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Occasional Papers, No. 1B, 2003
Why Invest in Payment Innovations?

In this paper, we provide a framework to study the creation and adoption of innovations by payment providers and processors. We identify several motivating factors for banks and nonbanks to invest in payment innovations. In addition, we discuss the evolutionary process of payment innovations from inception to commoditization recognizing that innovations differ in the time necessary to evolve from proprietary technology to commoditization and some may never evolve completely. Finally, we consider a snapshot of payment innovations at different stages of development. We compare proprietary versus nonproprietary innovations and their profitability. Our main conclusions are the following. Payment innovators are more likely to be successful when they target niche markets. Banks often use innovations to add value to a bundled product offering. Payment networks and processors leverage their connectivity when creating or adopting innovations.



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