Discounting Inertia

Below is the ‘Tip of the Week’ from Ep88: Fintech Investing, Part 2 (Sheel Mohnot)

In today’s interview, we spent some time discussing payments and the lack of innovation therein.  The most common medium used in payments is the credit card, which is technology that was developed in the 1960’s.  This antiquated technology is fairly efficient, but also easily stolen.  Sheel cited the ease in which the magnetic strip on credit cards can be copied.  And, of course, one can always write down the information on the front and back of a card and immediately have a way to use a card illegally.
 
And, outside of credit, transactions are still dominated by fiat money; a form of currency developed in 11th century China.  In 2016, the United States Treasury is projected to spend over $730M just producing paper & coin currency .  And this number does not capture the amount of value that’s lost due to counterfeiting.  Clearly there has been a major lack of progress in the currency and payment transaction sectors, which only results in lost value.  Printing money and fighting counterfeiting provides no net benefit to anyone.
 
So, the key question here is “Why such a lack of progress?”  Is innovation to blame?  I don’t think so.  Many alternatives to credit cards have been developed over the past 30 years that, in principle, are superior to plastic.  And, even replacements for the fiat money system have emerged that are tremendously more efficient, less susceptible to piracy and cost very little to maintain; namely the development of crypto-currencies like bitcoin.  So, if options exist then why the lack of adoption?  I think the explanation is inertia ie. resistance to change.
 
There are many industries that experience significant inertia.  And the degree of inertia is impacted by:
-the types of stakeholders,
-the number of stakeholders,
-the ideology of stakeholders,
-the range of decision makers within each,
-whether one is dealing with the enterprise or consumers,
-the amount of infrastructure that exists,
-the switching costs, 
-regulatory and government influence,
-and many other factors.
 
In the example that Sheel and I talked about today, one must consider the credit card companies, the retailer, the payment processor, the point-of-sale hardware manufacturers and, of course, the consumer.  In a two-sided marketplace with many intermediaries, is there

a hugely compelling reason for players on each side of the transaction to change?  Does new technology exist that allows for a better method?  Can extraneous layers in the value-chain be disintermediated?

Often with new technologies, we hear about the “killer app,” referring to the application of a technology in a way that provides huge value for that specific task.  And finding this killer app is often a gateway which allows a technology to expand to many more applications and use-cases.  In a way, the killer app can function as a trojan horse, laying the foundation for broader market applications.

As I think about the credit card example, the two major stakeholders in any transaction are the purchaser and the seller. And the purchaser’s most significant needs include efficiency of use (ie. how fast can I complete a payment?) and security (ie. how well is my information protected?).  And the seller’s most significant need is reducing fees (ie. how can the cost per transaction be lowered?).  If a payment application exists where speed and security are particularly painful for the consumer and transaction cost is particularly high for the seller, the right ingredients are there for a killer app.  And, if buyers and sellers get comfortable with the new technology, in applications such as these, it will begin to expand to other applications.  Look at a company like Paypal, that was able to find it’s killer app by providing a payment mechanism to ebay users, eliminating the significant pain of the check-by-mail standard.  After completing a transaction via ebay, many consumers & sellers became comfortable enough with Paypal to use it for a variety of transactions.
 
Look, resistance to change can be tough.  And a startup founder may not have all the answers to how they’ll deal with inertia.   But understanding its sources is critical.  While we can imagine a future of ubiquitous flying cars, cryptocurrency and human-intelligent AI; technology is not all that’s required to attain these realities.  So, rather than discount inertia, respect it; and look for that killer app, trojan horse, or foothold that best exemplifies the value of making the switch.
 

 
   

   

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Andrew Bogle

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