e Money and e Commerce
Content
SPECIAL ISSUE
THE FEDERAL RESERVE BANK OF CHICAGO
MARCH 2001 NUMBER 163a
Chicago Fed Letter E-money and e-commerc erce: e: Two alter alterna nati tive ve views of future innovati tions ons Some in the b anking industry have wrung their hands over the slow adoption of deb it card s, e-cash, electro nic bill payment, financial electronic data interchange (FEDI), and smart cards in the U .S. Whether Whether o r not t hese ininnovations grow swiftly, this subject is important for several reasons. First, payment services bring in significant revenues for financial institutions, and changes in technology could impact future revenues. revenues. Second, a co rnerston e of p olicy on issues of safety, sound ness ness,, an d co nsumer protection is the a ss ssumption umption th at a si significant gnificant portion of financial services activity flows through “trusted” financial institutions. As a result, it is important for policymakers, the industry, and the public to understand the broad implications of technology for the payments mechanism and banking. Ho w will will the the future path of electronic payment systems be determined? One school of thought argues that a number of obstacles and barriers stand in the way of e-payment e-payment in novations and th at these will will need to be ad dressed before e-payment e-payment tech no logies can be successful successful.. O ther studies have suggested an alternative theory— that th e advent of the Intern et will will cause revolutionar revolutionar y changes in b anking and commerc commercee requiring requiring funda men tally new payment sy systems stems to evolve. 1 A Att the root o f this debate are several sev eral q uestions. Why Why do some inn ovations succeed succeed a nd others fail? How do t hese cha nge s occur ? Are e-mo e-mo ney innovations and the supporting law and technology infrastructure driven driven by planning for future needs or by focusing focusi ng mo re nar rowly on pa st problems? Will the innovations be spurred
by current institutions institutions or b y nontraditional prov providers iders??
hicago cago Fe Fed d Le Lette tter r , I provide an In th is Chi overview of d evel evelopm opm ents in e-mo e-mo ney syste sy stems ms and commerce. I then explore research research on the econo mics of innovation to put th es esee chan ges in in a broad er context. La st stly ly,, I ana ly lyze ze the potential implications of chan ges in in banking and commerce for the evolution of e-mon e-mon ey ey.. In the process, I build on a theory advanced by Clayton Clayton Christianson that aims to explain and predict how different product innovations do o r do not o ccur ccur.. 2 The changing nature of comm commerce The n ature of commerce will contincontinue to chan ge with with the growing fam iliarity of th e Intern et and the World World Wide Web. U se of th e World World Wide Web is on tra ck to reach a critical ma ss of U.S. households many times more quickly than the telephone did when it was introduced into American households.. The holds The G artner G roup pred icts that over $7 trillion worth of businessto-business tobusiness (B 2B) co mmerc e will be conducted electronically in 2004 and over $380 billion of business-to-consumer (B2C) comm erce will will be conducted electronically in 2003. 3 While the la st five five years have seen seen f irms experiment with the Intern et to ad vertise the availability of products and to o ffer services services for sale in a tra nsaction capacity, more fundamental chan ges in commerce ha ve begun to emerge. Consider Ebay, which allows consumers to trade with con sumers without a direct intermediary, creating a fund amenta lly new market of buyers and sellers who would otherwise have been unlikely to find one another.. Yet, er Yet, while pro viding impor tan t benefits, this new commercial environment also exposes consumers to risks risks that they may not be accustomed to
man aging, suc such h a s finality finality of payments and recours recoursee in case of untimely delivery or po or q uality uality.. Similarly, Similarly, emerging In ternetternet-based based B2B portals may offer si significant gnificant improv improvements ements to market participants, but again may potentially expos exposee them to important risks, relating to seller performance, buyer financial stability, and dispute resolution.
Changing nature of payment systems As one would expect, payment systems have been evolv evolving ing to m eet the cha nging needs of buyers and sellers. New payment instruments are being created to expand the reach of the payments infrastructure that has been in place for d ecades; current sy systems stems are bein g reengineered at the fringe; and fundamentally new payment systems are being developed as well. For instance, st ance, while the d ev evelopment elopment of new e-cash ecash techn ologies contin ues to be explored, expl ored, P ayPal, an In ternet payment mechanism, puts a “new front end” on existing credit card and ACH (automated clearing house) networks to make them more convenient for consumers and to allow con sumers to send money to each other. Paper checks are being con verted to electronic transactions and cleared via via th e ACH ACH and ATM (autom ated teller machine) networks by some some retailers as a d ev evice ice to red uce check-clearing check-clearing co sts an d to begin to wean some consumers from checks. Some organizations are also exploring the use of AT ATM networ ks and the ACH ACH for Internet transactions transactions in order to of fer a lower cost cost alternative to credit cards. Some retailers ha ve also implemen ted storestore-based based debit cards that are cleared an d settled over the ACH rather than ATM networks, again to reduce costs while broad ening th e store’s relationship with its customers.
That organ izations are using “ different pa yment networks” for “ similar” commercial purposes and the “same payment networks” for “very different” commercial reasons is not a n ew phenomenon. For instance, for decades some organ izations have used checks for payments of hundreds of thousands of dollars rather than using large-do llar, real-time fu nd s tran sfer systems. Other organizations have trad itiona lly used large-do llar, realtime funds transfer systems to make fairly mod est-sized payment s. Some of these events are motivated by the fact that it is easier to pay using “preset mechanisms” tha n to change to a new system for infrequent transactions. At other times, decisions are driven b y a payment instrument’s “special features.” For example, a firm m ight use checks for lar ge-do llar payments to slow down th e process for exchanging funds or to improve its negotiating leverag e with a supplier. On oth er occasions, a firm might use large-dollar pa yments mech an isms to guarantee timely payment. Thus, a significant amoun t of pressure is exerted on payment systems as various parties attempt to push innovations with certain chara cteristics or to leverage other instruments for their relative strengths.
Payment innovations Ho w does the process of inn ovation occur? There a re two genera l, complementary theories of how new products are adop ted. The first theor y, the new product diffusion model, assumes that the primary determinant of new product a doption is the time it takes customers to learn about a product, to experiment with it, an d th en ultimat ely to use it. This theo r y assumes that customers view a new product or service as a clear substitute for past products. These types of innovations essentially “sustain” or “extend” the current pro duct (see figure 1). Christianson n otes that new entrants in this market will tend to find it harder to enter successfully against incumbent com petitors, who can ro ll out inn ovations profitably to their existing customer bases.
The second theor y suggests that bro ader Disruptive technology (new market) structural changes are under way, d riven by r e Sustaining technology m technology, an d th ese o (diffusion) t s changes are blurring u c Evolution without the lines between bank o t innovation e ing and commerce. u l a v While it is both natural and critical for incumbent firm s to experiment, this theory time suggests that these innovations tend to unleash improvements The second theory, the new market that incumbents may not find valuable development model, suggests that some in the short- or mid-term. Some obinnovations—disruptive technoloservers may suggest that incumbent gies—lead to new products or services firms in these industries “d o no t unthat by themselves have a limited ma r- derstand their markets” or “are not ket potential (see figure 1). This theadeq uately investing in the future.” or y suggests that, in order to reach However, Christianson finds that inmass markets, firms need to offer a dcumbent firms, for purely profit maxiditional product features and/or inmizing reasons, may not want to cho ose frastructure, tailoring the pro duct to pioneer some of these innovations to new uses and to nontraditional themselves, leaving other firms with customers. In many of these cases, different specialties to do so. Christianson suggests that “ new” or “nontraditional” providers tend to Blurringlines of banking have an ad vanta ge over incumbent and commerce firms since they have the freedo m to focus on fringe benefits rather than Figure 2 provides an overview of th e focusing o n m ass market needs.4 historical chan ges underway in the financial services industry. Looking back 20 years, ban ks competed primaWhy haven’t e-payments succeeded? rily on the basis of geography. With the advent of deregulation and techBuilding on new product diffusion nology, significant cha nges occurred theor y, some studies cite a laund ry in t he 1980s and 1990s with the emerlist of b arriers stand ing in the way of gence of mor e prod uct-based institue-payment inno vations. On the d etions. It is not clear h ow the industry mand side, studies have cited customer structure will progress in the 21st resistance or inertia, la ck of incent ives, century, but future models of financial and lack of customer awareness of the services might include: 1) a universal innovation as obstacles to change. On bank that bundles a broad range of the supply side, studies have pointed financial products and services under to the lack of clear standards, the need one roof for a b road ran ge of customto overcome industry fragmentation, ers, 5 2) an institution tha t focuses on inadequate incentives among incumthe broad financial and nonfinancial bents, and th e presence of network needs of a narrow segment of the externalities. This theory assumes market, 6 3) a “virtual portal’ or “ aggreimplicitly that a significant portion of gator” that uses technology to intee-payment in novation s are clear subgrate financial services from a variety stitutes for existing services and that of specialized providers, 7 or 4) a traadd itional work by incumben t firms ditional, fina ncial institution, which alone or in collabora tion will lead to focuses on a limited number of finanbroad acceptance. cial products.
1. Newproduct innovation models
suggests that n onb anks will not necessarily replace th e function s of ban ks but rather provide parts of services that financial institutions do not have a compa rative ad vanta ge in providing. 11 Second, much of consumer protection po licy is based aro und bundling protections around a few fairly common ban king prod ucts. To the degree that commerce and ba nking continue to mingle, public authorities may need to be particularly careful about a ttempting to regulate the relative rights, warran ties, an d incentives associated with altern ative e-mo ney implementations, leaving markets to influence the outcom es. 12
1
A critical issue running through both of these theories relates to the pr oblems associated with implementing products with network externalities. For instance, see G. Gowrisankaran and J. Stavins, 1999, “Are there network externalities in electronic payments?,” Global Financial Crises: I m plications for Banking and Regulation, proceedings from the 35th Conference on Bank Structure and Competition, Chicago: Federal Reserve Bank of Chicago, pp. 302–312. Clayton Christianson, 1997, The I nnovator’s Dilemma: When New Technologi es Cause Great Firms to Fail, Boston, MA: Harvard Business School Press. 2
3
Leah Knight, 2000, “Triggering th e B2B electronic commerce explosion,” Trends and Directions Note, Stamford, CT: Gartner Group; and Blaine Mathieu, 1999, “G lobal con sumer e-commerce forecast update,” Tr ends and Directions Note, Stamford, CT: Ga rtner Group.
—Brian Mantel
For a broa der discussion, see Peter Wallison, 2000, “The G ram m-Lea ch-Bliley Act elimina ted the separation of banking and commerce,” The
Changing Financial I ndustry Structure and Regulation: Bri dging States, Countri es, and I ndustri es, proceedings from Con ference on Ban k Structure and Competition, Chicago: Federal Reserve Bank of C hicago, p p. 34–41. 7
For instance, see Ross Snel, 1999, “In tuit offers view of accounts with more th an o ne pro vider,” American Banker , Vol. 164, No. 220, Novemb er 1. 8
For instance, see Steve Ollenberg, 1999, proceedings from the Federal Reserve Ban k of Chicago an d Illinois Institute of Techn ology’s Electronic Pa yments Workshop, Ch icago, IL, Septemb er. 9
For instance, see “ Impose th ose fees—And stick to your guns,” American Banker, Vol. 165, No. 65, April 4, 2000. 10
4
It should be no ted tha t the ab ove types of q uestions are not new. Ind eed, banking and commercial markets have been f acin g th ese types of issues for years. The above points are observations advanced as a theor y for how e-mo ne y systems m ay evolve. C lear ly, these are not resolved q uestions; rath er they are questions warranting careful monitoring. More importantly, the policy implications for private sector and public sector leaders may be quite different depending on one’s view of h ow the ma rket is evolving. 13
6
An important segment of the “new market developmen t” th eor y, as I define it, is for those innovations 1) with positive n etwork externa lities and 2) with users who make significant and irreversible investments leadin g to an installed base. This installed b ase, coupled with th e presence of switching costs, leads to significant ch allenges for n ew innovations to prosper. As a result, I argue that some innovations, which might appear to be natural extensions of current products (such as smart cards for credit cards), actually fall into the “new market development” category. For more o n th is subject, see Michael L. Katz an d Carl Sh apiro, 1993, “Network extern alities, competition, and compatibility,” Princeton University, Wood row Wilson Scho ol, discussion pap er in econom ics, No. 54, September. 5
For instance, see Liz Moyer, 1999, “Citigroup’s strategy: Multiple prod ucts, multiple cha nn els,” American Banker , Vol. 164, No. 191, Octo ber 5.
For instance, see C atherin e Allen, 1999, “ Remarks,” proceedings from the Federal Reserve Ban k of Chicago an d Illinois Institute of Technolog y’s Electronic Pa yments Workshop, Ch icago, IL, September. 11
For instance, see “Banks giving aggregators respect, biz,” American Banker , Vol. 165, No. 157, August 16, 2000. 12
For instance, see Hen ry H ., Per ritt Jr., 1999, “Remarks” in pro ceedings from th e Workshop on Promoting the Use of Electronic Payments: Assessing the Business, Leg al, a nd Techno logical Infrastructures, Chicago, IL, September. 13
The author would like to recognize the participants at Electronic Commerce Can ada’s Con ference “ The E-Busine ss Tran sform ation : Wher e to Go?” for their helpful comments on an early version of th is article.
Program Manager Emerging P ayments Studies Department
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THE FEDERAL RESERVE BANK OF CHICAGO
MARCH 2001 NUMBER 163a
Chicago Fed Letter E-money and e-commerc erce: e: Two alter alterna nati tive ve views of future innovati tions ons Some in the b anking industry have wrung their hands over the slow adoption of deb it card s, e-cash, electro nic bill payment, financial electronic data interchange (FEDI), and smart cards in the U .S. Whether Whether o r not t hese ininnovations grow swiftly, this subject is important for several reasons. First, payment services bring in significant revenues for financial institutions, and changes in technology could impact future revenues. revenues. Second, a co rnerston e of p olicy on issues of safety, sound ness ness,, an d co nsumer protection is the a ss ssumption umption th at a si significant gnificant portion of financial services activity flows through “trusted” financial institutions. As a result, it is important for policymakers, the industry, and the public to understand the broad implications of technology for the payments mechanism and banking. Ho w will will the the future path of electronic payment systems be determined? One school of thought argues that a number of obstacles and barriers stand in the way of e-payment e-payment in novations and th at these will will need to be ad dressed before e-payment e-payment tech no logies can be successful successful.. O ther studies have suggested an alternative theory— that th e advent of the Intern et will will cause revolutionar revolutionar y changes in b anking and commerc commercee requiring requiring funda men tally new payment sy systems stems to evolve. 1 A Att the root o f this debate are several sev eral q uestions. Why Why do some inn ovations succeed succeed a nd others fail? How do t hese cha nge s occur ? Are e-mo e-mo ney innovations and the supporting law and technology infrastructure driven driven by planning for future needs or by focusing focusi ng mo re nar rowly on pa st problems? Will the innovations be spurred
by current institutions institutions or b y nontraditional prov providers iders??
hicago cago Fe Fed d Le Lette tter r , I provide an In th is Chi overview of d evel evelopm opm ents in e-mo e-mo ney syste sy stems ms and commerce. I then explore research research on the econo mics of innovation to put th es esee chan ges in in a broad er context. La st stly ly,, I ana ly lyze ze the potential implications of chan ges in in banking and commerce for the evolution of e-mon e-mon ey ey.. In the process, I build on a theory advanced by Clayton Clayton Christianson that aims to explain and predict how different product innovations do o r do not o ccur ccur.. 2 The changing nature of comm commerce The n ature of commerce will contincontinue to chan ge with with the growing fam iliarity of th e Intern et and the World World Wide Web. U se of th e World World Wide Web is on tra ck to reach a critical ma ss of U.S. households many times more quickly than the telephone did when it was introduced into American households.. The holds The G artner G roup pred icts that over $7 trillion worth of businessto-business tobusiness (B 2B) co mmerc e will be conducted electronically in 2004 and over $380 billion of business-to-consumer (B2C) comm erce will will be conducted electronically in 2003. 3 While the la st five five years have seen seen f irms experiment with the Intern et to ad vertise the availability of products and to o ffer services services for sale in a tra nsaction capacity, more fundamental chan ges in commerce ha ve begun to emerge. Consider Ebay, which allows consumers to trade with con sumers without a direct intermediary, creating a fund amenta lly new market of buyers and sellers who would otherwise have been unlikely to find one another.. Yet, er Yet, while pro viding impor tan t benefits, this new commercial environment also exposes consumers to risks risks that they may not be accustomed to
man aging, suc such h a s finality finality of payments and recours recoursee in case of untimely delivery or po or q uality uality.. Similarly, Similarly, emerging In ternetternet-based based B2B portals may offer si significant gnificant improv improvements ements to market participants, but again may potentially expos exposee them to important risks, relating to seller performance, buyer financial stability, and dispute resolution.
Changing nature of payment systems As one would expect, payment systems have been evolv evolving ing to m eet the cha nging needs of buyers and sellers. New payment instruments are being created to expand the reach of the payments infrastructure that has been in place for d ecades; current sy systems stems are bein g reengineered at the fringe; and fundamentally new payment systems are being developed as well. For instance, st ance, while the d ev evelopment elopment of new e-cash ecash techn ologies contin ues to be explored, expl ored, P ayPal, an In ternet payment mechanism, puts a “new front end” on existing credit card and ACH (automated clearing house) networks to make them more convenient for consumers and to allow con sumers to send money to each other. Paper checks are being con verted to electronic transactions and cleared via via th e ACH ACH and ATM (autom ated teller machine) networks by some some retailers as a d ev evice ice to red uce check-clearing check-clearing co sts an d to begin to wean some consumers from checks. Some organizations are also exploring the use of AT ATM networ ks and the ACH ACH for Internet transactions transactions in order to of fer a lower cost cost alternative to credit cards. Some retailers ha ve also implemen ted storestore-based based debit cards that are cleared an d settled over the ACH rather than ATM networks, again to reduce costs while broad ening th e store’s relationship with its customers.
That organ izations are using “ different pa yment networks” for “ similar” commercial purposes and the “same payment networks” for “very different” commercial reasons is not a n ew phenomenon. For instance, for decades some organ izations have used checks for payments of hundreds of thousands of dollars rather than using large-do llar, real-time fu nd s tran sfer systems. Other organizations have trad itiona lly used large-do llar, realtime funds transfer systems to make fairly mod est-sized payment s. Some of these events are motivated by the fact that it is easier to pay using “preset mechanisms” tha n to change to a new system for infrequent transactions. At other times, decisions are driven b y a payment instrument’s “special features.” For example, a firm m ight use checks for lar ge-do llar payments to slow down th e process for exchanging funds or to improve its negotiating leverag e with a supplier. On oth er occasions, a firm might use large-dollar pa yments mech an isms to guarantee timely payment. Thus, a significant amoun t of pressure is exerted on payment systems as various parties attempt to push innovations with certain chara cteristics or to leverage other instruments for their relative strengths.
Payment innovations Ho w does the process of inn ovation occur? There a re two genera l, complementary theories of how new products are adop ted. The first theor y, the new product diffusion model, assumes that the primary determinant of new product a doption is the time it takes customers to learn about a product, to experiment with it, an d th en ultimat ely to use it. This theo r y assumes that customers view a new product or service as a clear substitute for past products. These types of innovations essentially “sustain” or “extend” the current pro duct (see figure 1). Christianson n otes that new entrants in this market will tend to find it harder to enter successfully against incumbent com petitors, who can ro ll out inn ovations profitably to their existing customer bases.
The second theor y suggests that bro ader Disruptive technology (new market) structural changes are under way, d riven by r e Sustaining technology m technology, an d th ese o (diffusion) t s changes are blurring u c Evolution without the lines between bank o t innovation e ing and commerce. u l a v While it is both natural and critical for incumbent firm s to experiment, this theory time suggests that these innovations tend to unleash improvements The second theory, the new market that incumbents may not find valuable development model, suggests that some in the short- or mid-term. Some obinnovations—disruptive technoloservers may suggest that incumbent gies—lead to new products or services firms in these industries “d o no t unthat by themselves have a limited ma r- derstand their markets” or “are not ket potential (see figure 1). This theadeq uately investing in the future.” or y suggests that, in order to reach However, Christianson finds that inmass markets, firms need to offer a dcumbent firms, for purely profit maxiditional product features and/or inmizing reasons, may not want to cho ose frastructure, tailoring the pro duct to pioneer some of these innovations to new uses and to nontraditional themselves, leaving other firms with customers. In many of these cases, different specialties to do so. Christianson suggests that “ new” or “nontraditional” providers tend to Blurringlines of banking have an ad vanta ge over incumbent and commerce firms since they have the freedo m to focus on fringe benefits rather than Figure 2 provides an overview of th e focusing o n m ass market needs.4 historical chan ges underway in the financial services industry. Looking back 20 years, ban ks competed primaWhy haven’t e-payments succeeded? rily on the basis of geography. With the advent of deregulation and techBuilding on new product diffusion nology, significant cha nges occurred theor y, some studies cite a laund ry in t he 1980s and 1990s with the emerlist of b arriers stand ing in the way of gence of mor e prod uct-based institue-payment inno vations. On the d etions. It is not clear h ow the industry mand side, studies have cited customer structure will progress in the 21st resistance or inertia, la ck of incent ives, century, but future models of financial and lack of customer awareness of the services might include: 1) a universal innovation as obstacles to change. On bank that bundles a broad range of the supply side, studies have pointed financial products and services under to the lack of clear standards, the need one roof for a b road ran ge of customto overcome industry fragmentation, ers, 5 2) an institution tha t focuses on inadequate incentives among incumthe broad financial and nonfinancial bents, and th e presence of network needs of a narrow segment of the externalities. This theory assumes market, 6 3) a “virtual portal’ or “ aggreimplicitly that a significant portion of gator” that uses technology to intee-payment in novation s are clear subgrate financial services from a variety stitutes for existing services and that of specialized providers, 7 or 4) a traadd itional work by incumben t firms ditional, fina ncial institution, which alone or in collabora tion will lead to focuses on a limited number of finanbroad acceptance. cial products.
1. Newproduct innovation models
suggests that n onb anks will not necessarily replace th e function s of ban ks but rather provide parts of services that financial institutions do not have a compa rative ad vanta ge in providing. 11 Second, much of consumer protection po licy is based aro und bundling protections around a few fairly common ban king prod ucts. To the degree that commerce and ba nking continue to mingle, public authorities may need to be particularly careful about a ttempting to regulate the relative rights, warran ties, an d incentives associated with altern ative e-mo ney implementations, leaving markets to influence the outcom es. 12
1
A critical issue running through both of these theories relates to the pr oblems associated with implementing products with network externalities. For instance, see G. Gowrisankaran and J. Stavins, 1999, “Are there network externalities in electronic payments?,” Global Financial Crises: I m plications for Banking and Regulation, proceedings from the 35th Conference on Bank Structure and Competition, Chicago: Federal Reserve Bank of Chicago, pp. 302–312. Clayton Christianson, 1997, The I nnovator’s Dilemma: When New Technologi es Cause Great Firms to Fail, Boston, MA: Harvard Business School Press. 2
3
Leah Knight, 2000, “Triggering th e B2B electronic commerce explosion,” Trends and Directions Note, Stamford, CT: Gartner Group; and Blaine Mathieu, 1999, “G lobal con sumer e-commerce forecast update,” Tr ends and Directions Note, Stamford, CT: Ga rtner Group.
—Brian Mantel
For a broa der discussion, see Peter Wallison, 2000, “The G ram m-Lea ch-Bliley Act elimina ted the separation of banking and commerce,” The
Changing Financial I ndustry Structure and Regulation: Bri dging States, Countri es, and I ndustri es, proceedings from Con ference on Ban k Structure and Competition, Chicago: Federal Reserve Bank of C hicago, p p. 34–41. 7
For instance, see Ross Snel, 1999, “In tuit offers view of accounts with more th an o ne pro vider,” American Banker , Vol. 164, No. 220, Novemb er 1. 8
For instance, see Steve Ollenberg, 1999, proceedings from the Federal Reserve Ban k of Chicago an d Illinois Institute of Techn ology’s Electronic Pa yments Workshop, Ch icago, IL, Septemb er. 9
For instance, see “ Impose th ose fees—And stick to your guns,” American Banker, Vol. 165, No. 65, April 4, 2000. 10
4
It should be no ted tha t the ab ove types of q uestions are not new. Ind eed, banking and commercial markets have been f acin g th ese types of issues for years. The above points are observations advanced as a theor y for how e-mo ne y systems m ay evolve. C lear ly, these are not resolved q uestions; rath er they are questions warranting careful monitoring. More importantly, the policy implications for private sector and public sector leaders may be quite different depending on one’s view of h ow the ma rket is evolving. 13
6
An important segment of the “new market developmen t” th eor y, as I define it, is for those innovations 1) with positive n etwork externa lities and 2) with users who make significant and irreversible investments leadin g to an installed base. This installed b ase, coupled with th e presence of switching costs, leads to significant ch allenges for n ew innovations to prosper. As a result, I argue that some innovations, which might appear to be natural extensions of current products (such as smart cards for credit cards), actually fall into the “new market development” category. For more o n th is subject, see Michael L. Katz an d Carl Sh apiro, 1993, “Network extern alities, competition, and compatibility,” Princeton University, Wood row Wilson Scho ol, discussion pap er in econom ics, No. 54, September. 5
For instance, see Liz Moyer, 1999, “Citigroup’s strategy: Multiple prod ucts, multiple cha nn els,” American Banker , Vol. 164, No. 191, Octo ber 5.
For instance, see C atherin e Allen, 1999, “ Remarks,” proceedings from the Federal Reserve Ban k of Chicago an d Illinois Institute of Technolog y’s Electronic Pa yments Workshop, Ch icago, IL, September. 11
For instance, see “Banks giving aggregators respect, biz,” American Banker , Vol. 165, No. 157, August 16, 2000. 12
For instance, see Hen ry H ., Per ritt Jr., 1999, “Remarks” in pro ceedings from th e Workshop on Promoting the Use of Electronic Payments: Assessing the Business, Leg al, a nd Techno logical Infrastructures, Chicago, IL, September. 13
The author would like to recognize the participants at Electronic Commerce Can ada’s Con ference “ The E-Busine ss Tran sform ation : Wher e to Go?” for their helpful comments on an early version of th is article.
Program Manager Emerging P ayments Studies Department
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