Commerce in 2008: It’s not About the Instrument

In 1991, a new currency was created.  This local, time-based currency, was designed to promote local economic development and to build a sense of community.  On October 19th of that year , the first purchase was made using this currency (reportedly a samoza).  Thus, the "Ithaca Hour" was born.  Today, more than 900 participants in Ithaca, NY will accept an Hour in exchange for service or goods.  The stated exchange rate is 1 Hour is worth $10.  Much more information can be found on the website of the managing entity Ithaca HOURS, Inc.  (As an aside, many deride the Ithaca Hour as having no inherent value. . .If you feel similarly I encourage you to read about the concept of fiat currency.)

While the creation of new currency is always interesting, the story of the Ithaca Hour highlights something that is often misunderstood in the payments sector.  Let’s begin with a few definitions:

  • tender: the act of tendering; an offer of something for acceptance.
  • payment instrument: Any instrument enabling the holder/user to transfer funds.

Or, perhaps more simply, the payment instrument is what is used to present the payment tender.

Much of the press about the payments, or commerce, industry focuses on payment instruments.  Take, for example, mobile payments.  For years there has been substantial industry and press buzz around the concept of paying with a cellular device.  The majority of the companies positioned to address this capability focus on the phone as the payment instrument, and do so rightfully.  Or, consider NFC cards.  There is now MasterCard PayPass, Visa PayWave, and chasing issuing "blink" cards.  Again, an update of a payment instrument. Interestingly, the marketing and benefits of these instrumentsare typically focused on consumer simplicity and ease of payment initiation. 

However, commerce is inherently a multi-sided market.  As such, it is necessary not only to drive consumer interest but to ensure merchant acceptance. Remember the Ithaca Hour?  That tender has seen success due to the desire of both the merchant and the consumer to use a local tender.

How is this important in 2008?

We have seen the creation of new tenders in commerce over the last several years.  One wildly successful example is BillMeLater.  What is, inherently, an open-ended credit account with instant approval has seen substantive traction.  They, as a business, have done a superb job of marketing to both the consumer and the retailer.  The consumer is told the story of speed, simplicity and security.  The merchant is given firm statistics about decreasing cart abandonment and increasing average ticket price through a new payment tender.

Another example is the Revolution Card.  Although it seems like a traditional credit card, it basically a marriage of PIN-Debit and traditional credit (what I, happily, call PIN-Credit).  This tender also allows for account-to-account transfers between account holders for free.  In essence, adding a stored-value like element to the equation.  Again, they are doing an excellent job of marketing to both sides of their market.  To the consumer, the story of security, merchant rewards.  To the merchant, better marketing opportunities (merchant reward programmes rather than card reward programmes), increased security, and above all the elimination of traditional interchange fees.

Will there be advancements in commerce related to payment instruments in 2008? 
Absolutely. 

Will those advancements be as interesting as the potential for emergence of new tenders?
No.

Payment tender creation is difficult.  Creating a new tender requires more than modifying the way that a tender is used (new instrument).  However, I fully expect to see a focus in 2008 on alternative tenders not just alternative instruments.  When reading industry news, or considering innovation in your business sector, don’t focus solely on the story of new workflows. . .focus on those who have potential to change the way that commerce works.

What’s your perspective? Agree? Disagree? Anything to add? Critiques?
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January 4, 2008

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