Disruptive innovation in the Swedish payment market: A supply-side perspective

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Disruptive innovation in the Swedish

payment market: A supply-side





Master of Science Thesis Stockholm, Sweden 2013  



Disruptive innovation in the Swedish

payment market: A supply-side perspective

Patrik Tidebrant

Master of Science Thesis INDEK 2013:18 KTH Industrial Engineering and Management


Master of Science Thesis INDEK 2013:18 Disruptive innovation in the Swedish payment

market: A supply-side perspective

Patrik Tidebrant Approved 2013-04-03 Examiner Staffan Laestadius Supervisor Niklas Arvidsson Abstract

For  the  last  decades  there  has  been  a  steady  shift  from  cash  to  card  payments  and  with   increased   smart   phone   penetration,   payments   have   started   to   move   into   our   mobile   devices.  This  thesis  studies  how  mobile  payments  can  change  the  traditional  payment   landscape.  The  purpose  is  to  assess  the  disruptiveness  of  the  Swedish  mobile  payment   market   and   describe   key   stakeholder   strategies   for   managing   a   potentially   disruptive   change.  

The  study  has  been  designed  as  a  combination  of  a  theoretical  and  an  empirical  study   where  the  theoretical  part  consisted  of  a  literature  review  that  hinted  on  a  gap  in  terms   of   available   literature   on   the   disruptiveness   of   different   mobile   payment   business   models.   Main   theoretical   concepts   used   are;   disruptive   innovation,   business   model   innovation,  and  theories  on  competing  solutions  and  dominant  design.  The  subsequent   empirical   study   consisted   of   a   number   of   qualitative,   in-­‐depth   interviews   with   key   stakeholder  from  the  Swedish  mobile  payment  industry:  five  mobile  payment  providers,   one  major  merchant,  and  the  Swedish  Trade  Federation.    

This  thesis  shows  that  two  fundamentally  different  types  of  mobile  C2B  payments  are   emerging;   mobile   payment   solutions   based   on   existing   card   payment   schemes   and   mobile   payment   solutions   that   build   on   new   and   independent   payment   schemes.   The   independent  model  has  been  defined  as  the  most  powerful  disruptive  force  in  relation   to   the   existing   market   for   card   payments,   mainly   because   it   offers   opportunities   for   innovative  players  to  build  simple  new  payment  schemes  that  bypass  traditional  card   payment   players   and   therefore   can   be   made   far   more   cost-­‐efficient.   However,   many   established  card  payment  players  are  inhibiting  this  development  since  they  are  afraid   it  could  seriously  harm  their  existing  card  business.    



1   INTRODUCTION  ...  1   1.1   BACKGROUND  ...  1   1.2   PROBLEM  ...  2   1.3   PURPOSE  ...  2   1.4   RESEARCH  QUESTIONS  ...  2  


1.6   THESIS  OUTLINE  ...  3  

2   METHODOLOGY  ...  4  

2.1   APPROACH  AND  METHODS  ...  4  



3.1   THEORY  ...  10  


3.3   GAP  ANALYSIS  ...  22  


4.1   GENERAL  DEVELOPMENTS  ...  23  

4.2   MAIN  STAKEHOLDER  GROUPS  ...  23  



5   EMPIRICS  ...  32  

5.1   A  CHANGING  PAYMENT  MARKET  ...  32  

5.2   ROLES  IN  THE  ECOSYSTEM  ...  35  



5.5   MANAGING  INNOVATION  ...  48  


6   DISCUSSION  ...  53  

6.1   DISRUPTION  ANALYSIS  ...  53  



7   CONCLUSION  ...  60  

7.1   FUTURE  RESEARCH  ...  62  

7   BIBLIOGRAPHY  ...  63  






List  of  figures  

Figure  1:  General  interview  framework  ...  6  

Figure  2:  Performance  impact  of  sustaining  versus  disruptive  innovations  ...  12  

Figure  3:  Design  hierarchies  and  dominant  design  ...  17  

Figure  4:  Major  stakeholders  in  the  mobile  payment  ecosystem  ...  24  

Figure  5:  SEQR  Consumer-­‐to-­‐Business  (C2B)  ...  26  

Figure  6:  Payair  Consumer-­‐to-­‐Business  (C2B)  ...  27  

Figure  7:  Bart  Consumer-­‐to-­‐Business  (C2B)  ...  28  

Figure  8:  Swish  Consumer-­‐to-­‐Consumer  (C2C)  ...  28  

Figure  9:  WyWallet  -­‐  Three  ways  to  top  up  ...  29  

Figure  10:  WyWallet  POS  Consumer-­‐to-­‐Business  (C2B)  ...  30  

Figure  11:  The  Swedish  cash  distribution  system  ...  33  

Figure  12:  Payment  market  scenarios  ...  53  

Figure  13:  C2B  mobile  payment  provider  classification  matrix  ...  55  

Figure  14:  The  independent  mobile  payment  model  ...  58  

List  of  tables


Table  1:  Nine  business  model  components  ...  13    


List  of  abbreviations  

FMCG   Fast-­‐moving  consumer  goods  

C2C   Consumer-­‐to-­‐consumer  

C2B   Consumer-­‐to-­‐business   POS   Point-­‐of-­‐Sale  

EMV   Card  payment  standard  (Europay,  MasterCard  and  Visa)    



First  of  all,  I  would  like  to  thank  my  supervisor  Associate  Professor  Niklas  Arvidsson  for   continuous  support  and  helpful  guidance  throughout  the  research  process.    

Besides   my   supervisor,   I   would   also   like   to   thank   the   rest   of   the   advisors   from   the   Industrial   Dynamics   Masters   Seminar   Group,   Staffan   Laestadius,   Cali   Nuur,   and   Pär   Blomkvist  for  constructive  feedback  during  the  seminar  sessions.  

Finally,   I   would   like   to   thank   my   fellow   INDEK   student   Peter   Ahlström   for   many   productive  discussions  and  cheering  comments.  


Patrik  Tidebrant  


1 Introduction  

This   chapter   aims   to   introduce   the   reader   to   the   thesis.   It   starts   with   a   general   background   and   a   presentation   of   the   problem,   followed   by   the   specific   purpose,   formulated  research  questions,  and  a  section  on  definitions  and  delimitations.  The  chapter   ends  with  a  thesis  outline  to  help  guide  the  reader  through  the  rest  of  this  thesis.    

1.1 Background  

A  shift  from  traditional  cash-­‐  and  card  payments  to  new  mobile  payments  is  currently   re-­‐shaping  the  global  payment  industry  (Ding  &  Hampe,  2003).  The  electronic  payment   market  has  historically  been  dominated  by  banks  and  global  payment  scheme  owners   (e.g.  VISA  and  MasterCard).  With  the  mobile  revolution  however,  new  stakeholders  such   as  telecom  companies,  retailers  and  start-­‐ups  are  entering  the  market  –  determined  to   secure  their  share  of  the  vast  stream  of  global  payment  revenues.  Developments  in  the   market  for  mobile  payments  is  increasingly  referred  to  as  a  “war”  which  indicates  that   the   stakes   are   high   and   that   there   is   a   huge   uncertainty   about   the   future   roles   of   involved   players.   Traditional   card   payment   stakeholders   have   invested   heavily   in   the   existing  infrastructure  and  they  are  not  going  to  give  up  without  a  fight,  but  they  need  to   innovate   if   they   should   be   able   to   stay   ahead   of   competition   (The   Economist,   2012).   Forming   effective   partnerships   will   be   a   key   success   factor   for   all   mobile   payment   stakeholders.  

Globally,  mobile  payment  adoption  is  growing  along  with  the  increasing  penetration  of   smart  mobile  devices.  Mobility  has  changed  the  business  landscape  for  many  industries   in  recent  decades  and  now  the  payment  industry  may  be  next  in  line.  Mobile  payments   could   potentially   be   the   biggest   disruption   the   payment   industry   has   seen,   and   incumbents   need   to   carefully   choose   the   right   strategies   in   order   to   avoid   being   substituted   by   emerging,   independent   stakeholders.   Card   payment   stakeholders   risk   loosing   large   market   shares   when   merchants   realize   that   new   entrants   can   provide   them  with  more  competitive  price  models.  Banks  are  in  a  good  position  to  leverage  a   mobile   payment   disruption,   but   they   need   to   innovate   traditional   business   models   or   they,  too,  risk  falling  behind.    


At   the   Royal   Institute   of   Technology   (KTH),   there   are   currently   several   on-­‐going   research  projects  in  the  field  of  mobile  payments  and  there  are  yet  many  questions  to   be  answered.  One  of  those  questions  is  how  the  emergence  of  a  new  payment  ecosystem   will   affect   established   payment   players   and   how   they   are   planning   to   handle   such   a   potentially  disruptive  change.  

1.2 Problem  

As   mentioned   above,   the   payment   sector   is   currently   facing   many   challenges   and   the   progressive  shift  from  traditional  electronic  systems  to  mobile  solutions  will  definitely   change   the   way   we   make   payments   in   the   future   (Au   &   Kauffman,   2008).   Such   a   potentially   disruptive   development   raises   some   interesting   questions   on   industry   dynamics.   It   is   unclear   how   mobile   payments   will   change   the   traditional   payment   landscape,  who  the  new  stakeholder  are,  how  traditional  stakeholders  will  be  affected   and  what  stakeholder  strategies  will  be  employed  to  handle  a  disruptive  change  in  the   payment  market.  

Answering  this  problem  would  help  to  better  understand  how  and  to  whom  new  mobile   business   models   may   be   disruptive   and   how   affected   stakeholders   are   managing   this   change.  

1.3 Purpose  

The   purpose   of   the   proposed   master   thesis   is   to   assess   the   disruptiveness   of   the   Swedish  payment  market  and  describe  strategies  for  managing  a  potentially  disruptive   change,   by   extracting   acclaimed   theories   and   using   them   to   analyse   qualitative   data   gathered   from   interviews   with   key   supply-­‐side   stakeholders   in   the   mobile   payment   ecosystem.  

1.4 Research  questions  

To  fulfil  the  specific  research  purpose,  four  research  question  have  been  formulated:  

1. How  can  various  mobile  payment  systems  be  disruptive?  

2. What  mobile  payment  business  models  and  provider  strategies  can  be  identified?   3. What  business  model  expectations  do  merchants  have  and  what  are  their  mobile  

payment  strategies?  

1.5 Definitions  and  delimitations  

First  of  all,  it  is  necessary  to  define  mobile  payments.    For  this  thesis,  the  definition  by   Lai   and   Chuah   (2010)   serves   as   a   good   guideline;   mobile   payments   are   “electronic  

payments  made  using  mobile  devices  either  to  directly  purchase  or  to  initiate  or  to  confirm   payment  for  goods  or  services  for  both  online  and  physical  point-­‐of-­‐sale  transactions”  (p.  


In  terms  of  disruptive  innovation,  disruptiveness  concerns  mobile  payments  in  relation   to   the   space   of   electronic   payments   and   the   players   in   the   corresponding   ecosystem.   The  new  mobile  payment  ecosystem  contains  four  main  groups;  consumers,  merchants,   regulators,   and   providers   (Au   &   Kauffman,   2008)   and   the   proposed   study   will   focus   mainly  on  merchants  and  providers  of  mobile  payments  systems.  Throughout  the  rest   of  the  thesis  the  term  supply-­‐side  stakeholders  will  be  used  to  denote  this  delimitation.  It   should  however  be  noted  that  merchants  also  have  a  demand-­‐side  role.  

Moreover,   the   proposed   research   will   focus   primarily   on   mobile   payment   systems   enabling  POS  transactions  between  consumers  and  merchants  (C2B  transactions)  much   like   today’s   debit   and   credit   card   purchases.   Consumer-­‐to-­‐consumer   (C2C)   payments   will   not   be   primary   objects   of   study.   However,   given   the   complexity   of   the   payment   ecosystem  and  the  interrelation  between  different  forms  of  payment,  it  is  possible  that   mobile  payment  types  other  than  C2B  POS  transactions  will  be  touched  upon.    

In  general,  it  is  also  hard  to  properly  define  the  scope  of  an  interpretivist  study  given   the  exploratory  nature  (Collis  &  Hussey,  2010).  The  complexity  of  the  mobile  payment   ecosystem  and  the  high  pace  at  which  it  changes  also  makes  it  hard  to  delimit  the  thesis   beforehand.  In  terms  of  geographical  market  delimitations,  the  proposed  study  is  only   concerned  with  players  acting  on  the  Swedish  market.  However,  important  players  from   other   markets   may   be   mentioned   if   it   is   considered   likely   that   they   would   enter   the   Swedish  market.    

1.6 Thesis  outline  

This  first  chapter  (Introduction)  has  provided  some  background  on  the  research  topic   and   argued   for   why   the   topic   is   relevant   to   study.   The   purpose   of   the   study   and   the   research  questions  have  also  been  presented.    

The   second   chapter   (Methodology)   describes   the   chosen   research   methodology   and   methods  used.  It  includes  limitations  in  terms  of  likely  compromises  and  weaknesses  of   the  proposed  study.  There  is  also  a  short  presentation  of  the  interviewees.  

The   third   chapter   (Theory   and   literature   review)   aims   to   present   the   reader   with   the   current   and   past   research   on   mobile   payment   system   as   well   introduce   acclaimed   theories   on   disruptive   innovation,   business   models,   business   model   innovation   and   competing  technologies.    

The   fourth   chapter   (Mobile   payments   in   Sweden)   will   familiarise   the   reader   with   the   Swedish  mobile  payment  market;  some  general  developments  are  described,  important   stakeholders  are  mapped  and  current  mobile  payment  solutions  are  presented  in  detail.   The  fifth  chapter  (Empirics)  describes  raw  empirical  findings  from  interviews  with  key   supply-­‐side  stakeholders  and  the  sixth  chapter  (Discussion)  analyses  findings  from  all   previous  chapters  in  relation  to  the  theory  presented  in  chapter  3.  


The   seventh   and   last   chapter   (Conclusion)   ends   the   research   by   answering   the   initial  


2 Methodology  

This   chapter   describes   how   the   research   problem   was   investigated   and   motivates   the   different  methods  employed  in  relation  to  the  chosen  research  paradigm.  There  is  also  a   short  presentation  of  the  interview  respondents.  Finally,  limitations  of  the  research  design   are  discussed.  

2.1 Approach  and  methods  

In   terms   of   the   two   main   paradigms   proposed   by   Collis   and   Hussey   (2010),   the   conducted   research   had   mostly   interpretivistic   characteristics;   data   was   primarily   gathered   from   a   limited   number   of   qualitative   interviews,   the   study   had   a   natural   location   in   the   Swedish   payment   market,   the   research   was   not   concerned   with   hypothesis   testing,   instead   it   was   concerned   with   gathering   a   rich   and   nuanced   understanding  of  what  is  currently  happening  in  the  Swedish  mobile  payment  market.   In   order   to   satisfactory   answer   the   research   questions   the   study   was   performed   as   a   combination  of  a  theoretical  and  an  empirical  study.  The  theoretical  part  consisted  of  a   literature   review   and   the   formulation   of   a   theoretical   foundation.   The   empirical   part   consisted   of   a   number   of   interviews   with   key   stakeholder   from   the   Swedish   mobile   payment  industry  and  a  subsequent  analysis  of  the  interview  data.    

2.1.1 Theoretical  study  

The  first  step  of  the  theoretical  study  was  to  form  an  understanding  of  both  the  Swedish   mobile  payment  market  but  also  the  more  traditional  electronic  payment  market.  This   initial   scan   was   based   solely   on   secondary   data.   Since   the   mobile   payment   market   is   undergoing  raping  changes,  literally  transforming  itself  on  a  week-­‐to-­‐week  basis,  it  was   necessary   to   have   a   progressive   information-­‐gathering   approach   and   complement   the   data   gathered   from   published   literature   with   press   releases,   white   papers,   consulting   reports   and   newspaper   articles.   To   maintain   a   high   level   of   data   integrity,   all   sources   had  to  be  individually  validated  in  terms  of  intention,  objectivity  and  credibility.    


(e.g.  disruptive  innovation  (Au  &  Kauffman,  2008;  Ondrus  &  Pigneur,  2005,  2006,  2007),   business   models   and   business   model   innovation   (Bourreau   &   Verdier,   2010;   Camponovo  &  Pigneur,  2003;  Lai  &  Chuah,  2010;  Lao  &  Liu,  2011))  In  many  aspects,  the   three   theories   are   highly   interrelated   and   they   will   be   used   in   parallel   to   facilitate   an   insightful,   multi-­‐perspective   analysis   of   the   empirical   data.   Even   though   the   theory   serves   as   a   basis   for   the   interview   template,   the   theoretical   foundation   was   continuously  validated  throughout  the  empirical  study.  

2.1.2 Empirical  study  

For   the   empirical   part   of   the   thesis,   primary   data   was   gathered   from   key   industry   stakeholders.  All  major  providers  of  mobile  payment  systems  in  Sweden  were  contacted   and  most  of  them  agreed  to  participate  in  this  study.  The  market  was  also  searched  for   progressive   merchants   taking   an   active   role   in   the   emergence   of   mobile   payment   systems.   One   major   merchant   agreed   to   participate   and   an   additional   interview   was   conducted   with   the   Swedish   Trade   Federation   to   gain   a   broader   perspective   on   how   other  Swedish  merchants  may  reason  when  it  comes  to  mobile  payment  systems.  (See   section  2.1.3  for  a  presentation  of  the  interviewees.)  It  should  be  noted  that  consumers   were  not  targeted  in  this  study.  The  main  reason  for  this  is  that  such  an  approach  would   have   been   very   time-­‐consuming   and   would   therefore   not   have   fitted   within   the   given   time   frame.   Nevertheless,   several   studies   have   already   been   conducted   on   consumer   adoption   of   mobile   payment   systems   and   consumer   insights   could   thus   be   gathered   from  secondary  sources.  Such  consumer  data  has  been  used  to  create  a  more  nuanced   picture  of  the  underlying  industry  dynamics.  

In  accordance  with  the  interpretivistic  paradigm,  the  empirical  data  gathered  was  of  a   qualitative  nature.  Such  qualitative  data  is  best  collected  from  semi-­‐structured  face-­‐to-­‐ face   interviews   (Collis   &   Hussey,   2010).   General   questions   and   subjects   were   defined   beforehand,   but   the   interviews   were   conducted   in   an   open   manner   allowing   the   interviewees  to  properly  express  their  own  standing  and  present  thoughts  on  subjects   that  were  not  covered  in  the  interview  framework.    

The  last  step  of  the  research  process  was  to  analyse  the  empirical  data.  All  interviews   were   recorded   and   transcribed   directly   after   the   interview.   The   first   step   of   the   analytical   process   was   to   reduce   the   data.   As   argued   by   Collis   and   Hussey   (2010),   reduction  is  a  way  to  filter  and  reorganize  the  data  to  make  it  easier  to  identify  results   and  draw  conclusions.  However,  the  reduction  was  done  after  all  interviews  had  been   completed.  Such  an  approach  is  preferable  since  it  is  hard  to  know  what  data  is  actually   relevant   before   being   familiar   with   the   whole   data   set   (Collis   &   Hussey,   2010).   After   removing  redundant  data,  it  was  necessary  to  restructure  the  data  to  make  it  fit  with  the   theoretical   foundations.   Finally,   the   restructured   data   was   compared   and   analysed   in   relation  to  the  theory.  Conclusions  could  then  be  drawn  and  verified,  and  the  research   questions  could  be  answered.    


2.1.3 Interview  structure  and  respondents  

The  interview  framework  was  based  on  the  theoretical  foundations  in  order  to  ensure  a   strong   link   between   theory   and   empirics.   The   interview   template   has   however   had   a   quite  dynamic  character;  when  new  and  important  insights  were  gained,  the  framework   was   carefully   reviewed   and   alterations   were   made   when   deemed   necessary.   Such   a   procedure   also   served   as   a   continuous   validation   of   the   theoretical   foundations.   The   final   interview   framework   illustrated   in   Figure   1   covered   five   basic   themes;   (1)   how   mobile  payments  are  changing  the  traditional  payment  landscape,  (2)  stakeholder  roles   in  the  new  mobile  payment  ecosystem,  (3)  business  models  and  strategies  for  mobile   payments,   (4)   managing   innovation   in   the   payment   market,   and   (5)   the   struggle   between   competing   solutions.   Themes   1,   2   and   5   were   of   a   rather   general   nature   whereas  themes  3  and  4  were  concerned  with  more  company-­‐specific  factors  such  as   employed   business   models,   provider   and   merchant   strategies,   and   how   innovation   is   managed   internally.   The   exact   questions   were   altered   depending   on   the   respondent’s   role   as   either   provider   or   merchant.   Example   questions   can   be   seen   in   Appendix   A:   Interview  framework.  





Since  the  primary  focus  of  this  study  has  been  on  merchants  and  providers  of  mobile   payment   systems,   five   interviews   were   conducted   with   providers   and   one   interview   was  conducted  with  a  major  merchant.  Additionally,  one  interview  was  conducted  with   the  Swedish  Trade  Federation,  the  employers’  organisation  for  the  entire  Swedish  trade   and  commerce  sector,  to  gain  better  insights  into  how  other  merchants  may  reason.   Below   follows   an   overview   of   the   respondents   and   their   respective   organizations.   Providers   are   presented   first,   followed   by   merchants   and   finally   the   Swedish   Trade   Federation.    

1.  A  changing   payment  market  

2.  Roles  in  the   ecosystem  

3.  Business  models   and  mobile  payment  



Date  for  interview   2013-­‐02-­‐19  

Company  /  Owner   4T  Sverige  AB  (Joint  Venture:  Telia,  Telenor,  Tele2  and  3)  

Respondent   Ingrid  Lindström  

Position   Managing  Director  


WyWallet   is   a   mobile   payment   application   introduced   by   the   four   dominating   MNOs   Telia,  Telenor,  Tele2,  and  3.  The  solution  is  available  to  all  Swedish  residents  and  can  be   used   with   iOS,   Android,   or   any   other   platform   supporting   Java.   With   WyWallet,   consumers   can   make   both   C2C   and   C2B   transactions   and   it   works   much   like   a   real   wallet;  consumers  must  deposit  money  before  it  can  be  used.    


Date  for  interview   2013-­‐02-­‐14   Company  /  Owner   Klarna  AB  

Respondent   Claes  Tellman  

Position   Head  of  Communications  


Klarna  is  a  leading  Swedish  e-­‐commerce  company  and  they  have  been  offering  online   payment  solutions  since  2005.  Klarna  has  developed  a  mobile  version  of  their  platform   Klarna   Checkout.   Online   commerce   is   the   target   and   there   are   currently   no   plans   to   extend  this  functionality  to  include  the  physical  POS  market.    


Date  for  interview   2013-­‐02-­‐20  

Company  /  Owner   Seamless  Distribution  AB  

Respondent   Emil  Wikström  

Position   Managing  Director  SEQR  


SEQR  is  an  independent  mobile  payment  application  by  the  Swedish  company  Seamless   Distribution  AB.  SEQR  was  introduced  in  the  first  quarter  of  2012  and  is  currently  used   by  both  small  and  large  merchants,  the  largest  being  food  retailer  Axfood.  The  solution   enables  both  consumer-­‐to-­‐business  (C2B)  and  consumer-­‐to-­‐consumer  (C2C)  payments.  



Note:  For  Swish,  two  interviews  were  held:  one  with  Swedbank  and  one  with  SEB.  

Date  for  interviews   1:  2013-­‐02-­‐19,  2:  2013-­‐02-­‐21  

Company  /  Owner   Joint  venture:  Danske  Bank,  Handelsbanken,  Länsförsäkringar,  Nordea,  SEB,  Swedbank   Respondents   1:  Jesper  Ahrgren  (Swedbank),  2:  Jan  Forsell  (SEB)   Position   1:  Business  Developer,  2:  Business  Developer  


Swish  is  a  mobile  payment  application  for  C2C  payments  introduced  by  a  majority  of  the   largest   banks   in   the   Swedish   market:   Danske   Bank,   Handelsbanken,   Länsförsäkringar,   Nordea,   SEB,   and   Swedbank.   The   application   was   launched   in   December   2012   and   is   available  to  all  private  customers  of  the  above-­‐mentioned  banks.  Customers  can  make   real-­‐time  transfers  between  bank  accounts,  even  if  they  have  different  banks.  


Note:  The  interview  with  Swedbank  concerned  both  Bart  and  Swish.  

Date  for  interview   2013-­‐02-­‐19   Company  /  Owner   Swedbank  

Respondent   Jesper  Ahrgren  

Position   Business  Developer  Mobile  Payments  


Bart  is  a  mobile  payment  application  developed  by  Swedbank  and  enables  mobile  C2B   transactions   at   POS.   A   limited   trial   was   conducted   in   the   Stockholm   area   during   late   2012  and  the  solution  will  be  released  to  all  Swedish  consumers  during  2013.    


Date  for  interview   2013-­‐02-­‐20   Company  /  Owner   Axfood  AB  

Respondent   John  Svensson  

Position   Business  Developer  Payments  



Swedish  Trade  Federation  

Date  for  interview   2013-­‐02-­‐15   Company  /  Owner   N/a  

Respondent   Bengt  Nilervall  

Position   Head  of  Payments  


The  Swedish  Trade  Federation  is  the  employers’  organization  for  retailers,  wholesalers   and  importers.  It  has  13,000  members  spanning  from  large  companies  (such  as  IKEA,   ICA,   and   H&M)   to   small   and   medium-­‐sized   companies.   The   federation   is   an   active   promoter  of  mobile  payments.  

2.2 Limitations  of  the  research  design  

Limitations   are   concerned   with   weaknesses   or   flaws   in   the   research   design   (Collis   &   Hussey,   2010)   and   will   here   be   discussed   in   terms   of   validity,   reliability   and  


Validity   is   the   extent   to   which   the   research   findings   correctly   reflect   the   phenomena  

under  study  and  is  generally  high  in  interpretivistic  studies  (Collis  &  Hussey,  2009).  To   ensure   high   validity   in   the   conducted   study,   different   measures   were   taken   to   ensure   that   the   interviewees   fully   understood   questions   and   key   theoretical   concepts   in   an   effort   to   eliminate   the   risk   for   misinterpretations   or   misunderstandings   affecting   the   results.  

Most   qualitative,   interpretivistic   studies   however   struggle   with   reliability.   One   foundation   for   scientific   research   is   that   it   should   be   replicable,   but   the   performed   study’s  semi-­‐structured  interviews  with  open  questions  would  probably  not  return  the   same   answers   if   the   interviews   were   to   be   repeated   at   a   later   point   in   time.   To   help   counterbalance   this,   examples   from   the   interview   framework   are   presented   in   Appendix  A:  Interview  framework.  Interviewees  were  allowed  to  talk  freely  in  an  effort   to   minimize   subjectivity,   but   in   order   to   at   the   same   time   promote   replicability   interviewees  were  only  allowed  to  talk  about  pre-­‐defined  subjects.  

Generalizability  is  concerned  with  how  the  results  of  a  study  can  be  extended  to  other  

cases,  or  to  situations  other  than  those  investigated.  Generalization  was  not  part  of  this   study  and  is  mostly  relevant  for  positivist  studies  where  researchers  may  want  to  draw   general   conclusions   and   extend   the   findings   from   a   sample   to   the   population   from   which  the  sample  was  chosen  (Collis  &  Hussey,  2010).    


3 Theory  and  literature  review  

This   chapter   presents   applicable   theories   that   subsequently   will   be   used   to   analyze   the   empirical   data.   First,   there   is   a   short   introduction   to   the   innovation   typology.   Second,   theory  is  presented  on  disruptive  innovation,  business  models,  business  model  innovation,   and   competing   technologies.   Finally,   a   review   of   the   existing   literature   on   mobile   payments  is  presented  together  with  the  identified  research  gap.  

3.1 Theory  

The  theory  used  in  this  thesis  will  build  on  three  main  pillars:  (1)  Disruptive  innovation,   (2)  Business  model  innovation,  and  the  struggle  between  (3)  Competing  technologies.   In   many   aspects,   the   theories   are   highly   interrelated   but   they   will   be   presented   separately   to   provide   a   more   straightforward   basis   for   analysis.   For   a   more   complete   overview,   there   are   also   two   sections   on   Innovation   typology   and   The   concept   of   business  models.  

3.1.1 Innovation  typology  

There   is   a   sea   of   definitions   relating   to   innovations   (Garcia   &   Calantone,   2003)   and   analyzing  the  available  typology  could  easily  be  the  subject  of  a  separate  thesis.  For  that   reason,  this  section  should  only  be  seen  as  a  brief,  non-­‐exhaustive  introduction  to  the   innovation  typology  used  in  the  studied  literature.  

Architectural  innovations  change  the  linkage  between  core  concepts  and  components  of  

a   product   without   changing   the   actual   core   concepts.   The   difference   between   radical   innovations   and   architectural   innovations   is   that   radical   innovations   also   changes   the   core  concepts  of  the  product  (Henderson  &  Clark,  1990).    

Business  model  innovation  is  concerned  with  changes  to  the  customer  value  proposition,  

profit  formula,  or  key  resources  and  processes.  The  concept  was  introduced  in  the  now   legendary  HBR  article  “Reinventing  Your  Business  Model”  by  Christensen  et  al  (2008).   See  section  3.1.4  for  more  theory  on  business  model  innovation.    

Radical  innovations  employ  substantially  new  technology  and  offers  substantially  higher  

customer  or  user  benefits  relative  to  existing  products,  services,  or  processes  (Sorescu,   Chandy,   &   Prabhu,   2003).   Radical   innovations   also   result   in   a   new   market   infrastructure.  Incremental  innovations  on  the  other  hand  involve  only  modest  changes   to   existing   products   in   existing   markets   (Garcia   &   Calantone,   2003).   The   typology   radical   versus   incremental   innovation   was   first   used   by   Abernathy   and   Utterback   (1978)  but  has  been  used  in  many  settings  since.  

Disruptive   innovations   initially   have   worse   performance   than   existing   products   in   the  

market,   but   instead   introduce   new   sets   of   features,   performance,   and   price   attributes   that   attract   certain   customer   segments.   Through   subsequent   development,   the   innovation   may   ultimately   become   competitive   also   in   the   mainstream   market.  


products   (Christensen,   1997).   Mobile   payments   can   be   seen   as   such   an   underperforming,  disruptive  technology  currently  unable  to  satisfy  consumer  demands   in   the   main   payment   market   (Ondrus   &   Pigneur,   2006).   See   section   3.1.2   for   more   theory  on  disruptive  innovation.  

Discontinuous  innovations  require  consumers  to  establish  different  behavioral  patterns  

than   those   used   for   non-­‐discontinuous   innovations.   Discontinuous   innovations   are   sometimes  also  referred  to  as  radical  innovations  (Utterback,  1996).    

3.1.2 Disruptive  innovation  

The  concept  of  “disruptive  technologies”  was  coined  by  Bower  and  Christensen  (1995)  in   a   Harvard   Business   Review   article   where   the   authors   outline   strategies   for   how   managers  of  leading  companies  should  assess  new  technologies  and  manage  disruptive   changes  in  the  market.  The  theory  should  be  mostly  credited  to  the  latter  author  who   later  extended  the  theory  (Christensen,  1997)  where  he  discussed  the  full  implications   for  managers  in  relation  to  disruptive  technological  change.  

The   central   question   for   Christensen   (1997)   is   how   managers   of   leading   companies   (companies   that   have   been   admired   and   studied   by   other   managers)   fail   to   identify   disruptive   innovations   and   instead   steer   their   companies   towards   destruction.     Innovations  can  be  classified  as  either  sustaining  or  disruptive:  

Sustaining   innovations   are   aimed   at   improving   the   performance   of   existing   products.   Performance   is   in   turn   defined   as   the   performance   valued   by   mainstream  customers  in  major  markets.  Most  technological  improvements  have   historically  been  of  a  sustaining  nature.  





The   main   findings   of   Christensen’s   (1997)   original   work   can   be   summarized   in   seven   points.  First,  there  might  not  be  a  fit  between  the  pace  of  progress  offered  by  technology   and  the  progress  of  market  demand.  This  implies  that  a  disruptive  innovation  may  seem   unwanted   today   but   perfectly   address   the   needs   of   tomorrow’s   consumers.   Second,   managing  innovation  is  closely  linked  to  theories  on  resource  allocation:  it  is  very  hard   for  an  organization  to  effectively  allocate  funding  and  manpower  in  order  to  promote   the   right   innovations.   Third,   the   considerations   needed   for   taking   a   disruptive   innovation  to  market  differs  from  those  of  a  sustaining  innovation.  Many  companies  will   try  to  force  disruptive  technologies  to  fit  the  needs  of  current  mainstream  customers,   which   will   lead   to   failure.   Fourth,   the   capabilities   of   most   organizations   are   far   more   specific   than   most   managers   believe   hence   making   the   organization   incapable   of   handling   unfamiliar   scenarios.   Fifth,   there   is   a   scarcity   of   information   available   to   support   large   investments   in   disruptive   technology.   Sixth,   companies   should   mix   strategies  to  stay  competitive.  It  is  not  sufficient  to  stick  with  either  being  a  leader  or  a   follower.   Seventh,   the   largest   barriers   to   entry   and   mobility   are   that   disruptive   technologies  seldom  make  sense  and  large  companies  have  difficulties  doing  things  that   do  not  fit  their  established  value  creation  model.  


Danneels   (2004)   argue   that   despite   the   fact   that   Christensen’s   work   has   been   widely   acclaimed  and  heavily  referenced,  there  is  a  fundamental  issue  with  the  core  definition   of  “disruptive  technology”;  the  definition  has  become  loose  and  it  is  rather  unclear  what   actually   constitutes   disruptive   innovation.   In   fact,   Christensen   never   provides   any   rigorous  criteria  for  when  a  technology  is  to  be  considered  disruptive  (Danneels,  2004;   Markides,  2006).    

Markides   (2006)   also   criticizes   Christensen’s   model   by   questioning   the   seemingly   widespread   assumption   that   the   model   can   be   used   to   explain   all   sorts   of   disruptive   innovations.   Instead,   he   suggests   that   there   is   a   fundamental   difference   between   a   disruptive   technological   innovation,   a   disruptive   product   innovation,   and   a   disruptive  

business   model   innovation.     The   characteristics   of   the   latter   category   will   be   further  

explored  in  section  3.1.4  (Business  model  innovation).    

Another   deficiency   of   Christensen’s   original   model   is   the   assumption   that   the   new   technology  will  grow  to  dominate  the  market.  Instead,  Markides  (2006)  argue  that  this   is  not  always  the  case.  However,  their  different  positions  are  best  explained  by  the  fact   that   Christensen’s   original   theories   were   solely   focused   on   technological   innovations   where  total  market  dominance  of  new  innovations  is  far  more  likely  than  it  is  for  new   business  models.    

3.1.3 The  concept  of  business  models  

There  are  many  definitions  available  of  what  a  business  model  is,  but  generally  they  are   concerned   with   “how   an   organization   creates,   delivers,   and   captures   value”   (Osterwalder   &   Pigneur,   2010,   p.   14).   The   concept   of   business   models   cannot   be   credited   to   any   single   author   or   authors.   Business   models   are   part   of   strategy   theory   which   has   been   studied   for   decades   including   the   early   developments   by   Chandler   (1962),  Ansoff  (1965)  and  Andrews  (1971).  Bearing  in  mind  that  there  is  no  coherent   definition  of  a  business  model,  the  9-­‐fold  Business  Model  Canvas  concept  developed  by   Osterwalder   and   Pigneur   (2010)   and   presented   in   Table   1   below   will   be   used   throughout  this  thesis  to  allow  for  a  consistent  analysis.  The  concept  covers  four  main   areas:   the   (1)   customers,   the   offer   or   (2)   customer   value   proposition,   the   (3)  

infrastructure,   and   (4)   financial   aspects.   The   components   outlined   in   this   model   are  

similar  to  those  of  other  key  business  model  concepts  such  as  Christensen  et  al.  (2008)   and  Chesbrough  et  al.  (2002).  




4   Customer  relationship   The  types  of  relationships  a  company  establishes  with  specific  Customer  Segments   5   Revenue  streams   The  cash  a  company  generates  from  each  Customer  Segment   6   Key  resources   The  most  important  assets  required  to  make  a  business  model  work   7   Key  activities   The  most  important  things  a  company  must  do  to  make  its  business  model  work   8   Key  partnerships   The  network  of  suppliers  and  partners  that  make  the  business  model  work   9   Cost  structure   All  costs  incurred  to  operate  a  business  model  

Note.   Adapted   from   Business   Model   Generation   (pp.   20-­‐40),   by   A.   Osterwalder   and   Y.   Pigneur,  

2010,  New  York  City,  NY:  John  Wiley  &  Sons.    

Porter  (2001)  has  criticized  the  definition  of  business  models  for  being  “murky  at  best”     (p.  13),  arguing  that  the  concept  is  unclear  and  that  it  risks  leading  managers  into  faulty   thinking.   Whatever   the   actual   implications   for   managers   may   be,   the   concept   is   frequently   referred   to   in   the   literature   on   mobile   payments   (Au   &   Kauffman,   2008;   Bourreau   &   Verdier,   2010;   Camponovo   &   Pigneur,   2003;   Lao   &   Liu,   2011;   Lim,   2008;   Ondrus  &  Pigneur,  2005;  Pousttchi,  Schiessler,  &  Wiedemann,  2008).  

3.1.4 Business  model  innovation  

As   already   mentioned,   there   is   a   fundamental   difference   between   the   innovation   of   products,  technology  and  business  models.  Not  only  do  they  ascend  in  different  ways,   but   they   also   have   different   effects   on   established   players   thus   requiring   different   strategies  for  affected  companies.  It  is  important  to  note  that  business  model  innovators   do   not   introduce   new   products   or   services;   they   merely   change   the   way   they   are   provided  to  the  customer  (Markides,  2006).  This  is  also  the  case  of  mobile  payments.   Paying   for   goods   and   services   is   definitely   not   a   new   phenomenon,   but   they   way   the   service  is  provided  to  the  consumer  via  a  mobile  device  instead  of  hard  cash  or  a  plastic   card  –  that  is  indeed  something  new.  


entrants.  There  are  very  few  examples  of  established  players  that  have  been  successful   in   introducing   new   business   models   in   existing   markets   (Christensen   et   al.,   2008).   Despite  this  apparent  problem,  Christensen  et  al.  (2008)  argue  that  almost  all  managers   agree   that   their   businesses   are   in   need   of   business   model   changes   in   order   to   stay   competitive,   but   in   reality   only   10%   of   total   innovation   investments   are   made   in   the   area  of  business  model  innovation.    

So,  why  is  business  model  innovation  so  hard  to  pull  off  in  reality?  Start  by  combining   the   fact   that   new   business   models   mainly   attract   customers   outside   of   a   company’s   main   markets   and   that   new   business   models   often   require   different   and   conflicting   value   chains   from   what   the   company   has   established,   and   it   is   not   surprising   that   incumbents  often  lack  the  initial  motivation  to  adopt  or  respond  to  new  and  disruptive   business   models   (Markides,   2006).   Similarly,   Christensen   et   al.   (2008)   argue   that   the   main   reason   why   companies   fail   to   innovate   their   business   models   is   that   new   ideas   often   look   unattractive   from   the   outside.   Markides   (2006)   has   a   similar   view   and   suggests   that   it   does   not   make   economical   sense   for   many   incumbents   to   respond   to   disruptive   innovations.   Instead,   they   have   several   other   possibilities   to   grow   their   businesses,  e.g.  international  expansion,  investments  in  adjacent  markets  etc.  However,   as  the  new  business  models  eventually  improve  and  start  to  deliver  value  comparable   or  better  than  the  value  delivered  to  customers  in  the  old  market,  customers  will  start   to  switch  from  the  old  to  the  new  market.  At  this  point,  it  is  inevitable  for  incumbents  to   react   to   the   disruptive   forces.   Many   companies   are   also   afraid   of   alienating   existing   relationships   with   distributors   and   other   stakeholders   in   their   value   network.   For   example,  when  airline  companies  decide  to  start  selling  tickets  on  their  own  websites,   they  risk  alienating  existing  relationships  with  their  travel  agents  (Markides,  2006).     The  slow  but  brutal  collapse  of  Eastman  Kodak  serves  as  a  classic  schoolbook  example   of   what   might   happen   when   companies   fail   to   innovate   their   business   models.   Kodak   wasn’t  blind  to  disruptive  forces.  In  fact,  they  invested  heavily  in  emerging  technologies   early  on,  but  they  did  so  only  by  extensions  to  their  existing  business  model.  Also,  they   started  their  wind-­‐down  of  their  core  business  way  to  late;  when  other  players  started   to  innovate,  their  film  business  was  still  growing  resulting  in  a  lack  of  urgency  to  change   (Anthony,  2012).    


the   ability   to   do   so   is   low,   the   company   should   either   attack   back   in   an   attempt   to   destroy  the  innovation  or  embrace  it  fully  and  completely  abandon  its  old  business.  If   both  the  motivation  and  the  ability  to  respond  are  high,  the  company  should  adopt  the   new  innovation  and  incorporate  it  into  the  existing  business.  

When  a  company  do  decide  to  innovate  their  business  model,  Christensen  et  al.  (2008)   suggest   a   three-­‐step   approach   for   successful   business   model   innovation.   First,   the   company  should  not  think  about  business  models  at  all.  Instead,  they  should  focus  on   satisfying   customer   needs   and   their   desire   to   get   a   job   done.   Second,   the   company   should   then   carve   out   a   plan   on   how   to   deliver   this   value   to   the   potential   customers   while  making  a  profit.  Third,  the  company  should  take  this  new  plan  and  compare  it  to   the  existing  business  model  to  see  what  has  to  change.  When  this  is  done,  the  company   can  assess  how  to  adapt  the  organization  to  allow  for  a  successful  development  of  the   new  innovation.  


acquiring   company   should   not   integrate   the   acquired   company   into   the   existing   organization.  On  the  contrary,  if  resources  were  the  main  reason  for  the  acquisition,  it   makes   sense   to   integrate   it   into   the   existing   organization   and   leverage   existing   capabilities  (Christensen  &  Overdorf,  2000).  

Business   model   innovation   can   disrupt   competition   and   create   spectacular   growth   opportunities   without   requiring   the   company   to   fundamentally   change   the   business   model   (Christensen   et   al.,   2008).   However,   managers   must   carefully   assess   what   the   new  customers  actually  value  and  what  changes  the  organization  is  capable  of  making   (Christensen   &   Overdorf,   2000).   Christensen   et   al.   (2008)   conclude   that   the   most   transformative  companies  are  the  ones  that  take  a  new  technology  and  wrap  it  into  a   successful   business   model,   rather   than   trying   to   beat   competition   by   exclusivity   in   terms  of  discovery  and  commercialization.        

3.1.5 Competing  technologies  and  dominant  design  

Theory   on   evolutionary   economics   suggests   that   the   dynamics   behind   competing   technologies   can   be   seen   as   twofold:   a   variation   and   a   selection   process   (Nelson   &   Winter,   1982).   The   variation   process   is   concerned   with   creating   many   alternatives   to   the  current  dominant  design  and  the  selection  process  is  concerned  with  how  different   choices,  small  or  big,  by  rationale  or  chance,  lead  to  the  emergence  of  a  dominant  design   (Anderson  &  Tushman,  1990).  A  dominant  design  is  defined  as  a  “specific  path,  along  an   industry’s   design   hierarchy,   which   establishes   dominance   among   competing   design   paths”  (Utterback  &  Suárez,  1995,  p.  416).  The  concept  is  illustrated  in  Figure  3  below.   Dominant   design   is   related   to   the   concept   of   standards,   but   Utterback   and   Suárez   (1995)  argue  that  standards  are  more  narrowly  defined  as  the  battle  between  technical   alternatives.   Some   authors   however   tend   to   use   a   wider   definition   of   standards,   resulting  in  a  potential  overlap  between  the  two  concepts.  For  this  thesis,  the  dominant   design   typology   is   more   suitable   than   standards   since   it   allows   other   business   model   related   factors   such   as   strategic   maneuvers   and   network   externalities   to   be   incorporated  in  the  analysis.    




Economies  of  scale  are  seldom  present  before  a  dominant  design  emerges  since  many   different  products  will  be  produced  by  a  large  number  of  small-­‐scale  producers.  Once   the   dominant   design   emerges,   this   is   likely   to   change;   firms   that   master   the   development   of   products   building   on   the   new   dominant   design   will   experience   rapid   growth   killing   those   firms   that   betted   on   other   solutions   (Utterback   &   Suárez,   1995).   There   are   however   cases   were   economies   of   scale   do   indeed   play   a   vital   role   for   the   emergence  of  a  dominant  design.  When  network  externalities  have  a  positive  impact  on   adoption,   the   perceived   consumer   value   of   a   product   becomes   higher   when   more   consumers  adopt  the  product  (Katz  &  Shapiro,  1986)  hence  creating  economies  of  scale   already  at  an  early  stage  (Utterback  &  Suárez,  1995).  This  is  especially  true  for  mobile   payment  systems;  the  more  merchants  that  adopt  a  specific  mobile  payment  system,  the   more  consumers  will  be  willing  to  adopt  it  and  when  more  consumers  start  using  the   network,  the  value  for  merchants  will  increase  hence  resulting  in  a  domino  like  effect   (Au  &  Kauffman,  2008;  Mallat,  2007).  

Before  a  dominant  designs  emerges,  there  will  be  plenty  of  competing  variations  on  the   market  (Nelson  &  Winter,  1982;  Utterback  &  Suárez,  1995).  The  different  variations  can   be   seen   as   trials   of   various   features,   much   like   experiments,   where   the   performance   measures  differs  widely.  During  the  subsequent  selection  process,  the  scope  of  features   will   be   narrowed   (Nelson   &   Winter,   1982),   and   it   is   normal   that   the   now   dominant   features  stems  from  different  products  and  companies.  The  number  of  competitors  will   also   decrease   until   stabilized   around   a   limited   number   of   large   firms   (Utterback   &   Suárez,   1995).   Anderson   and   Tushman   (1990)   extends   this   reasoning   by   proposing   a   cyclical   model   for   technological   change.   In   this   model,   the   dominant   design   phase   is   followed  by  a  period  of  sustaining  or  incremental  innovation  until  a  second  disruption   occurs  which  in  turn  leads  to  a  new  dominant  design  and  a  repetition  of  the  cycle.     Arthur   (1989)   adds   to   the   literature   by   arguing   that   the   selection   process   is   heavily   affected   by   random   “historical   events”   (p.   126)   that,   if   combined   with   positive   economies  of  scale,  can  create  lock-­‐in  of  inferior  technologies.  It  is  therefore  difficult  to   predict   how   a   certain   industry   will   develop,   both   in   theory   and   in   practice.   Some   managerial   implications   are   also   outlined   by   Utterback   and   Suárez   (1995)   who   conclude  that  it  is  preferable  for  a  company  to  enter  a  market  several  years  before  the   emergence   of   a   dominant   design.   In   doing   so,   companies   will   have   enough   time   to   experiment  with  different  product  attributes.  However,  the  authors  only  found  limited   support  to  their  assumption  that  entering  a  market  several  years  after  the  emergence  of   a  dominant  effect  would  be  associated  with  a  greater  risk  of  failure.    

3.2 Past  research  on  mobile  payment  systems  




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