Innovation-spurring competition firms to hold back technological change and innovation so the 616
573 Innovation-spurring competition influences the evolution of competitive status quo is not dramatically undermined. When they 617
574 innovations in multiple ways. In an oligopolistic market, a number consider the potential technological risk and uncertain market 618
575 of competing firms invest in R&D, resulting in faster technology changes that may accompany technology innovations, these strate- 619
576 innovations and service performance improvement. A leading gies may serve the purpose of blocking innovations. One example 620
577 firm’s efforts with innovation may create a basis for further break- is Citibank, which for some years declined to join the Cirrus nation- 621
578 throughs in the related areas or facilitate faster and wider adoption al network of shared ATMs in the United States. Citibank deployed 622
579 of the innovation. Competition will encourage firms to pursue pre- its own high-end ATM machines at locations in the New York area 623
580 emption and co-opetition strategies, creating new opportunities (Quint 1991), and had the highest-quality operational performance 624
581 and capabilities in some important aspects of financial services. and most attractive ATM-based services, but did not permit the 625
582 We observed the innovation-spurring effects of competition in customers of other banks to use them. This slowed down the devel- 626
583 the early years of automated teller machine (ATM) innovation opment of the paths of influence for ATM technology-based service 627
584 development, for example. During the mid-1970s, Philadelphia innovations, which cascaded to the business infrastructure level in 628
585 National Bank (PNB) launched one of the U.S.’s first and largest the electronic banking ecosystem. 629
586 regional networks of ATMs: the Money Access Center (MAC) net- Another example is J.P. Morgan Bank’s early 1990s effort with 630
587 work (Clemons 1990). PNB was instrumental in pushing the adop- CapitaLink Securities Corporation. It attempted to build a sub- 631
588 tion of ATM technology innovations forward in multiple ways, sidiary called CapitaLink Bond Auction Systems to support com- 632
589 including bank-to-bank ATM services sharing for customers, mercial bank sell-side bond issuance (Quint 1989, 1990). The 633
590 kiosk-based ‘‘icon services’’ that permitted different banks to offer effort challenged the U.S. Securities and Exchange Commission’s 634
591 their own branded on-ATM services, and other services. Another (SEC) Shelf Registration Rule 415, which did not permit commer- 635
592 example of co-opetition is the partnership between the now- cial banks at the time to take on the debt issuance functions of 636
593 worldwide Cirrus and Plus interbank electronic banking and credit investment banks (Kauffman and Wang 2007). When CapitaLink 637
594 card networks. Together, they expanded the beneficial effects of attempted to bring a three-year US$100 million note to the market 638
595 ATM and credit card network to many banks and their customers. in 1991, it was blocked by Merrill Lynch & Co., which sought to 639
596 They also moved the related technologies from a more limited U.S. hold Morgan back from participating in the corporate debt under- 640
597 national service role to a global business infrastructure role in sup- writing market to preserve its own valuable market. 641
598 port of financial IS and technology ecosystems.
3.2.3. Regulation-driven innovation 642
599 3.2.2. Innovation-stalling competition Regulation-driven innovation occurs when regulators set rules to 643
600 Innovation-stalling competition demonstrates the negative side ensure that firms achieve minimum revenues, and reduce their 644
601 of competition. To maintain market power and leadership, an risks and compliance costs. They may try to motivate firms to 645
602 established incumbent firm may employ a defensive strategy to enhance their productivity, avoid imitation and achieve innova- 646
603 prevent others from adopting, accessing or making use of a specific tion. Regulators may also wish to liberalize and privatize markets 647
604 technological innovation, slowing down or even blocking the evo- that have been dominated by public organizations. Hence, they 648
605 lution of the innovation. With a differentiation strategy, competing may make decisions that unintentionally support the adoption of 649
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650 a specific kind of technology innovation, which potentially will confirmations within 10 milliseconds (Mellanox Technologies 715
651 result in the emergence of a future technology standard and lead 2013). Along with these and other technological innovations that 716
652 to technology evolution (Blind 2012). These are likely to be by- have supported HFT, there came opportunities for some firms to 717
653 products of working with industry leaders, so new services in an see changing prices and trading opportunities just milliseconds 718
654 area of technology innovation become more valuable. Regulators sooner than other stakeholders, which supported flash trading 719
655 are unlikely to consciously favor one technology over another, (Durden 2009). In addition, risk controls were widely viewed as 720
656 though it may be the case that they block some technology innova- being less stringent for HFT due to the competitive pressures for 721
657 tions from diffusing because they are viewed as being potentially trade execution in such a short time (Chakraborty 2012). The U.S. 722
658 damaging, or actually have damaged competitiveness, or amplified Senate (2009) hearing in 2009 assessed the performance of com- 723
659 the risk associated with operating in a specific area of the market. puterized trading venues, as well as the road ahead for algorithmic 724
660 The example of CapitaLink is also relevant here. Shortly after trading. As a result, market practices for HFT changed, which 725
661 the SEC permitted Morgan to grow its debt and equity issuance caused the market share of HFT in the U.S. to fall from 61% of the 726
662 businesses via its subsidiary, Morgan pulled the plug on total in mid-2009 to 51% by late-2009 (Popper 2012). 727
663 CapitaLink (Sell-Side Technology 1991). Later, the long-standing
664 restrictions of the U.S. Banking Act of 1933 (the Glass-Steagall
665 Act) were repealed when the Gramm-Leach-Bliley Act of 1999 4. Paths of influence for mobile payments technology 728
666 was adopted (Labaton 1999). This legislation brought together
667 the interests of commercial banking, investment banking and M-payments are widely viewed as the next revolution in pay- 729
668 insurance services stakeholders, and smoothed the way for a uni- ments to support store-based bricks-and-mortar selling. Huge 730
669 fied industry-wide approach to technological innovation in finan- potential benefits are associated with successful adoption for firms 731
670 cial services for capital creation through debt and equity that are able to get the technology innovation right (Etherington 732
671 issuance, while creating new wealth and new risks in the U.S. 2013). The investment and adoption decision-making for m-pay- 733
672 banking industry (Mamun et al. 2005). Another example is the ments technologies involves significant uncertainties though. 734
673 European payments-integration initiative, Single Euro Payments These consist of technological risks, changing consumer demand 735
674 Area (SEPA). The SEPA regulation by European Commission made and expectation, competition in the marketplace, and ill-defined 736
675 all electronic payments across the euro area, including by credit technology standards (Kauffman et al. 2013a). Various technology 737
676 card, debit card, bank transfer or direct debit, as efficient as domes- solutions will emerge when industrial standards are not provided, 738
677 tic payments within one country, and created a single payment generating uncertainty for potential adopters. In addition, the m- 739
678 market in Europe (European Commission 2012). payments technology ecosystem demonstrates complexity in its 740
structure, spanning multiple sectors, including banking, payments, 741
679 3.2.4. Regulation-delayed innovation telecoms and retailing. Its success thus also depends on the efficacy 742
680 Regulation-delayed innovation occurs when the actions of of collaboration among stakeholders in multiple related industries 743
681 regulators restrict cooperation between companies for R&D, and across the underlying innovation network. Such collaboration is 744
682 thus discourage innovation activities. Market entry regulations typically very hard. All these contribute to the difficulty of m-pay- 745
683 also put up barriers for innovators to enter a specific market. In ments investment and adoption decision-making. As a result, it is 746
684 addition, regulators’ actions may change the conditions in the mar- critically important for senior managers to understand the patterns 747
685 ketplace, on purpose or unintentionally, so it becomes unattractive of technological changes and the paths of innovation development. 748
686 for firms to adopt or use specific technological innovations (Aghion It will help them estimate the sustainability of certain innovations, 749
687 et al. 2005, Blind 2012). These post hoc regulatory restrictions low- and what is likely to be the future state of the m-payments market, 750
688 er the impetus for technological progress (Averch and Johnson and eventually to make the right investment decisions. We will 751
689 1962), limit innovation in financial services, and slow their next analyze the paths of influence for the m-payments technology 752
690 implementation. ecosystem. 753
691 Typically, the purpose of regulation is not to directly interfere
692 with innovations and delay its development. Instead, it is to miti-
693 gate potential negative effects associated with disruptive tech- 4.1. The m-payments technology ecosystem 754
694 nology innovation, and to ensure security, stability, efficiency,
695 and fairness in the related marketplace. One example is what is We first offer an overview of current mobile payments services 755
696 happening in emerging peer-to-peer markets and the collaborative and define the m-payments technology ecosystem. Fig. 1 shows 756
697 sharing economy, which has stimulated new consumption, the generalized near field communication (NFC)-enabled m-pay- 757
698 improved productivity and encouraged individual innovation and ments technology platform that represents the most recent busi- 758
699 entrepreneurship. Various aspects of the practices that character- ness model innovations, such as Softcard, Google Wallet, and 759
700 ize the sharing economy have been increased regulators’ concerns Apple Pay (Contini et al. 2011). 760
701 in several areas, for example, including short-term accommoda- The m-payments platform providers participate and cooperate 761
702 tions, point-to-point urban transportation, and car rentals. For in a cross-industry alliance, such as the Smart Card Alliance 762
703 example, New York City cracked down on Airbnb lodging that (www.smartcardalliance.org), to establish a set of common opera- 763
704 violated zoning and other laws, and the Philadelphia Parking tional, process and technology standards, enabling related tech- 764
705 Authority conducted sting operations for UberX cars in the city that nology innovations to populate the m-payments technology 765
706 disrupt the traditional taxi industry (Sundararajan 2014). ecosystem (Smart Card Alliance 2007). 766
707 An example of regulation-delayed innovation was the 2009 U.S. In this business model, each sector takes on different responsi- 767
708 Senate hearing on dark pools, flash orders, HFT and other financial bilities. Mobile network operators (MNOs) and mobile device 768
709 market structure issues. The capability to trade at a high speed manufacturers equip the smartphones with a Secure Element 769
710 with low-latency direct market access has been built to create (SE) and an NFC chip for safe memory and execution operations. 770
711 out-of-software hardware acceleration. This is based on field-pro- Banks control the payment terminals and issue specialized credit, 771
712 grammable gate-array chips, and high-speed telecommunication debit or prepaid cards. Merchants install new NFC-enabled point- 772
713 protocols, such as InfiniBand and 10/40 gigabit Ethernet (10 billion of-sale (POS) terminals. And trusted service managers (TSMs) and 773
714 bits per second), which now permit order data transfers and gateway services providers transmit, process, and secure the 774
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Fig. 1. The NFC-enabled m-payments technology platform.
Table 2
775 transactions and provide additional services to consumers (de Technology innovations in the mobile payments technology ecosystem.
776 Reuver et al. 2015).
Innovation levels Related innovations for m-payments
777 M-payments satisfy customers’ cashless payment service
778 demand, relying on the prevalence of mobile phones and the Component NFC-enabled smartphones and POS
3G and 4G mobile networks
779 tokenization scheme that we discussed earlier. The tokenization
Credit and debit cards
780 of customers’ payments credentials significantly reduces the risk Cloud computing and storage
781 of and impact from data breaches, so customers are better protect- Mobile apps
782 ed from fraud and other kinds of disruptions. As a result, there is a Service NFC-enabled technology solutions
Cloud-based technology solutions
783 new regime for risk management that is possible with mobile pay-
Third-party app-based technology solutions
784 ments, and an extension to the instantaneous credit provision Business Infrastructure Location-based services
785 capabilities of the standard credit card for merchants and cus- Trusted services management
786 tomers through new devices. The digitalization of m-payments Mobile and online banking capabilities
787 process, reduced financial risks and lower transactions cost will Banking ATM and branch platforms
NFC-enabled public infrastructure
788 also support peer-to-peer payments among individuals, as the
789 sharing economy expands.
790 Understanding the scope of the participants and the business 4.2.1. Qualitative analysis method 816
791 process will help us to know what technology innovations are like- Since the first m-payment service emerged in the late 1990s, a 817
792 ly to influence the development of m-payment services, and how number of significant technological changes have occurred in the 818
793 they will fit into our extended paths of influence model. Some of m-payments technology ecosystem. The development process has 819
794 the related innovations are summarized in Table 2. involved many different related technology innovations that 820
795 Following the four steps offered by Adomavicius et al. (2007), occurred at the component, service, and business infrastructure 821
796 we identify the related technology innovations occurring at three levels. Hence, the ecosystem is an ideal setting for us to illustrate 822
797 levels in the m-payments technology ecosystem. Step 1 involves the nature of the changes that have occurred in the related financial 823
798 the identification of the focal innovation and context of use. Step IS and technologies. In addition, the payments marketplace with 824
799 2 covers the identification of competing service innovations. Step intensive competition, cooperation and regulation among multiple 825
800 3 is for the identification of technology innovations at the compo- stakeholders enables us to map the analysis to our new constructs. 826
801 nent level. And finally Step 4 is for the identification of technology Given the complex structure of the m-payments ecosystem and 827
802 innovations at the business infrastructure level. limited sources of quantitative data, we decided to adopt a qualita- 828
803 Fig. 2 illustrates the interrelationships among technology inno- tive analysis approach (Miles and Huberman 1994, Sarker et al. 829
804 vations at three levels – component, service, and business infras- 2013, Strauss and Corbin 1998), following guidelines described 830
805 tructure – for m-payments. (See Fig. 2.) It serves as a basis for by Hevner et al. (2004). We collected data involving m-payments 831
806 interpreting how the market has developed and how it will further technology-related events over seventeen years between 1997 832
807 evolve. and 2014. We used news and industry announcements, govern- 833
ment reports and surveys, publicly-available historical documents, 834
808 4.2. Paths of influence analysis for the m-payments technology Internet search tools, and also interviews with industry practition- 835
809 ecosystem ers. In total, we tracked innovations on approximately twenty 836
related technologies in the m-payments technology ecosystem. 837
810 We next offer a first step toward an explanation of the tech- The changes in m-payment technology and the associated events 838
811 nology evolution process in the m-payments ecosystem, by dis- are reported in Appendix 1, which are organized in chronological 839
812 cussing our methods in greater detail. We collected information sequence. We applied the procedure for identifying an ecosystem, 840
813 on when m-payments-related technology innovations occurred. as described earlier, for different points in the timeline that our 841
814 Our second step was to understand how competition and regula- data cover. The coding and analysis procedure is similar to what 842
815 tion add to our understanding of the evolutionary patterns. is described in Kauffman et al. (2015b). 843
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Fig. 2. The Relationships among mobile payments technology innovations.
844 4.2.2. Paths of influence and patterns of evolution different stakeholders in the m-payments ecosystem. We previous- 882
845 We coded the events occurring in the evolution of m-payments ly noted that, among the drivers of changes in the financial IS and 883
846 technology at the component, service, and business infrastructure technology ecosystem, innovation-spurring and innovation-stal- 884
847 levels, and identified different patterns of technological change ling competitive forces played an important role in the develop- 885
848 based on the paths of influence across different levels. We adopted ments that we have observed. 886
849 a state transition diagram to visualize the paths of influence over When the first two SMS payments-enabled Coca Cola vending 887
850 time and to depict patterns in the ecosystem’s development trajec- machines were installed in Finland in 1997 (Montgomery 2012), 888
851 tory. (See Fig. 3.) Technology evolution involves entrepreneurs and few people were truly aware of the capabilities of mobile devices 889
852 organization that contribute to the path-dependent nature of the to initiate, authorize and confirm the exchange of financial value 890
853 process, which makes it seem random. in return for goods and services supplied. By 2001 though, the intro- 891
854 The arrows in Fig. 3 represent the paths of influence that reflect duction of 3G mobile networks enhanced their connectivity and 892
855 changes in the three kinds of innovations across fourteen time capability for data transmission among mobile phones, and the 893
856 periods. The collection of arrows in each period represents the var- competition for the central roles in the mobile marketplace had 894
857 ious evolutionary patterns of m-payments technology. M-pay- begun. The component-based innovations of the early 2000s were 895
858 ments technology evolution started with the introduction of stimulated by competition among market participants, and created 896
859 SMS-enabled m-payments in 1997; and it exhibits five different a strong push-forward force for m-payments-related technology 897
860 patterns that are summarized in Table 3. Note the similarities to innovations. Since that time, the collaboration and cooperation 898
861 the patterns presented by Adomavicius et al. (2008a). strategies have come to characterize much of the additional devel- 899
862 Most of the recent innovations in the m-payments ecosystem opment of the market, especially when firms such as Google, 900
863 seem to have started with new components and services that MasterCard, Citibank, First Data Corporation and Sprint from differ- 901
864 allowed for more advanced performance and new functionality. ent industry sectors work together to create Google Wallet. Their 902
865 For example, the vendors of various mobile wallets (Google cooperation accelerated the development of NFC-enabled m-pay- 903
866 Wallet, Apple Pay, and Softcard) now offer services that permit ments technology solutions, resulting in a service and infrastructure 904
867 swiping a mobile phone to make a payment. They are also alignment pattern that we have observed in our sketch of 905
868 providing the ability to collect detailed data about where con- m-payments technology evolution in its ecosystem (Aspan and 906
869 sumers are transacting and what they are buying – as well as more Saba 2011). 907
870 information about where they are, and how they are moving. This
871 information can be analyzed to understand and predict consumers’
872 purchase behavior. It also allows merchants to send real-time tar-
4.3.1. Complementary and countervailing forces 908
873 geted advertisements and perform location-based services (LBS),
We now shift gears to do a richer assessment of how some of 909
874 by taking advantage of existing components (the global positioning
the other events that are present in the timeline of the evolution 910
875 and accelerometer components of smartphones, cloud servers and
of m-payments technologies played out, when there is evidence 911
876 storage, and high-speed mobile networks) and business infrastruc-
of the concomitant effects of regulation. Sometimes financial IS 912
877 tures (mobile banking, location-based systems) (Groenfeldt 2014;
and technology providers benefit when they are able to anticipate 913
878 Liu et al. 2013).
regulatory actions to minimize the risks, so it is possible for them 914
to harmonize their actions to push forward the adoption and diffu- 915
879 4.3. The effects of competition, cooperation and regulation sion of an innovation. Otherwise, they may encounter countervail- 916
ing forces from the market or the regulators. This represents a 917
880 Some of the patterns that we have observed are a by-product of setting in which competition spurs innovation while regulation drives 918
881 competition and cooperation that have occurred among the or delays it – in other words, in settings where there are 919
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Fig. 3. M-payments technology state transition diagram, 1997–2014.
920 complementary or countervailing forces at work to some degree.4 of large financial institutions, the competition, risk, and market 954
921 We recognize that it may be difficult to identify the exact extent uncertainties have all been affected. Changes in competition driven 955
922 to which each force is at work, but it nevertheless is possible to iden- by digital convergence (Yoffie 1987) involve a somewhat different 956
923 tify the outcomes associated with their co-occurrence. impetus for innovation. Instead of having existing market par- 957
924 When there are active vendors whose interests align with the ticipants to develop new innovations, other players – start-ups, 958
925 regulators’ interest on new technology-based services, this will technology firms, telecoms and Internet giants – have entered 959
926 increase the likelihood of the success of technology innovation the m-payments marketplace because the expected returns for 960
927 and help to push its evolution forward faster. Elements of this kind successful firms there are so high (Ernst and Young 2014). 961
928 of behavior on the part of market participants can be observed with Examples of digital convergence are occurring all around us. 962
929 the success of M-Pesa in Kenya and other countries in East Africa, Accenture (2012) has pointed to instances of digital convergence, 963
930 and the transformation of the consumer payments process such as Square (www.squareup.com) and iZettle (www.izettle.- 964
931 (Graebner 2014). A large segment of the population in these coun- com), which have been expanding the capability of mobile phones 965
932 tries has long been unbanked, and generally under-served by finan- as point-of-sale checkout devices to support consumer purchases. 966
933 cial services organizations, which have struggled to achieve Despite the new technologies, the payments scheme is still similar 967
934 profitability in markets with low-income consumers (Deloitte in its underlying operations, since banks dominate the payment 968
935 2012). The success of M-Pesa since 2007 is due to its close col- authorization, clearing and settlement processes. However, there 969
936 laboration with the Central Bank of Kenya, which provided its is now greater transparency in the payments process, new seg- 970
937 expertise to help M-Pesa’s management to mitigate key systemic ments of payments services for under-banked and unbanked cus- 971
938 risks and offered it room to innovate rather freely (Bishko and tomers are being served, and new ways to accomplish risk 972
939 Chan 2013). Collaboration between the national central banks and management that were not possible before. The digital conver- 973
940 mobile financial services entrepreneurs in the region also facilitated gence process exhibits the Lamarckian style of evolution that we 974
941 a valuable and direct dialogue (Nyaga 2014). discussed earlier, in which next generation technologies seem to 975
942 More recently, the dialogue has emphasized the negative be inheriting somewhat amplified characteristics that were 976
943 impacts of M-Pesa’s near-monopoly power though, such that the acquired during the prior generation. A recent report by 977
944 regulators are now interested in shaking up the financial network Accenture (2012, p. 8) commented further: 978
945 infrastructure of the economy, by permitting the entry of new
‘‘These characteristics make the new online payment providers 979
946 mobile virtual network operators (MVNOs), such as Finserve Africa,
especially dangerous competitors, as they have the capacity to tar- 980
947 Mobile Pay, and Zioncell Kenya (Heinrich 2014). This process aids
get growth aggressively, secure in the knowledge that they can 981
948 in identifying the inappropriate aspects of the highly-concentrated
switch to focusing on profits once they achieve a critical mass of 982
949 network operational and financial risks related to financial tech-
users and transactions. This means they can effectively buy market 983
950 nology innovations for payments (The Economist 2013).
share by ‘giving away’ the services that banks currently regard as 984
revenue generators. . . . Against this background, assuming con- 985
951 4.3.2. Digital convergence, competition and innovation cerns over security can be overcome, if banks or card issuers try 986
952 When large and powerful Internet firms have turned their to charge fees for new service that technology players might offer 987
953 attention to the payments marketplace – the traditional territory for free, then users will inevitably migrate towards free alternatives 988
. . . However, the ability of banks and card issuers to compete effec- 989
4
Various kinds of countervailing forces and their effects can be observed in the tively against new entrants is currently undermined by a lack of 990
evolution of industrial organization in different sectors, with respect to firm-level visibility over how the relative costs in their different payments 991
strategies and decision-making (Freeman and Soete 1997). This is especially true in silos stack up and compare. This makes it difficult for them to make 992
settings involving different kinds of IT. At the industry level, Kauffman and Tsai pricing and investment judgments around payments offerings – 993
(2010) evaluated the evolution of business process and technology standards, and
boosting the risk that they could get these decisions wrong and face 994
how they developed out of the changing interests of different stakeholders –
technology producers and users, business intermediaries and standard-setting being disintermediated.’’ 995
organizations, regulators and market analysts – in different industry settings. At
the firm level, Kauffman and Kumar (2008) evaluated countervailing positive and
negative network effects, as well as complementary network effects arising from the 4.3.3. Fragmented markets and uncertain standards 996
mutually value-enhancing components of a network. The authors argued that tech- In other settings where there is a more fragmented market, for 997
nology adoption and the forces that support technological innovation can be studied
over time by firms, enabling them to take value-maximizing managerial actions for
example, characterized by the lack of an accepted technology stan- 998
the deployment of services based on new IT innovations, as the market situation dard, or conflicting strategic objectives across different business 999
changes. networks, there may be innovation-stalling competition, as well 1000
11 March 2015
Table 3
Five evolutionary patterns for the m-payments technology ecosystem.
Name Pattern Definitions and comments Events

1. Services All of the technology innovations observed are clustered at the component Emergence of m-payments and mobile banking;
development and service levels; technologies at component and service levels are refined continuous developments of new m-payments
and gain greater attention over time. services; the further adoption of smartphones.
2. Service and The observed innovations occur at the levels of service and business Innovation-spurring competition by PayPal, Google
infrastructure infrastructure. Wallet and Apple; eBay’s acquisition of PayPal.
alignment
3. Feed-forward Involves innovations that new services become possible in the presence of a Introduction of 3G networks, cloud computing and
new component innovation, or a new infrastructure innovation that is Square; the wide adoption of Internet and mobile
desirable to have because of already-developed components and services banking
4. Feed-back Involves new services motivated by the development of a new business Introduction of NFC standards, smartphones, and
infrastructure that enables it, or a new component that will be possible due smartphones that support NFC as new components
to the development of business infrastructure and services and business infrastructures
5. Incremental New component innovations make it possible for subsequent component Development of 4G networks and the NFC
innovations; new services beget subsequent service innovations; and the platform; carrier-backed m-payments emerged;
same for business infrastructures launch of Apple Pay, and iPhone 6 and iPhone 6
Plus
1001 as regulation-driven effects. Regulations, in some cases, pave the payments regime, maintain financial stability, monitor the risks, 1029
1002 way for the market to understand how the emergence of innova- and build an efficient payment process. 1030
1003 tions may proceed. In January 2010, the Federal Reserve Banks of Atlanta and 1031
1004 The history of m-payments, based on our empirical observa- Boston convened a set of key players in the U.S. mobile payments 1032
1005 tions, suggests that almost all of the initiatives in the 2000s failed. ecosystem to create the Mobile Payments Industry Workgroup 1033
1006 After 2011, the m-payments standard competition between online (MPIW), which we mentioned earlier. The purpose of the MPIW 1034
1007 independent payment service providers, such as PayPal and Alipay, is to identify the barriers, potential risks and opportunities for 1035
1008 and the new technology platforms, such as Google Wallet and the development of a robust mobile payments environment. In 1036
1009 Softcard (Arthur 2014), as well as more recent developments addition to suggesting the fundamental elements for success, the 1037
1010 around Apple Pay (CardNotPresent.com 2014), created uncertain- MPIW aims at understanding the appropriate regulatory oversight 1038
1011 ties for stakeholders’ adoption decisions and network formation model that will enhance safety and integrity in payments systems. 1039
1012 (Zalubowski 2014). This has slowed down the pace of m-payments New regulations regarding the risk management and instanta- 1040
1013 services innovations, as market leadership is still a major issue that neous credit capabilities of m-payments have begun to address 1041
1014 needs to be sorted out. In 2012, a U.S. Senate (2012) hearing was consumer protection issues also, such as identity management, 1042
1015 convened to assess the development of a framework for mobile consumer privacy, cyber-security and how prepaid mobile phone 1043
1016 payments and identify the major roadblocks for m-payments accounts are handled (Contini et al. 2011). 1044
1017 infrastructure and services development. A notable example of regulation-delayed effects related to m- 1045
payments technology innovation occurred in China in March 1046
1018 4.3.4. Financial stability, risk management and government regulation 2014. The People’s Bank of China, the central bank of China, pro- 1047
1019 Government agencies that deal with the market for financial mulgated innovation-stalling regulations that slowed down the 1048
1020 services also have considered the stability and risks of current initiatives of Tencent and Alibaba to roll out virtual credit cards 1049
1021 banking and payment systems in light of competition around tech- (Zhao and Xie 2014). The central bank was especially concerned 1050
1022 nological innovations (World Bank 2012). Some have noted that m- about these companies’ use of quick-scan QR codes that support 1051
1023 payments innovations may be detrimental to the operation of well- m-payments innovations. The problem was a perceived lack of 1052
1024 functioning financial services in an economy (Khiaonarong 2014), security with respect to the transaction verification process that 1053
1025 and that they also may cause severe security issues (Dobos 2013; uses QR code-based technology. It expressed concerns about the 1054
1026 ISACA 2011). For the most part though, the purpose of regulation potential risks that new payment mechanisms may create, espe- 1055
1027 is not to interfere with innovation-spurring competition in the cially for the stability of the banking and credit card industries, 1056
1028 m-payments arena, but instead to facilitate a more successful although others have alleged that the pull-back on third-party 1057
11 March 2015
1058 m-payments could be based on its concern that there would be lost Table 4
1059 revenues and fees for banks, and conflicts with NFC-based initia- The effects of competition, cooperation and regulation.
1060 tives that UnionPay promoted (Hernandez 2014). Issues analyzed Major findings Illustrative events
Competition and Countervailing or M-Pesa in Kenya and other
1061 4.3.5. Vendor competition, solution success, and the specter of Regulation complementary forces may countries in East Africa.
1062 regulatory intervention work together; regulatory
1063 During the past five to ten years, large firms in financial services actions can mitigate the
risks.
1064 have competed intensely to produce innovations that will trans- Competition and Digital convergence Square; iZettle; Google
1065 form the traditional processes related to payments services. Digital changes the competition Wallet.
1066 Severe competition may decelerate the development of new ser- Convergence landscape, and spurs new
1067 vices since the related investments may involve greater uncertain- innovations.
Competition and Without standards, the Early initiatives’ failures;
1068 ty. This will affect the patterns of technology evolution, possibly
Standards market is more fragmented Competition between
1069 causing a shift in the observed patterns going forward. In contrast, and innovation-stalling PayPal and Alipay, Google
1070 some firms have been able to push a technological innovation for- competition is more likely; Wallet and Softcard, and
1071 ward by providing strong support, and by partnering and making regulation can help to Apple Pay.
1072 alliances with other firms to gain advantage and accelerate the break the standards
logjam.
1073 development of new services (Dai and Kauffman 2004).
Financial Regulators support The action of People’s Bank
1074 We observed this in our timeline of m-payments ecosystem Stability, Risk financial market stability of China to delay virtual
1075 events most recently, when Apple announced its cooperation with Management and mitigate potential credit cards initiatives;
1076 Visa, MasterCard and American Express at the business infrastruc- and risks, which may delay MPIW and U.S. Federal
Regulation innovation. Reserve Bank.
1077 ture level, in the rollout of Apple Pay mobile payments via smart-
Competition and A large leading stakeholder Apple’s cooperation with
1078 phones used at contactless point-of-sale (POS) outlets (Townsend Cooperation can partner with others, Visa, MasterCard and
1079 2014). Most merchants and banks supported Apply Pay shortly moving from competition American Express to align
1080 after its initial launch, which brought a new set of capabilities to cooperation, which may Apple Pay with contactless
1081 and installed base of consumers to the m-payments market. result in a greater infrastructures.
likelihood of success.
1082 According to recent estimates, about 800 million people have
1083 access to iTunes (Arora 2014), although many fewer have an
1084 iPhone 6 or similar mobile handset. This nevertheless was an software suite market niches, was alleged to have inappropriately 1121
1085 astonishing development in terms of the potential network effects tied the distribution of Microsoft Windows to Internet Explorer 1122
1086 that Apply Pay may eventually be able to project in the m-pay- and the Microsoft Office software suite (Liebowitz and Margolis 1123
1087 ments ecosystem. Some large U.S. retailers, however, including 2001). Apple’s market capitalization of US$640 billion as of mid- 1124
1088 Wal-Mart, CVS, and Rite Aid, have refused to commit to Apple, November 2014 is now about 58% greater than Microsoft’s at 1125
1089 since they have contracts with rival payments systems that will US$404 billion, so there may be future issues with regulation that 1126
1090 punish the stores for adopting Apple Pay (Wells 2014). Karen Apple will face (Watts 2014). (See Table 4 for a summary.) 1127
1091 Webster (2014), CEO of Pymnts.com and m-payments market ana-
1092 lyst has reminded us:
5. Discussion and implications 1128
1093 . . . it’s more or less game over for everyone but Apple in the iOS
1094 ecosystem. Pundits cite the fact that Apple has embraced the pay-
Organization-level internal factors such as firm heterogeneity 1129
1095 ments status quo by getting issuers on board (so much so that
and competitive strategy, and industry-level external factors 1130
1096 they’re paying to be part of the Apple Pay wallet), getting 3 of
including government regulation and technology standards, jointly 1131
1097 the 4 networks to play ball their way, legitimizing NFC as an
contribute to shaping the evolution of m-payments technology. 1132
1098 enabling payments technology and commercializing a tokenization
They have encouraged and supported, or stalled and delayed the 1133
1099 scheme tied to the Apple Secure Element that pretty much sets the
adoption and diffusion of specific m-payment-related technolo- 1134
1100 standard for cardholder security. . . . The payoff for Apple, of course,
gies. We next discuss m-payments technology evolution at the 1135
1101 is that, beyond its initial launch, the most powerful technology
organization level, and provide some recommendations to firms 1136
1102 company in the world, with the biggest cash horde, has been able
about how to increase their firm-level returns on investment 1137
1103 to make the profit-challenged banks, awash in legal fees, pay for
(ROI) after committing to m-payments. 1138
1104 massive amounts of marketing.
First, we claim that first-mover advantage and network effects 1139
are positively associated with the success of a firm’s investments 1140
1105 Apple’s extraordinary success as a newly-entering m-payments in technology innovations. Gaining the first-mover position and 1141
1106 services vendor, according to Webster (2014) is that ‘‘Apple Pay obtaining network effects will help to accelerate the pace of evolu- 1142
1107 was the kick in the pants that everyone in the ecosystem needed tion of a technology, especially when the investment decision can 1143
1108 to get the mobile payments flywheel focused and moving in high be made flexibly or delayed to manage its risks. 1144
1109 gear.’’ The untested aspect of the Apple Pay launch is whether The development of the m-payments market supports this 1145
1110 Apple will be able to build strong network effects with merchants, statement. The m-payments services market has been highly frag- 1146
1111 who will recognize that adopting Apple Pay is an essential part of mented since it emerged. Many competing technology solutions 1147
1112 doing business – again, a hook-up-lose-out value proposition, have coexisted in the market; different stakeholders have invested 1148
1113 based on the long-standing argument of Clemons and McFarlan in and shepherded their development. There have been no widely- 1149
1114 (1986). Adoption may ensue on multiple sides of the m-payments accepted technology standards so far though. This has made firm- 1150
1115 platform around Apple’s solution – current iPhone 6 and next-gen- level m-payments adoption decisions difficult for many market 1151
1116 eration users, banks, as well as merchants and stores – because the participants. On the other hand, in spite of the market uncertain- 1152
1117 functionality and convenience are high-value solutions. Antitrust ties that are present, there still are advantages and benefits associ- 1153
1118 issues in the market may arise around such a powerful technology ated with the early adoption of a truly valuable technology 1154
1119 services vendor, just as Microsoft, when it seemed like the domi- innovation that will become a standard later on (much like EMV 1155
1120 nant and unchallenged force in the Internet browser and office chips in credit cards). David (1985) noted that first-to-market 1156
11 March 2015
1157 technology innovations can become entrenched, such as QWERTY all at once (Au and Kauffman 2001; Au et al. 2009). We conclude, 1223
1158 keyboard or Microsoft Windows, and sometimes inferior standards therefore, that one firm’s decision, including which m-payments 1224
1159 can persist because of the installed base they have built up. This technology innovation to invest in, when to adopt, and how heavy 1225
1160 will give firms an incentive to preempt the rest of the market with the investment should be, will impose externalities on other firms. 1226
1161 their early adoption and full commitment (Dai and Kauffman In specific, we believe that firms that are early adopters of a speci- 1227
1162 2006). When the uncertainties associated with technology innova- fic technology innovation may impose competitive externalities on 1228
1163 tions are substantial and the investment is at least partially irre- other non-adopters. High competitive externalities can potentially 1229
1164 versible, firms will value flexibility. They can benefit, for delay adoption and slow down the pace of a specific technology 1230
1165 example, through having the flexibility to defer adoption (Dixit innovation, because other rival firms may commit to competing 1231
1166 and Pindyck 1994). This may affect the opportunities that firms technology innovations. These things will make it harder for firms 1232
1167 have to leverage first-mover advantage though: deferring for too to align their collective interests, in order to make mutually- 1233
1168 long may a time may eliminate the flexibility for a firm to benefit beneficial adoption decisions based on their rational expectations 1234
1169 from timing adoption to achieve high ROI (Mason and Weeds of what is likely to come out in the market. 1235
1170 2010). Competitive externalities are external penalties that affect other 1236
1171 Another issue is network effects in financial services, which competitors if one firm’s adoption of a specific technology innova- 1237
1172 affect decision-makers’ choices in two ways. First, strong network tion has the potential to affect and change market-wide prof- 1238
1173 effects will induce them to make investment decisions at a little itability (Seidmann and Wang 1995). An early adopter typically 1239
1174 earlier rather than a later time (Kauffman et al. 2013a, 2015b). In can obtain higher profits from the new services and increased 1240
1175 addition, they will tend to make similar, rather than different transactions that become available with the new technology. 1241
1176 investment decisions. An analogy is that stores have an incentive Since one firm’s profitability from adopting a technology innova- 1242
1177 to geospatially cluster (Krugman 1991). When there are enough tion critically depends on its transactions volume, relative market 1243
1178 stores to form a business hub, competitors located elsewhere are share, and the number of other competing adopters, the firm’s 1244
1179 at a disadvantage. As a result, they may eventually move to the incentive for adoption will decrease as more and more rival firms 1245
1180 hub, further increasing its relative attractiveness. This is precisely will have adopted. When adoption becomes less and less attractive 1246
1181 the story that we see playing out now with Apple Pay and the due to too many adopters, as Bakos and Brynjolfsson (1993) and 1247
1182 banks. Richard Branson, founder and chairman of the 400 compa- Dai and Kauffman (2006) have shown for electronic procurement 1248
1183 nies that comprise the Virgin Group, has commented (Green market participation, it eventually will drive latecomers to recon- 1249
1184 2014): ‘‘Apple Pay is a step towards mobile payments becoming even sider their strategies. If this occurs with respect to technology 1250
1185 more mainstream and it’s the right step because it’s how I think we’ll innovation, firms are more likely to turn to competitive differen- 1251
1186 be making payments in the future.’’ Clearly, if Branson’s views are on tiation strategies, and this will mitigate head-to-head market com- 1252
1187 target, then the strong network effects associated with Apple Pay petition among them. An example in the m-payments domain is 1253
1188 will hasten the decisions of others to adopt and speed up innova- PayPal, which left NFC capabilities in its m-payments solution to 1254
1189 tion, while consecrating the value of the first-movers’ choice to achieve differentiation in comparison to Google Wallet and 1255
1190 become involved. Softcard in 2011 (Pymnts.com, 2012). Such strategic interactions 1256
1191 Firm differences are also important when we consider these among firms, thus, are likely to delay the diffusion of a specific type 1257
1192 issues. In practice, a firm’s willingness and ability to commit and of innovation and decelerate its evolutionary pace. This is also true 1258
1193 participate in cross-industry collaborations for payment-related for their competitive interactions when they are mostly influenced 1259
1194 technology innovation will vary. Some have the spare resources; by the uncertainties in the market of a given technology solution or 1260
1195 others do not. The lack of uniform willingness to commit may also standard. We view this as another kind of competitive externality: 1261
1196 be due to the individual views that firms have of the risks of future an indecision externality. This term makes sense to us, because it is 1262
1197 technological changes, market uncertainties associated with con- clear in such cases that the entire market bears the social costs of 1263
1198 sumer and merchant responses to new technologies, as well as stalled adoption. Indeed, any movement in the market to the 1264
1199 other firm-specific factors, such as different market shares, ‘‘next’’ equilibrium involving new technology will be beneficial, 1265
1200 nuanced and contrasting technology capabilities, and competing especially in terms of the value for firms to learn what is necessary 1266
1201 strategic objectives. to succeed for a given m-payments technology innovation. 1267
1202 It is unlikely that all firms will make unanimous adoption deci- Competition itself in the financial services industry and the pay- 1268
1203 sions and take actions all at once in most technology adoption set- ment services segment also demonstrates unique features. Decades 1269
1204 tings, because senior managers must make the ‘‘right’’ decisions in ago, banks and other financial institutions bore the heavy financial 1270
1205 the absence of perfect information or the full and sophisticated weight of initial fixed costs in building the foundations for today’s 1271
1206 capability (Au and Kauffman 2003). The firms are also different in payments system. As a reward, they gained dominant positions in 1272
1207 terms of their ability to acquire and process information from the the industry and have enjoyed oligopolistic market power for 1273
1208 market, and even when they are able to acquire similar information, years.5 With the high entry barriers in the financial services market, 1274
1209 they still may process it differently. In previous research in different it has been difficult for new entrants to enter and succeed, unless 1275
1210 domains, Au and Kauffman (2005, electronic bill presentment
1211 adoption), Li and Kauffman (2012, public transit systems pricing 5
A parallel argument can be made about the global distribution systems (GDSs) in
1212 mechanism adoption), Li et al. (2014, inefficient herd behavior in the air travel and hospitality industries. They included such firms as Amadeus, Galileo
1213 a world of rational decision-makers) and (Ma and Kauffman /Travelport, Sabre and Worldspan that bore the heavy investment load with their
1214 (2014, software-as-a-service adoption) noted that firms go through airline firm partners in the development of the airline flight schedule, pricing and
booking systems (Granados et al. 2008). It was the case that the U.S. government
1215 a process of adaptive learning. They may eventually align their
airline industry regulators prohibited the practice of display biasing, which caused
1216 rational expectations about the business value of a technology they certain GDSs and computerized reservation systems (CSRs) to favor some airlines over
1217 are evaluating, and whether and when to adopt – or they may not. other by positioning their schedules and fare on easier-to-reach pages in the green-
1218 The latter scenario was for electronic bill payment and presentment screen GDS airline ticket book systems used by travel agents. The industry regulators
1219 in the U.S., as Au (2004) showed in his doctoral dissertation. also sought to make it illegal for the GDSs and CRSs to block competing airlines from
cross-listing their fares. Clemons (2010) has referred to these information-based
1220 The lack of harmonized firm actions in the market typically will competition issues as the strategic geometry of industry distribution, which also has
1221 result in an observable time-wise distribution of their adoption implications for electronic banking, shared ATM networks at the regional and national
1222 decisions, as opposed to clustered adoption that occurs more or less levels.
11 March 2015
1276 some portion of the market becomes newly vulnerable: easy to enter, solutions indicates their lack of agreement with respect to expec- 1342
1277 attractive to attack, and difficult to defend (Clemons 1997; Granados tations on what the relevant technology standard will be and which 1343
1278 et al. 2008). An example is the HFT segment of the financial markets, business models are likely to be suitable for m-payments (Hayashi 1344
1279 which has experienced great technological innovation (McGowan and Bradford 2014). 1345
1280 2010, Menkveld 2013), as well as the emergence of issues that made In the presence of significant uncertainties, it is likely that com- 1346
1281 new oversight and regulation a reality (Gould 2011). petition will harm the health of the m-payments market. 1347
1282 Things have changed with m-payments though, especially in Competition brings in a lot of new things, attracting new firms, 1348
1283 terms of what Weber (1995) has called digital bypass. Many current producing new products, enabling new strategies, and introducing 1349
1284 financial services, inclusive of m-payments, heavily rely on the suc- new technologies. The fact is: not all of them are able to offer true 1350
1285 cess of underlying technology innovations, rather than any firm’s value though. Some new market entrants will be operating ineffi- 1351
1286 historical position in the marketplace. For example, some m-pay- ciently and will not create real business value. Some technology 1352
1287 ments solutions are able to digitally bypass the offline payments innovation-based strategies are myopic in maximizing short-term 1353
1288 networks in banking with direct network access to the ACHs and profitability, while failing to achieve sustainable returns in the 1354
1289 the card networks. This disintermediation capability created a long-term. And some innovations are not mature enough to be 1355
1290 technology-based vulnerability. It also provided opportunities for implemented and create much value. These are like noise in the 1356
1291 new entrants to be involved and compete with existing market market that will delay the adoption and evolution of more valuable 1357
1292 players. Due to competitive pressures, the latter have had to adjust innovations. They also represent a loss in social welfare due to the 1358
1293 their strategies. For example, they now are forced to invest to inappropriate investments of some participating stakeholders. 1359
1294 reduce customers’ transaction costs and improve service quality, Market uncertainties can be mitigated through standardization in 1360
1295 with little hope for additional profitability. The investments they the underlying payments technologies, in order to have competi- 1361
1296 make will be more a matter of strategic necessity than strategic tion result in the beneficial innovation-spurring effect. 1362
1297 advantage (Goh and Kauffman 2013). These, in turn, will result in Finally, it is important to note that m-payments technology 1363
1298 a new wave of competition for payments services, eventually lead- solutions require a high level of consumer data-sharing. Thus, 1364
1299 ing to gains in consumer welfare and economic efficiency (Laffont financial services firms are often reluctant to make commitments 1365
1300 and Tirole 1990, 2001), such as we have seen in the past with ATMs that may compromise their separate commitment to customer 1366
1301 (Bernhardt and Massoud 2002, McAndrews 1998; Wright 2004). data privacy. We expect that, over time as the market gradually 1367
1302 These analyses allow us to conclude that the payments sector is reaches a consensus on appropriate technology solutions and busi- 1368
1303 a newly vulnerable market, in large part due to the rise of m-pay- ness infrastructures that are likely to become the actual standards, 1369
1304 ments. So we expect that competition in this market will be much firms will see the application of some specific m-payments tech- 1370
1305 more intense than in other traditional markets – at least for a nologies reaches critical mass across a large installed base of users. 1371
1306 while. Since competition may impose two opposite effects on tech- Once this happens, concerns in the marketplace will be diminished 1372
1307 nology innovation – an innovation-spurring or innovation-stalling among consumers, banks, and the regulators about the technology 1373
1308 effect, there are two questions that need to be asked. (1) Which adoption aspect, though they will continue to express concerns 1374
1309 effect will dominate and drive the outcome? (2) And what can be about data privacy, identity theft and payments fraud. 1375
1310 done so the more positive innovation-spurring effects will be fully
1311 expressed, while the more negative innovation-stalling effects are
1312 minimized? 6. Conclusion 1376
1313 Our answer is this: the level of uncertainty that exists in the
1314 market will play a key role in this process. Both technological In this article, we have proposed a new analysis approach that is 1377
1315 and business-related uncertainties in the m-payments market will based on the technology ecosystem paths of influence model, and 1378
1316 impact the effects of competition. If such uncertainties can be is especially applicable to financial services settings, to understand 1379
1317 mitigated, there is a higher likelihood that incentive-compatibility how competition, cooperation and regulation influence financial IS 1380
1318 and value co-creation among different stakeholders can be and technology innovation and evolution. Our application of the 1381
1319 achieved without destabilizing the existing market structure. As proposed approach to m-payments technology innovation is 1382
1320 a result, competition is more likely to accelerate technological among the first research that looks at the development of m-pay- 1383
1321 advances, spur the creation of valuable innovations, and benefit ments services from an evolutionary point of view. More impor- 1384
1322 the m-payments ecosystem. tantly, we raise the point that competition, cooperation and 1385
1323 Newly-vulnerable markets, such as has been occurring in the regulation jointly shape the development paths of financial IS 1386
1324 payments sector, tend to have relatively unstable institutional and technology innovations in markets. Our empirical analysis 1387
1325 structures. Many new firms are likely to be entering, pursuing digi- identifies various patterns of innovation and technology evolution 1388
1326 tal convergence strategies or alliance strategies, with some of them in the m-payments ecosystem, and supports this competition-and- 1389
1327 – including existing market participants – failing and exiting the regulation argument. It demonstrates how the evolution of tech- 1390
1328 market. This creates high business-related uncertainties for par- nology ecosystems plays out, based on the analysis of paths of 1391
1329 ticipants, so that decision-making related to m-payments adop- influence and the role of key events in an industry sector’s tech- 1392
1330 tion, in particular, is likely to be difficult. The decision process is nology innovation timeline. 1393
1331 made even harder in light of the high switching costs and tech- The limitation of this research is worth mentioning though. One 1394
1332 nology lock-in power that are present in a technology-intensive of the important characteristics of Adomavicius et al.’s (2008a) 1395
1333 industry (Farrell and Shapiro 1989), like the financial IS and tech- technology ecosystem evolution model is that it only focuses on 1396
1334 nology ecosystem. In addition, the m-payment market is fragment- the internal influence paths of the ecosystem. The mutual effects 1397
1335 ed in terms of its underlying infrastructural technologies, and thus of the m-payments ecosystem and the external environment are 1398
1336 is viewed as having high technological uncertainty as well (AFP simplified as external facilitators or inhibitors. In addition, our pro- 1399
1337 2014, Kim 2012). No industry observers, consultants or university posed approach is mainly for retrospective explanation and inter- 1400
1338 researchers have expressed an ability to foresee what is likely to pretation of how m-payments have evolved, but it may not be 1401
1339 happen in the future, though many have offered insightful predic- suitable for forecasting future technology evolution. 1402
1340 tions. Instead, firms mostly are experiencing a ‘‘learning-by-doing’’ M-payments services have been under development for years, 1403
1341 process. The existence of various incompatible technology though few initiatives by individual or groups of stakeholders have 1404
11 March 2015
1405 reached critical mass and market-wide adoption. Based on our According to an old saying related to telecommunications, nothing 1462
1406 competitive and regulatory analysis in the m-payments technology can really be considered as a service – unless you can charge for it. 1463
1407 ecosystem, we suggest that establishing a clear understanding of In an era where the barriers between wired and wireless applica- 1464
1408 the direction of industry competition and related regulatory poli- tions blur, and where hand-held electronic devices are becoming 1465
1409 cies can accelerate services development and facilitate successful ever more capable for sophisticated applications in spite of their 1466
1410 adoption of technology components and business infrastructure. small size, there is an increasing need for an infrastructure that will 1467
1411 Open dialogue and collaboration involving central banks, commer- be able to effectively support real-time payments for service usage. 1468
1412 cial banks and m-payments services vendors related to the mitiga- For business efforts to truly flourish in the mobile world, trusted 1469
1413 tion of risks and uncertainties are crucial for fostering a new methods for easy, inexpensive and immediate payments should 1470
1414 business model for m-payments without damaging the payments be in place. Once this is done, increasing demand for mobile busi- 1471
1415 system, as it currently operates. New competition policies are ness services will develop, and the ‘snowballing effect’ will jump- 1472
1416 needed to enable new entrants to compete with large existing start a new generation of mobile services and content far beyond 1473
1417 players. The latter may have insufficient incentive to be innovative what we know now.’’ 1474
1418 in reducing costs and improving service quality, as new entrants
1419 may have (Laffont and Tirole 2001). The main difference today – as we move to mid-2015 – is that 1475
1420 The digital convergence of e-commerce and m-commerce the industry is actually to the point where many of the capabilities 1476
1421 requires new payment methods to take advantages of mobile, have come together, making this optimistic view of the m-pay- 1477
1422 Internet, social networks and data analytics capabilities. M-payments ecosystem a realistic one. Today, the value that mobile pay- 1478
1423 ment technologies bring the capabilities of the traditional payment services can create in the economies and societies where it is 1479
1424 ments system to the online world, while supporting bricks-and- employed is nothing short of astonishing – M-Pesa in Africa, Square 1480
1425 mortar businesses in the offline world. This has been featured as in the U.S., Alipay in China, and many others. The new infrastruc- 1481
1426 offline-to-online competition.6 It provides new opportunities for tra- tural capabilities, coupled with innovative technological compo- 1482
1427 ditional businesses to compete with online businesses, and is nents and ever-expanding service capabilities, are creating value 1483
1428 enabled by the digital intermediation of third-party digital payers, that will be appropriated by the organizations that are deploying 1484
1429 such as PayPal and Alipay (Russell 2013). This competition will the technologies and systems, as well as by consumers whose pur- 1485
1430 revolutionize how people make payments in the e-commerce and chase transactions will become cheaper, faster and more secure. 1486
1431 the bricks-and-mortar world, and touch all aspects of their everyday These developments invite us to restart the effort to understand 1487
1432 lives. It has the potential to spur significant financial services inno- why people pay the way that they pay in many settings, as a basis 1488
1433 vations that will increase social welfare by transforming the brick- for understanding future demand for m-payments innovations 1489
1434 and-mortar store payment process to match the new capabilities (Borzekowski et al. 2008; Klee 2008; Xiao et al. 2015). It also will 1490
1435 for m-commerce (Bishko and Chan 2013). be helpful to gauge the extent to which future payments will be 1491
1436 Admittedly, even though IT-enabled financial innovations have composed of mobile payments, as opposed to other payments by 1492
1437 been talked about for years, the pace of technology innovation in different means, as has been studied for credit and debit cards, 1493
1438 some important niches of financial services has been slow due to and other electronic payment services in the past (Humphrey 1494
1439 various reasons. Since technology providers such as Apple, 2010, Stix 2004). The perspective we have offered – a paths of 1495
1440 Google, Alibaba and Facebook have entered the financial services influence view that considers the role of market competition, coop- 1496
1441 world, regulators may consider refining the related policies to pro- eration, and regulation – moves our understanding of m-payments 1497
1442 vide new room for innovation. Coordination of financial regulation forward in new ways that managers, investors, technology innova- 1498
1443 and competition policy may benefit the future marketplace for m- tors, consumers and regulators can all benefit from. 1499
1444 payments. It is important that the gains brought on from tech-

1445 nology innovations can be fully realized and passed to various Uncited references 1500
1446 stakeholders, which in turn will offer them incentives to further
1447 innovate. Finally, national infrastructural level and consumer Ma (2015). 1501
1448 demographic characteristics also play roles in the development
1449 process and outcome of m-payment services in the cross-industry Acknowledgments 1502
1450 technology ecosystem.
1451 In closing, we would like to tie this article back to the Electronic The authors would like to express their thanks for partial sup- 1503
1452 Commerce Research and Applications special issue on m-payments port from different sources. Jun Liu appreciates ongoing support 1504
1453 in 2008. The guest editors of that special issue (Karnouskos et al. from the Doctoral Program in Information Systems and the Living 1505
1454 2008, p. 137) offered an incisive perspective on what was to come Analytics Research Centre at Singapore Management University. 1506
1455 with the evolution of the m-payments ecosystem, by identifying Dan Ma and Rob Kauffman also are grateful for support from the 1507
1456 each of the key elements. They include the components, services School of Information Systems Research Centre. Earlier versions 1508
1457 and business infrastructures that have made technological innova- of this paper were presented at the 2013 Innovation for Financial 1509
1458 tion successful in this area. They presciently commented: Services Conference in Singapore and the 2014 Pacific Asia 1510
Conference on Information Systems in Chengdu, China. We benefit- 1511
1459 ‘‘High quality wireless applications will provide access to content ed from input on this article from Dan Geng, Jonas Hedman, 1512
1460 and ubiquitous services that can be accessed anywhere, anytime Yuzhou Hu, Jianhui Huang, Xiao Xiao and Martin Yu. We also 1513
1461 and in a much easier way than we have heretofore seen. appreciated the constructive comments of ECRA Co-Editor, Christ 1514
Westland. All errors and omissions are the sole responsibility of 1515
6 the authors. 1516
A related term, online-to-offline commerce, was coined in 2010 by TrialPay.com’s
CEO, Alex Rampell (2010), in a blog post published in TechCrunch. He wrote: ‘‘O2O . . .
finds consumers online and brings them into real-world stores. It is a combination of Appendix 1. The evolution of m-payments technology 1517
payment model and foot traffic generator for merchants (as well as a ‘discovery
mechanism for consumers) that creates offline purchases. It is inherently measurable,
since every transaction (or reservation, for things like OpenTable) happens online.’’ The
Since the 1950s and 1960s, banks have grappled with sig- 1518
O2O market has been growing rapidly in the past two years both globally (IDC 2014) nificant problems created by fast economic growth that drove an 1519
and in China (Sun 2014). increase of financial intermediation-related activities. This has 1520
11 March 2015
1521 generated high demand for processing payments and handling emergency of m-payments has been stimulated by the integration 1530
1522 other financial instruments. In the 1960s and 1970s, the automa- of advances in contactless payments, online and mobile banking, 1531
1523 tion of banking products and processes by computers and net- mobile and smart phones, mobile phone-based applications, and 1532
1524 works was just beginning, and since then, electronic payments the digital convergence of e-commerce and m-commerce 1533
1525 made through payment card networks and ACH systems have (Montgomery 2012). 1534
1526 become central to the industry’s operations. The automated pro- Since the first mobile commerce and banking initiative using 1535
1527 cessing of payments has driven several waves of innovations in SMS was launched in Finland in the late 1990s, new possibilities 1536
1528 the banking and payments sector, leading to improvements in that allow banking customers to use their mobile phones to per- 1537
1529 the efficiency and effectiveness of payments systems. The form many new financial functions have been proposed. (See 1538
Fig. A1. A visual timeline of m-payment technology evolution and the related technology innovations.
11 March 2015
1539 Fig. A1 and Table A1.) Also around that time, entrepreneurs con- Table A1
1540 nected with Stanford University-founded Fieldlink, which support- Events and reference sources for m-payments technology developments.
1541 ed the digital encryption of information on hand-held computing Year Event Source
1542 devices and the creation of Confinity (Fried 2002; Plotkin 1999). 1997 Vending machines with SMS payments introduced Montgomery
1543 These start-up technology innovation firms sought to support in Finland (2012)
1544 money transfers on devices such as Palm Pilots, which led to the Mobile phone-based banking services also rolled
1545 rise of PayPal and digital wallets (Lillington 1999, Reuters 2002). out in Finland
2001 Widespread adoption of online banking began to Xue et al.
1546 The acquisition of PayPal in 2002 further enabled eBay to perfect occur (2011)
1547 its online auction platform by supporting the digital exchange of Commercial 3G networks launched in Japan Yamada (2001)
1548 electronic payments (Kane 2002), inclusive of online merchants 2002 eBay’s acquisition of PayPal occurred Kane (2002)
1549 that were demonstrating increasing interests to participate in 2004 NFC Forum founded, and MobileLime began to offer Buckley (2006)
an NFC-based m-payments service
1550 eBay’s e-marketplace. Meanwhile, Alipay’s growth in China sky-
2005 NTT DoCoMo launched DCMX m-payments services Nita (2009)
1551 rocketed during these years, supporting consumers via Internet in Japan
1552 banking and e-commerce (Heggestuen 2014). 2006 Mobile WiMAX standard for 4G network Whitney
1553 The developments in electronic money and the first generation commercialized in Korea (2010)
1554 of Cybercash (e.g., electronic checks by Clifford Neuman’s First commercial cloud computing service offered Raghupathi
by Amazon Web Services (AWS) (2011)
1555 NetCheque, smart cards by Gemplus and Mondex in Europe, digital
2007 Apple introduced the original iPhone Honan (2007)
1556 coins by David Chaum’s DigiCash, and e-wallets by CyberCash in M-Pesa phone-based money transfer service spread Graebner
1557 U.S.) set the stage for contactless payments that are now widely out in Africa (2014)
1558 used in public transportation fare collection systems (Neuman 2008 HTC introduced the first smartphone using Android German (2011)
2009 Long Term Evolution (LTE) 4G standard first Klasson (2010)
1559 and Medvinsky 1995; Humbert et al. 1997; Levy 1994). The suc-
released in Europe
1560 cessful applications include the Octopus card system in Hong 2010 Square application to read credit cards launched on Wilhelm
1561 Kong, the EZ-Link card in Singapore, the Oyster electronic ticketing iOS and Android smartphones (2014)
1562 in London, and other innovations in the rapidly-changing payment Widespread adoption of mobile banking began to Kahn (2010)
1563 ecosystem in the Netherlands (BIS 2001). Most of them utilize the occur
2011 Google Wallet, an NFC-enabled m-payments Warren (2011)
1564 FeliCa contactless smart card from Sony in Japan, which set up the
solution, launched in the U.S.
1565 earliest de facto standard for electronic money and mobile pay- Handset vendors released more than 40 NFC- Balaban (2011)
1566 ments. Later, MasterCard’s PayPass and Visa’s PayWave global enabled smartphones
1567 innovations further standardized contactless payments in point- 2012 PayPal partnered with 15 retailers for in-store Perez (2013)
cloud-based payments
1568 of-sale (POS) networks (BusinessWire 2007, Stevens 2014). These
Apple awarded a patent for its iWallet technology Webster
1569 well-accepted contactless payments platforms have provided com- innovation (2013)
1570 patible infrastructures for mobile payments solutions using smart- Softcard brought NFC mobile payments to Austin Perez (2014)
1571 phones that have embedded RFID chips. The resulting convenience and Salt Lake City in the U.S.
1572 and benefits perceived by customers have increased the potential 2013 Mobile apps enabling money transfer, NFC m- Romann (2014)
payments and card readers became pervasive
1573 for user acceptance of m-payments.
AT&T, Vantiv partner for m-payments acceptance, Eddy (2014)
1574 Nevertheless, most of the mobile financial services offerings of and NFC platforms began rolling out
1575 the early 2000s failed to meet consumer and market expectations 2014 The People’s Bank called back virtual credit card Zhao and Xie
1576 due to their limited capability for handling data via mobile net- and QR-code payments in China (2014)
Apple released iPhone 6 that supports NFC, and use Garside and
1577 works (Montgomery 2012). Their adoption rate was lower than
Apple Pay for payments service Hern (2014)
1578 the prediction by many industry observers. By 2006 though, Apple Pay’s compliance with MasterCard, Visa and Townsend
1579 mobile phone manufacturers introduced smartphones, which American Express NFC POS terminals (2014)
1580 offered enhanced Web browsing and data transfer capabilities.
1581 Smartphones differed from traditional featured phones in their
1582 better usability, improved information security, and also their con-
1583 nected developer and mobile app ecosystems. Their capabilities role that banks play in card payments more central (Lunden 1605
1584 were further supplemented by the arrival of third-generation 2013). They enable small merchants who would otherwise be ‘‘un- 1606
1585 (3G) and fourth-generation (4G) telecom network technologies banked’’ in payments to process card payments. For example, 1607
1586 and the transaction-making capabilities of Internet banking. All Square, a payments application that supports merchant and con- 1608
1587 these have been driving the market demand for more advanced sumer transactions, serves as a virtual point-of-sale using a plug- 1609
1588 m-payments services. gable dongle for authorized merchants, offering payment 1610
1589 In 2007, the M-Pesa phone-based money transfer service start- connectivity for cards via mobile phones (Wilhelm 2014). 1611
1590 ed rolling out in Kenya and African countries (Graebner 2014).
1591 After 2011, a number of new technology solutions for m-payments
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ELERAP 601 No.

of Pages 20, Model 5G

Electronic Commerce Research and Applications xxx (2015) xxx–xxx

Contents lists available at ScienceDirect

Electronic Commerce Research and Applications

3 Competition, cooperation and regulation: Understanding the evolution

53 1. Introduction 2007). Some of them include the emergence of computer-assisted 65

E-mail addresses: jun.liu.2011@phdis.smu.edu.sg (J. Liu), rkauffman@smu.edu.sg

253 tion, new capabilities that arise from innovations in technology

Innovation levels Deﬁnitions Descriptions Examples

Fig. 1. The NFC-enabled m-payments technology platform.

Fig. 2. The Relationships among mobile payments technology innovations.

Fig. 3. M-payments technology state transition diagram, 1997–2014.

Name Pattern Deﬁnitions and comments Events

1444 payments. It is important that the gains brought on from tech-

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