Preparing for Takeoff in the Payment Industry

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INOM

EXAMENSARBETE INDUSTRIAL MANAGEMENT,

AVANCERAD NIVÅ, 30 HP STOCKHOLM SVERIGE 2020,

Preparing for Takeoff in the

Payment Industry

Co-opetition as Value Creation

FRANCESCA BERN

OTHILIA ÖSTERLING

KTH

SCHOOL OF INDUSTRIAL ENGINEERING AND MANAGEMENT

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INOM

EXAMENSARBETE INDUSTRIELL EKONOMI,

AVANCERAD NIVÅ, 30 HP STOCKHOLM SVERIGE 2020,

Förberedelser för avstamp i

betalindustrin

Värdeskapande genom co-opetition

FRANCESCA BERN

OTHILIA ÖSTERLING

KTH

SKOLAN FÖR INDUSTRIELL TEKNIK OCH MANAGEMENT

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Preparing for Takeoff in the Payment Industry

Co-opetition as Value Creation

Francesca Bern

Othilia Österling

Master of Science Thesis TRITA-ITM-EX 2020:207 KTH Industrial Engineering and Management

Industrial Management SE-100 44 STOCKHOLM

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Förberedelser för avstamp i betalindustrin

Värdeskapande genom co-opetition

Francesca Bern

Othilia Österling

Examensarbete TRITA-ITM-EX 2020:207 KTH Industriell teknik och management

Industriell ekonomi och organisation SE-100 44 STOCKHOLM

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Master of Science Thesis TRITA-ITM-EX 2020:207

Preparing for Takeoff in the Payment Industry Co-opetition as Value Creation

Francesca Bern Othilia Österling

Approved

2020-06-08

Examiner

Cali Nuur

Supervisor

Niklas Arvidsson

Commissioner

CGI

Contact person

Robert Book Abstract

The world is moving towards real-time – and so are payments. A global transformation of payments is lying ahead, and the future offers instant payments in multiple currencies, around the clock, every day of the year. Introducing a new platform that permits instant payments for cross-currencies will change the traditional business for banks and their corporate customers. Since this payment solution is first of its kind, it will become difficult for banks to predict the future needs of their corporate customers, but they do need to find new ways to create value. Moreover, the rise of a more network-centric way of doing business pressures banks into finding new partnerships and break the traditions of incremental improvements. This study aims to investigate how instant payments for cross-currencies influence the interplay of value creation between banks and their corporate customers. It further aims to understand how the need for co-opetition will affect banks’ value creation towards their corporate customers while maintaining a competitive position in the future of payments. Through an empirical study, survey findings, and a review of existing literature, an exploratory study was performed. The results implied that the amount of value created depends on the company’s size, target market, geographical location, transaction intensity, and degree of international relationships. Furthermore, the value can differ for different units within each company; for instance, closeness to end-consumer. A resistance to changing routines and systems was identified, which must be stabilized before the payment solution can properly be utilized. To grasp the new business opportunities emerging for banks, they must continuously sense the balance between customers’ willingness to pay and new value offerings. Suggestively by embedding it into a familiar presence and/or gradual implementation by providing an opportunity to choose among payment solutions. Besides, the future of payments will increasingly involve attention to the core business, availability, and providing customized support. Also, co-opetition was shown to be a promising strategy in many aspects, since the future of payments will be shared with more actors than ever before. However, common trading zones will arise and blur the national boundaries, which result in that partnerships initially taking the form of collaboration will, over time, progress into a co- opetition relationship. On top of that, cross-border issues in terms of cultural mismatches, different traditions, as well as integrating different businesses and operating models, might obstruct the progression. Some products or actors depend on other functionalities to grow, and for instant payments for cross-currencies to reach its full potential, all actors and regulations involved need to be aligned.

Keywords: Instant Payments, Cross-currency, Future Payments, Co-opetition, Network Effects

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Examensarbete TRITA-ITM-EX 2020:207

Förberedelser för avstamp i betalindustrin Värdeskapande genom co-opetition

Francesca Bern Othilia Österling

Godkänt

2020-06-08

Examinator

Cali Nuur

Handledare

Niklas Arvidsson

Uppdragsgivare

CGI

Kontaktperson

Robert Book Sammanfattning

Världen går mot realtid - och det gäller även betalningar. En global förändring av betalningar kommer att ske, och framtiden erbjuder realtidsbetalningar i flera valutor dygnet runt, året om. Att introducera en ny plattform som tillåter omedelbara betalningar i flera valutakurser kommer att förändra den traditionella verksamheten för både banker och deras företagskunder. Eftersom denna betalningslösning är den första i sitt slag kommer det att bli svårt för bankerna att förutsäga deras kunders framtida behov och de måste hitta nya sätt att skapa värde på. Dessutom bidrar ökningen av ett mer nätverkscentrerat sätt att göra affärer att bankerna är mer pressade till att hitta nya partnerskap och bryta gamla traditioner av inkrementella förbättringar. Denna studie syftar till att undersöka hur omedelbara betalningar inom flera valutor påverkar samspelet i värdeskapandet mellan banker och deras företagskunder. Vidare avser den förstå hur behovet av co-opetition kommer att påverka bankers värdeskapande gentemot sina företagskunder samtidigt som man behåller en konkurrensposition i framtidens betalningar. Denna studie utfördes som en empirisk studie genom intervjuer, enkätsvar och granskning av befintlig litteratur. Resultaten antydde att värdet som skapas beror på företagets storlek, marknad, geografiska läge, transaktionsintensitet och graden av internationella relationer. Dessutom kan värdet variera för olika enheter inom ett och samma företag; till exempel närheten till slutkonsument. Ett motstånd till att förändra rutiner och system identifierades, vilket måste stabiliseras innan betallösningen kan nå sin fulla potential. För att ta sig an de nya affärsmöjligheter som uppstår för bankerna måste de kontinuerligt urskilja balansen mellan kundernas betalningsvillighet och nya värdeerbjudanden. Detta kan förslagsvis göras genom att bädda in en ny lösning i en mer välbekant skepnad och/eller gradvis implementera innovationen genom att erbjuda en möjlighet att välja mellan betalningslösningar. Därtill kommer betalningarnas framtid i allt högre grad att innebära större satsningar på att arbeta med kärnverksamhet, tillgänglighet och att tillhandahålla personifierad support.

Dessutom visade sig co-opetition vara en lovande strategi i flera aspekter, eftersom betalningens framtid kommer att delas med fler aktörer än någonsin. Gemensamma handelszoner kommer emellertid att uppstå och sudda ut de nationella gränserna, vilket resulterar i att partnerskap som ursprungligen tar formen av samarbete kommer med tiden att utvecklas till co-opetition. Dessutom kan samarbete över landgränser utmanas av kulturella missförhållanden, olika traditioner samt integrering av olika företag och operativa modeller vilket kan hindra utvecklingen. Då vissa produkter eller aktörer är beroende av andra funktionaliteter för att växa, och för att realtidsbetalningar i flera valutor ska nå sin fulla potential, måste alla aktörer och förordningar vara i linje.

Nyckelord: Realtidsbetalnigar, Multivalutor, Framtidens betalningar, Co-opetition, Nätverkseffekter

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Acknowledgments

First, we would like to thank CGI for the opportunity to write our master thesis. A special thanks to Robert Book for guiding us through this research and providing us with all the information we needed, and more. Thank you for educating us on payments and the Swedish payment infrastructure. You have been amazing. Also, we would like to acknowledge Maja Ronca for the full support and willingness to help us at any time from the first day. Thank you for letting us be a part of your team. You have been invaluable.

A big thanks to our supervisor Niklas Arvidsson at the Department of Sustainability and Industrial Dynamics for your continuous guidance and support. Your knowledge and encouragement have been incredible. We would also like to thank Cali Nuur and Milan Jocevski at the Department of Sustainability and Industrial Dynamic, as well as our opponents who have given us feedback during the seminars. Further, we would like to thank all the interviewees for your time and your contribution with valuable insights.

Lastly, we would like to thank our beloved families and friends for the full support and encouragement throughout both this thesis and our entire education.

Stockholm, June 2020

Francesca Bern & Othilia Österling

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List of Figures

Figure 1. The relationship between disruptive, incremental, radical and sustaining innovation ... 6

Figure 2. The relationship of increasing buyer’s value while reducing costs (Kim and Mauborgne, 2005a, p.16). ... 10

Figure 3. The concept of network effects. ... 12

Figure 4. An overview of a simple payment without intermediaries. ... 26

Figure 5. An overview of a payment within the same bank. ... 26

Figure 6. An overview of a payment less than 500,000 SEK ... 27

Figure 7. An overview of a large-value payment larger than 500,000 SEK ... 28

Figure 8. An overview of a cross-border payment between Sweden and the U.S. ... 29

Figure 9. An overview of actors included in the information layer as well as the settlement layer. ... 30

Figure 10. Bank product areas under review (The Global Treasurer and CGI, 2019) ... 60

Figure 11. Value-added services corporates are looking for from banks (The Global Treasurer and CGI, 2019) ... 60

Figure 12. Challenges with real-time payments for corporates (Capgemini and BNP Paribas, 2018) ... 61

Figure 13. Use cases of real-time payments from executive survey (Capgemini and BNP Paribas, 2018) ... 61

Figure 14. Transaction services thought to deliver most value (The Global Treasurer and CGI, 2019) ... 62

Figure 15. The greatest barrier to bank growth (The Global Treasurer and CGI, 2019) ... 62

Figure 16. The areas of focus in business strategies (The Global Treasurer and CGI, 2019) ... 63

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List of Tables

Table 1. The layout of the thesis ... 4

Table 2. Information about the actors interviewed ... 19

Table 3. The three layers of the financial infrastructure in which collaboration and competition usually is done. ... 25

Table 4. Benefits and challenges with instant payments and instant payments for cross-currencies ... 35

Table 5. List of interviewees ... 38

Table 6. The collaborative and competitive layers of the payment ecosystem ... 53

Table 7. A summary of the outcomes of instant-payments for cross-currency. ... 57

Table 8. Value-offerings emerging from instant payments ... 58

Table 9. A summary of the challenges with instant payments for cross-currencies ... 58

Table 10. The outcomes of Instant Payments for Cross-Currency ... 65

Table 11. An overview of barriers to enhanced value creation ... 70

Table 12. The outcomes of instant payments for cross-currencies influencing corporate customers ... 79

Table 13. An overview of all conducted interviews ... I

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Abbreviations

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Glossary

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1. Introduction

This chapter explains the context of the research problem in the thesis. The chapter begins with a background to the problem statement and relevant knowledge to understand the drivers. Next, the problem formulation seeks to highlight the problematization, followed by the purpose and summed up into the research questions. The introduction concludes with an explanation of the delimitations, the thesis contribution, and the paper’s disposition.

1.1 Background

A global transformation of payments is lying ahead, where multiple shifts are coinciding. The combined effect of the advancement of technology, increased globalization, new customer expectations, and behavior, as well as revised regulations (Sveriges Riksbank, 2019a), is described to upset the traditional ecosystem (SWIFT, 2020a). At a global level, a new international standard for payment messaging, ISO 20022, is providing a universal common language, which will enable a flexible and more harmonized global payment infrastructure.

However, it also forces all banks around the globe to update their systems and processes (SWIFT, 2020a). Moreover, a new European Commission directive PSD2 permits Open banking, which allows access to third-party developers, intending to promote competition and foster innovation (Svenska Bankföreningen, 2019a; SWIFT, 2020a).

Additionally, a new and more seamless payment infrastructure is to be implemented in the Nordics, by the name of P27 Nordic Payments (P27). This project aims to replace the traditional system of batch payments with instant payments, defined as a payment where the payee's account is credited and sender's account is debited instantly (Sveriges Riksbank, 2013).

Moreover, it intends to integrate all Nordic currencies in one common platform (P27 Nordic Payments, 2020). Today, there are fragmentations within payment systems, and the lack of standards creates difficulties with interoperability. P27 will entail a less complex and more seamless payment ecosystem, harmonizing the payment infrastructure. The introduction of a new platform that permits instant payments for cross-currencies will enable new types of routines, products, and services that could influence traditional businesses. This innovation will be the first of its kind by enabling real-time payments in multiple currencies around the clock, every day of the year (P27 Nordic Payments, 2020).

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Besides, the transformation of payments in combination with Open banking and emerging technology has permitted new entrants, such as Fintechs, into the payment market with novel capabilities (SWIFT, 2018). On the one hand, banks could consider new entrents to be competitors, but on the other hand, banks could benefit from their complementary resources.

Banks have a history of establishing strategic alliances with other banks to create value by reaching broad networks (Child et al., 2019, chap.19). Consequently, along with Fintechs, new and innovative partnerships can arise, resulting in new possibilities in utilizing other actors’

competencies and capabilities (Gnyawali and Park, 2011) in a co-opetition partnership.

Meanwhile, introducing a seamless payment solution for cross-currencies also opens the borders for new strategic business relationships with international actors to target new market segments. Different, and perhaps unprecedented, strategies for competitive advantage might need to be explored.

1.2 Problem Formulation

Given the transformation that the payment infrastructure currently is undergoing, a new demand for instant payments for cross-currencies has arisen and is progressing among bank’

corporate customers. Corporates, however, have not yet adapted instant payments in their processes or working methods, meaning that this payment solution will probably influence the way corporates do business. Therefore, there are still uncertainties in how instant payments affect them when there are possibilities in extending working hours and executing faster cross- border payments. Also, there is an ambiguity if they even need it. However, there are changing behaviors and expectations among corporates regarding availability and flexibility, influenced by the emergence of technology. This creates a problem where expectations of new payment services might increase without knowing the consequences and impact on business.

Further, due to the changing expectations of their corporate customers, banks are affected in several ways. By not knowing how significant the changes are, it will be difficult for banks to predict the future needs of their corporate customers. At the same time, banks must consider the competitive landscape arising both from the transformation of payments and the introduction of the innovation instant payments for cross-currencies, creating barriers when trying to offer value towards their corporate customers. The difficulties are further increased since networks across borders handling instant payments in different currencies have never been achieved before.

However, radical changes in technology could open up for new business opportunities (Bond and Houston, 2003). With instant payments for cross-currencies, new business opportunities will emerge, but the challenges lie in how to reach them and how banks should find the proper strategies. For banks to grasp the opportunities created by the combination of instant payments for cross-currencies and corporates’ change in payment behaviors, there is a need to revise their proposed value and to find new ways to create value. At the same time, the rise of a more network-centric way to do business pressures banks to collaborate with competitors in a co- opetition partnership. As actors deriving from a tradition of incremental changes, the massive changes in the payment ecosystem could create considerable challenges for banks.

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1.3 Purpose and Research Question

The purpose is to investigate how the need for co-opetition will affect banks’ value creation towards their corporate customers while maintaining a competitive position in the future of payments. The study also aims to understand how instant payments for cross-currencies influence the interplay of value creation between banks and their corporate customers.

Therefore, the research will investigate the impact of instant payments for cross-currency for corporates and how banks can sustain and enhance value to their corporate customers when adapting to changing expectations and behaviors.

To fulfill the purpose of this study, three interrelated research questions are formulated.

RQ1 How are banks’ corporate customers influenced by the implementation of instant payments for cross-currencies?

RQ2 How could banks utilize emerging business opportunities to create value towards corporate customers with the introduction of instant payments for cross-currencies?

RQ3 How will the need for co-opetition in a new competitive landscape for cross-currency instant payments affect banks’ value creation for corporate customers?

1.4 Delimitations

Delimitations are made to ensure the research quality within the given timeframe and to fulfill the research’s purpose. The study is delimited to the geographical area of Sweden. As a result of the Nordic project P27, in combination with the ongoing discussion regarding RIX-INST, Sweden becomes a suitable and relevant delimitation for this research. Moreover, the study is delimited to the case of instant payments for cross-currencies originating from P27, which delimits other ongoing projects or initiatives of creating real-time infrastructures. When considering actors influenced by instant payments for cross-currencies, these are delimited to banks and their corporate customers.

1.5 Contribution

The study contributes to filling the existing gap in the literature of value creation resulting from instant payment for cross-currency – a novel and not yet implemented technology. Besides, literature regarding business opportunities, innovations, and network effects mainly focus on Fintechs or established firms outside the financial industry. Therefore, this research contributes by extending existing literature and developing the current knowledge in the area of payments by comparing and applying it with academic theories. Further, this research contributes to an objective view of the future of payments.

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1.6 Layout of the Thesis

In Table 1, the layout of the thesis is presented to provide the reader with an overview of the report.

Table 1. The layout of the thesis

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2. Literature Review and Theory

The chapter presents and critically reviews the concepts within the area and chosen theories to create a baseline of existing knowledge within different contexts. The focus areas are theories of innovation, new business opportunities, and strategies for benefitting on other actors, where theory of network effects, multi-sided platforms, and co-opetition are included.

2.1 Introducing New Products

When introducing a new product in any industry, acknowledging the classification and characteristics of the innovation create a higher likelihood to formulate a suitable strategy (Markides, 2006). Distinct innovations influence, for example, markets and technology differently as well as the development of customer expectations. Possessing this knowledge or acquiring knowledge about possible outcomes creates a better understanding of how to prepare strategically and how to create value and obtain a competitive advantage.

2.1.1 Classifications of Innovations

Since Schumpeter coined the concept of creative destruction in the seminal work Capitalism, Socialism, And Democracy (1942), interest of the dynamic industries has increased. The concept describes the economic structure as continuously transforming from within, meaning constant destruction of the old structure and, thereby, constant creation of a new one. Industries are argued to consist of change and cannot be analyzed in static terms. (Schumpeter, 1942, chap. 7). Many academics have developed this concept into new powerful and widespread concepts. Researchers have been introducing new concepts of innovation to support new situations and conditions (Gatignon et al., 2002; Das et al., 2017). There has also been a long interest in studying what factors influence the direction and rate of a technological change (Christensen and Rosenbloom, 1995). Many of the traditional classifications of innovations are distinguished between two extremes. Some examples of these are incremental vs. breakthrough innovation (Tushman and Anderson, 1990), conservative vs. radical innovation (Abernathy and Clark, 1993), or continuous vs. discontinuous innovation (Porter, 1986). In this study, the published literature on radical and incremental innovation by Abernathy (1978) and disruptive innovation by Christensen (1997) are investigated.

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Radical innovations are integrating different technologies to provide more benefits to the customer than what the industry previously has offered, including the transformation of the company trajectory. On the opposite side, incremental innovations are minor improvements in current technology, focusing on improving price or performance along established paths. The concept of radical innovation promotes the entry of new players, while incremental innovations contribute to strengthening the incumbents. (Christensen and Rosenbloom, 1995; Das et al., 2017). Sustaining innovations improve the performance of established products, striving for performance attributes that the mainstream customers have historically valued in the major markets (Christensen, 1997, p.11). In contrast, disruptive innovation targets a different set of performance attributes that are initially not valued by existing customers. Aiming for an emerging market, mainstream customers usually show an initial resistance to disruptive products. Yet, as the performance attributes valued by mainstream customers may change at a rapid pace, the innovation can later overtake (disrupt) the existing and established market. The relationship between these concepts is visualized in Figure 1 (Christensen and Bower, 1995).

Figure 1. The relationship between disruptive, incremental, radical and sustaining innovation

It should also be denoted that there is some overlap between different frameworks formulated by various scholars, indicating that the definitions are not exclusive. For instance, a particular innovation can be either radical or disruptive but can also possess characteristics that cover both definitions (Gatignon et al., 2002). Moreover, Christensen and Euchner (2011) discuss historical examples of situations where the customers have shown no signal for a specific need or demand. Still, the firm has incrementally improved the product – and eventually, an entirely new market was created. In other words, incremental innovations can gradually result in disruptive innovations (Christensen and Euchner, 2011).

The theory of disruptive innovation is extensively accepted and widespread (Baatartogtokh and King, 2015). However, Christensen has communicated concerns that there are great misunderstandings of its core principles. For instance, Christensen et al. (2018) argue in the article Disruptive Innovation: An Intellectual History and Directions for Future Research, for

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incorrect use of disruptive as a synonym for any new generic threat of a new technology intending to shake up a specific industry. The overuse of the terms disruptive innovation or disruption contributes to an ignorance of the concept’s theoretical definition. The authors express two significant risks that this misconception might cause. Firstly, researchers will face considerable difficulties in extending the work when building upon inaccurate statements.

Secondly, researchers relying on academic journals, publications, etc. with a misleading application of the theory, will acquire a reduced chance of success (Christensen et al., 2018).

Moreover, Markides (2006) points out another major flaw in the theory of disruptive innovation. In Christensen’s concept, disruptive innovation initially focused on the advancement of technologies and was later extended to include products and business models.

Using the same concept for these distinct innovations, and thereby handling them equally, is considered questionable since they require different responses from the established firms being disrupted. Thus, disruptive technological innovation, disruptive business-model innovation, and disruptive product innovation were introduced.

2.1.2 Changes in Customer Expectations

A common issue when investigating innovations is that the improvement of technology and the development of perceived customer value in performance attributes might not hold the same pace. This divergence can result in a firm providing a better and more expensive product than competitors, reaching beyond the customer needs and thereby exceeding the limit for what customers are willing to pay (Christensen, 1997, p.11). These potentially misleading implications can make firms miss the timing for a successful product. However, if the development of valuable performance attributes later catches up with the technology advancement, it could result in a fit allowing customers to access products or services that previously have been accessible at a higher cost than they were willing to pay (Kim and Mauborgne, 2005a, p.13). In other words, the rapid pace might result in a product or service that is underperforming today in terms of customer demand can be a significant success tomorrow (Christensen, 1997, p.11). This is a characteristic challenge for disruptive innovations (Kim and Mauborgne, 2005a, p.13).

Finding the right timing is challenging since value-adding products or services might be depending on additional functionalities to grow. Meanwhile, to maintain growth, it is crucial to continuously introduce new services (TietoEVRY and Lipis Advisors, 2020). This is further agreed in recent reports by Capgemini and BNP Paribas (2018) and SWIFT (2018). For financial institutions to maintain their positions and customer relationships, it is necessary to accommodate both present and future customer expectations. However, since rapid technological change is described as the ultimate disruptor of the payment market, difficult challenges are appearing for the established banks who are hampered by cultural and regulatory obstacles (Capgemini and BNP Paribas, 2018; SWIFT, 2018).

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Moreover, there is an agreement among several researchers that radical innovations are more difficult for customers to handle than incremental innovations, since radical innovations comes with an unfamiliar presence (Berry et al., 2006; Rindova and Petkova, 2007). However, by embodying this type of innovation into a more incremental and familiar form, customers are more likely to understand and apply the change. Abu-Shanab and Qasim (2015) agree and explain that even technologies with high potential of simplifying lives often meet some degree of resistance. After all, if a firm succeed in implementing a technological innovation, there is often a temporary monopoly with short-time profits of an excessive extent. Traditionally this will eventually be challenged by rivals and imitators (Buisson and Daidj, 2017).

2.1.3 Innovation for Established Firms and New Entrants

Christensen and Rosenbloom (1995) proved that established firms historically reach great success by fostering a series of incremental innovations. Even in more recent studies, researchers argue that established firms tend to be prominently engaged in incremental innovations to meet the customer demand (Bond and Houston, 2003; O’Connor and Rice, 2013). However, Christensen and Hwang (2010) state the importance of striving to separate from the status quo and to understand that this is resulting from new business models.

Supported by Henderson (1993), large and established firms are more likely to fail when implementing radical innovations compared to new entrants. It is argued that possessing capabilities for incremental innovations are reducing productivity when attempting to implement a radical innovation.

Christensen (1997, p.34) discussed the everlasting threat that established firms face since new entrants typically are the players disrupting the market. In the financial industry, the historically restricted access for new entrants has resulted in a lack of competitive pressure, which is essential for fostering innovation. As a consequence, radical and disruptive innovations rarely occur in this industry. However, many banks have applied new strategies where they have come to play an essential role in startup ecosystems, yet maintaining financial stability (Das et al., 2017). This is further increased in line with Open banking and PSD2 (Guibaud, 2015). Verified by Porter (1991), innovations are enabled when taking advantage of external effects influencing the industry.

2.2 New Business Opportunities

With the emergence of radical changes in technologies, and the change in customer behavior and expectations, new market opportunities could be created (Bond and Houston, 2003). New market opportunities are referred to by Bond and Houston (2003) as the intersection of the capabilities of a company and the need of a customer. Due to changing expectations, disruptive innovations are attracting an entirely new population of customers into the market (Christensen and Euchner, 2011), requiring a different value proposition (Christensen, 1997, p.11). When proposing and introducing new products or services, value could be increased, and there could be a creation of new market spaces and new customers (Berry et al., 2006). However, the creation of new business opportunities or new markets is something that is not discovered but

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emerges (O’Connor and Rice, 2013) or develops from a new strategic mindset (Gnecchi, 2009).

Therefore, the literature regarding new business opportunities aims to review what has previously been researched in the field of creating new markets, identifying barriers, and the benefits of being market-driven.

2.2.1 Creation of New Market Segments

With a market continuously having supply exceeding demand, the driving forces of the creation of new markets are identified to be the radical advancement of technology, new customer behavior, and new customer demand (Bond and Houston, 2003). Additionally, globalization has a great impact on the creation of new market spaces since borders open up, allowing products and services available both instantly and globally (Kim and Mauborgne, 2005b).

Further, when having a persistent aim for innovating business, both on a product level and managerial level, companies will easier confront economic difficulties. To seek beyond the competitiveness and develop a solution not built on what competitors are doing also enables innovation (Gnecchi, 2009). Besides, when creating a new market space, it is shown to have an impact on profit and revenues (Kim and Mauborgne, 2005b). Research suggests that value could be created by finding new combinations of already existing resources and that there seems to be an agreement that innovation is enabling value creation (Rindova and Petkova, 2007). As previously mentioned, new market opportunities are seen to be the intersection of a company’s capabilities and customers’ needs (Bond and Houston, 2003). Therefore, to be successful when creating new markets, firms must consider their customer’s perception of value (Gnecchi, 2009). There is a need to identify opportunities for the new market space to enable estimation of value, which could be challenging (Bond and Houston, 2003).

However, there are barriers for established firms, such as banks, to provide the radical innovations needed to create new market spaces. Kumar et al. (2000) have identified four barriers to why established firms do not provide these radical innovations. First, market driving ideas are challenging to predict, where they will occur, and by who. Second, the involvement of high risks. Third, established firms tend to identify business opportunities by technological usefulness and market size. Fourth, threats of cannibalization of existing products or services.

Besides, when introducing market creation activities, it is required not to intrude on existing business systems since this could hinder the success rate (Kumar et al., 2000). Additionally, market barriers can make the entrance of a new market difficult, which creates a need to develop or revise business models.

2.2.2 Value Innovation and Strategic Innovation

The seminal work from Kim and Mauborgne (2005a) defined the strategy of seeking uncontested markets as the Blue Ocean Strategy. The blue ocean represents a new and untapped market space – where competition is irrelevant. They suggest that when leaving the competition behind, and changing the focus from competing in the existing market space to creating something new, it is easier to focus on buyers’ value (Kim and Mauborgne, 2005b). Kim and Mauborgne (2005b) further suggest that the creation of new markets enables opportunities for

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integration of value innovation and cost integration. As a result, there is an increase in value innovation, allowing the creation of previously non-existing benefits or offerings and a cost reduction through the elimination of extraneous factors or previously competing factors.

Already in their earlier studies, Kim and Mauborgne (2004) mentioned the importance of integrating value and innovation. Where innovation without having the value aspect in mind tends to be more focused on technology and value without the innovation aspect tends to be more focused on incrementally creating or improving value. In Figure 2 the concept of value innovation is shown, created in the intersection where both the cost structure and the value propositions are favorably influenced by the company’s actions (Kim and Mauborgne, 2005a, p.16).

Figure 2. The relationship of increasing buyer’s value while reducing costs (Kim and Mauborgne, 2005a, p.16).

Similar to previous theory, Markides (1997) introduced the theory of strategic innovation, focusing on adjusting the strategic focus from competition to developing and setting its own rules. However, it is difficult to do this without the impact of new technological innovations, and strategic innovation is developing from the gaps in the industry. These gaps are most commonly related to new emerging customer segments and new types of products or services.

This as a result of changing customer behaviors, changing technologies, or changes in regulations.

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Further, Markides (1997) comes up with five crucial factors regarding strategy innovation:

1. The strategy of going outside the competitors is not new.

2. Strategic innovation is also about timing and might not be suitable for all firms. That is depending on the industry and the firm’s competitive position.

3. Managing strategic innovation depends on customer requirements and expectations and the firm’s strengths and weaknesses.

4. Breaking the rules could be risky as a strategy, but could be managed by piloting before fully adopting.

5. Innovating does not guarantee a successful realization. That is also depending on the management of the entire organization.

2.2.3 Innovating Business Models

As a result of more technology intense businesses, the general demand for more customer- centric solutions has evolved (Teece, 2010; Swacha-Lech, 2017). Also, the digitalization of the financial industry is threatening current business models (Cavelaars and Passenier, 2012;

Swacha-Lech, 2017). Researchers discuss how Fintech and digital disruption is transforming and affecting business models in the financial industry. Thus, creating a need for revised business models, hence, how value is created, offered, and captured (Teece, 2010; Swacha- Lech, 2017).

The essence and importance of business models are discussed among researchers because it outlines how well a business performs and how it proposes value towards customers (Johnson et al., 2008; Teece, 2010). Several researchers agree that the value proposition and the way value is created and captured are seen as the primary functions of the business model (Johnson et al., 2008; Osterwalder and Pigneur, 2010; Zott et al., 2011). The concept of business model innovation is seen as a strategy for competitiveness (Teece, 2010) where several researchers highlight the opportunities to create value through innovating the business model (Amit and Zott, 2010; Chesbrough, 2010), particularly for incumbents (Johnson et al., 2008; Teece, 2010).

Some researchers address the challenges facing the financial industry with the rise of technology, creating a new environment (Swacha-Lech, 2017), where the adaption to new ways of doing business is seen as a necessity (Teece, 2010; Swacha-Lech, 2017). According to Teece (2010), businesses with established business models might find it difficult to change, resulting in established banks find this necessity difficult. However, creating new business models will enable innovation and allow profit (Teece, 2010).

Moreover, the shift from relationship to transaction banking is affecting the way products and services are distributed. As banks move more to transaction banking, previous relationship banking is moved to intermediaries or third-party actors. Consequently, adding value through more transactional services without physical interaction has enabled cost savings. Therefore, it is necessary for banks to be aware of the business models, not least when adapting to new market spaces. The awareness also allows them to identify risks from innovations threatening

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the existing business models (Cavelaars and Passiniers, 2012). However, it is further stated that several business models might be combined for large banks, depending on different offerings, customers, and geographical locations (Cavelaars and Passiniers, 2012). This creates challenges when trying to innovate business models. Additionally, factors as internationalization and digitalization are influencing the traditional industry. These factors are resulting in a change in the conventional relationships and network of participants (Teece, 2010), making it necessary for banks to revise or search for new business models.

2.3 Strategies for Benefiting from Other Actors

Competition in the financial industry is growing, and new entrants are arising at a faster pace than ever before. At the same time, banks have to cope with unprecedented reforms of traditional and widely accepted payment products, relationships, and timescales. To profit from the new circumstances and environment, forming partnerships is essential (SWIFT, 2018).

Therefore, the concept of network effects is investigated, as it is seen as a requirement for the payment industry. Furthermore, multi-sided platforms are reviewed, which described as an upcoming strategy to approach the new international norm. Lastly, the theory of co-opetition is also discussed to understand the strategic choices behind collaborating with competitors.

2.3.1 Network Effects

At the beginning of the 1980s, some corporations-initiated collaborations where they worked together, resulting in a competitive business position (Hsueh et al., 2010). The term network effects later described this concept. The theory explains that the perceived value of a product or service increases with the increased number of users adapting to it, as shown in Figure 3 (Gawer and Cusumano, 2014; Abu-Shanab and Qasim, 2015). The increased value counts both for the users and owners of the platform. (Gawer and Cusumano, 2014). Moreover, this phenomenon accelerates the development of complementary products, which gradually increases the value for the users (Narayanan and Chen, 2012; Gawer and Cusumano, 2014).

Figure 3. The concept of network effects.

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Reviewing literature discussing network effects is relevant to understand incentives for adopting new technologies (Milne, 2006). Strong business networks have significant benefits in innovation performance, creating an amount of value that cannot be achieved independently (Hsueh et al., 2010).

Traditional Networks in the Financial Industry

According to Milne (2006), payment arrangements have been one of the most popular areas where network effects have been studied. More specifically, card payments, ATM networks, and automated clearing houses have been examples that have been of interest. The way the payment industry works differs from other industries since essential elements of the network need to be shared between all banks. In this industry, customers need to be able to transfer money, not only within one bank, but to all bank accounts in all banks (Milne, 2006). A benefit from network effects is the possibility of reaching economies of scale and scope (Hsueh et al., 2010). In the payment industry, network effects is defined as scale from the demand side, and have a higher degree of significance than scale from the supply side. Thereby, standardization and consolidation of the payment systems are advantageous. (Bergman, 2003)

Abu-Shanab and Qasim (2015) investigated the main factors influencing the level of acceptance for mobile payments. The findings proved the importance of building a critical mass both in terms of merchants providing the payment method, as well as a sufficient number of users of the technology, which could be described as the impact of network effects. This result is, according to by Milne (2006), applicable to all payment services. Also, SWIFT (2018), who is the primary provider of global payments, has identified scalability, reach, and availability as market requirements, which all are connected to network effects. Milne (2006) further reviews the situation of adapting a new payment technology. For that to occur, the ideal solution is for all banks to move together. However, at least a group of banks that are representing a significant share of the banking market have to accept and introduce the innovation for it to succeed. An example of this is the project going on to extend the regional networks in Europe into a common pan-European network. However, this payment market will remain fragmented as long as local market services are offered (SWIFT, 2018).

2.3.2 Multi-Sided Platforms

The concept of multi-sided platforms is a business model gathering two or more agents with different offerings to enable interactions between them (Evans and Schmalensee, 2013; Hagiu and Wright, 2015; Loux et al., 2020). According to this theory, value is created by services that are only possible to offer through the shared ecosystem (Evans and Schmalensee, 2013;

Hänninen et al., 2017). A close strategic network with various business partners enhances a more effective service innovation performance and a competitive business position (Hsueh et al., 2010). This is possible by bringing different types of complementary services or products together in an ecosystem (Hein et al., 2019), generating value in the interaction of consumers, suppliers, and the platform owner in a mutual network (Hänninen et al., 2017). Moreover, multi-sided platforms enable knowledge diffusion among the participants, fostering the development of further complementary innovations (Hein et al., 2019). Hence, multi-sided

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platforms are closely related to network effects, as users benefit from the number of users joining the platform from the other groups (Evans and Schmalensee, 2013; Loux et al., 2020).

Traditionally, multi-sided platforms have not been commonly utilized in the financial sector.

However, historically, banks have established strategic alliances with other banks to reach broad networks, both locally and internationally. Collaborating with banks in other parts of the world does both simplify and generate profits from international transactions (Child et al., 2019, chap.19). In recent days, a new norm of data-driven retail has arisen, driven by the digitalization, which has increased competition on a global level. To benefit from this, multi- sided digital platforms are appropriate, and the financial sector has initiated adaption to these kinds of collaborations (Hänninen et al., 2017; Hein et al., 2019). One common example is how banks benefit from integrating with Fintechs, as the partnership generates a complementary combination of skills and capabilities (SWIFT, 2018), filling the gaps between the current offerings and new value-adding products (Capgemini and BNP Paribas, 2018; Agarwal, 2020).

2.3.3 Co-opetition

The theory of co-opetition, defined as simultaneous competition and cooperation between firms (Gnyawali and Park, 2011; Pathak et al., 2014; Ferreira et al., 2015), is an increasingly studied theory due to uncertainties in increased global competition, new markets and fast-changing technologies (Ferreira et al., 2015). The complex concept, established by Brandenburger and Nalebuff (1996), is based on the paradox of fundamentally diverse and conflicting logic of interaction that the relationship types competition and cooperation are built upon. On the one hand, the firms acquire a hostile relationship due to contradiction in interest by the competing nature. At the same time, the firms acquire a friendly relationship due to mutual interest. To successfully benefit from co-opetition, these logics of interaction need to be separated appropriately (Bengtsson and Kock, 2000).

Several benefits can come from co-opetition, particularly regarding high-tech businesses since this form of partnership includes splitting considerable investments with competitors. Besides investments in platforms, funds for R&D can also be shared. However, in order for this partnership to be beneficial for all actors, common technological standards is required (Gnyawali and Park, 2011; Ferreira et al., 2015). Particularly for leading firms, co-opetition provides benefits of shaping new industry standards and structures. Since technological standards and platforms are the foundation for other products, this strategy has good chances of winning the battle of industry-norms, which is a massive advantage (Gnyawali and Park, 2011). The strategy of co-opetition can create a compelling new entrance barrier against the competitors that are not included in the partnership. The barriers are further raised by the fact that co-opetition alliances are all pushing towards a joint direction. This results in a heavy influence on the total movement of the industry (Ritala and Hurmelinna-Laukkanen, 2009).

Moreover, since competing firms face similar pressures, relevant resources from competitors can be used to create new technological innovations (Gnyawali and Park, 2011).

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In the chapter Inter-firm Cross Border Co-opetition: Evidence from a Two-Country Comparison from the book New Challenges in Entrepreneurship and Finance (2015), co- opetition from a cross-border perspective is studied. Cases of domestic co-opetition in Spain and Portugal are studied; two countries that often are considered similar in many aspects. The aim was to explore the actual engagement of these business relationships, with innovation- based objectives, and the study concludes significant differences in managing the co-opetition (Ferreira et al., 2015). Concluding from this, the case study proves the importance of highly considering the cross-border perspective when investigating co-opetition. This is agreed by Luo (2004), who directed this as criticism towards the concept. He had noted a lack of research regarding co-opetition in an international and multinational perspective. As a development, he argued that both global competitors, country governments, alliance partners, and subunits should be included. In a recent study, McKinsey & Company (2019) agree that cultural mismatch is a reason for failures for integration. They further address that for cross-border relations, it is challenging to integrate different businesses and operating models (McKinsey &

Company, 2019).

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3. Methodology

This section presents the methodology of the research by initially describing the research design and process. After that, the methods for collecting data are presented, followed by a discussion about how research quality is achieved through validity, reliability, and generalizability. Lastly, the ethical aspects of this research are presented.

3.1 Research Design

This study was conducted as a case study and thereby has a qualitative research approach. Since the area of investigation was considered somewhat unexplored from a theoretical perspective, the use of exploratory research provided an understanding of the phenomena that was studying, since this method enables a significant amount of empirical data (Yin, 1994; Eisenhardt and Graebner, 2007). According to Hennik et al. (2020), a qualitative method is preferred when investigating a complex phenomenon to enable a contextualization of the event, allowing an increased understanding and depth of the study. Due to the complexity of the financial infrastructure, both regarding functionality and concepts, a qualitative approach was an appropriate choice. Also, Creswell (2013) argued that this method is useful when studying topics where there are gaps in knowledge at the beginning of the research, which was the case of this study. The choice of a qualitative case study was further justified by the fact that the research was focusing on contemporary events (Yin, 1994, pp.4-9).

Further, the research had an abductive approach – combining both deductive and inductive reasoning. This implied that the empirical findings were discussed in combination with literature, which allowed theory to confirm empirics, and contrariwise, empirics to confirm the theory. Using an inductive design is common in qualitative methods, initializing with literature to increase knowledge about the researched area (Creswell, 2013, p.28). However, the use of the abductive approach was helpful in this study and enabled the analysis and justification of the empirics (Saunders et al., 2009, pp.127-128; Blomkvist and Hallin, 2015).

3.1.1 The Case Study – Instant Payments for Cross-Currencies

The thesis was conducted as a case study, defined by Farquhar (2012) as “An empirical inquiry that investigates a contemporary phenomenon in depth and within its real-life context, especially when the boundaries between phenomenon and context are not evident.” This

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approach was, therefore, suitable to create insights into the chosen phenomenon within the actual context. More specifically, this approach implied collecting evidence about the event where it has impact and occurs in reality. Besides, Yin (1994) argues for the appropriate use of a case study in situations when:

- How or why questions are being asked.

- The focus is on a contemporary phenomenon.

- The researcher has little control over events. (Yin, 1994)

In this thesis, the phenomenon – or the case study – was instant payment for cross-currencies.

The phenomenon was during this research, a currently ongoing case in the Nordics by the project P27 Nordic Payments, aiming to create the world’s first real-time cross-currency infrastructure. The project was a joint initiative, structured as an independent project with representatives from banks in the Nordics, read more about P27 in chapter 4.3.1. The establishment and the setting of a pan-Nordic payment infrastructure are complex but relevant.

The case of instant payments for cross-currencies was characterized as a contemporary phenomenon. Furthermore, the project proceeded during the research, and the researchers had limited control over events, which concluded the case study was the proper method.

3.2 Research Process

The research was conducted as an iterative and non-linear process, mainly divided into four segments. The method of convergent and divergent thinking was allowing the formulation of a problem and the identification of the case (Blomkvist and Hallin, 2015, pp. 31-32). The first segment consisted of stating the case by defining the problem formulation and research questions and determining delimitations being the frame of the study. Subsequently, literature was reviewed, and empirical data was collected in a parallel process. The literature was reviewed to identify existing knowledge on the topic and obtain the required amount of theory to proceed with the research. Simultaneously, qualitative empirical data gathering was performed. The reason for the parallel procedure was to confirm that the topics included in the interviews were also covered in the literature review and theory. After that, the data was sorted and analyzed, which was later used for discussion. Lastly, the research questions were answered in the conclusion of the study.

3.3 Data Collection and Analysis

Combining different methods enabled the triangulation of data, which refers to the use of multiple methods to develop a comprehensive understanding of the problem (Patton, 1999;

Saunders et al., 2009, chap.5). The data used in this research was collected by different methods as a part of the iterative process previously explained. The primary sources of the empirical study consisted of semi-structured interviews with different actors in the payment ecosystem and two surveys already performed by The Global Treasurer and CGI (2019) and Capgemini and BNP Paribas (2018). Moreover, the secondary sources used in this study were acquired from a literature review to build the theoretical foundation and to investigate the outcome of

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previous research. The collected data was sorted and analyzed with the help of theories of innovation, network effects, co-opetition, and new business opportunities. To increase research quality when analyzing the results, and to obtain more valid results, both source and observation triangulation were taken into consideration. Interviewees were chosen to ensure that they had a different relation to the phenomenon, providing different perspectives. Further, when analyzing the data, the objectivity of the respondents needed to be taken into consideration.

3.3.1 Secondary Sources and Document Review

Secondary sources were reviewed to create a baseline of existing knowledge, including substantive findings within different contexts. The literature review included previous studies in the chosen areas of research. Besides providing relevant theories or concepts, the review aimed to identify insights of potential weaknesses and limitations in theory (Blomkvist and Hallin, 2015, pp. 43-45). The literature review covered literature about the concepts of innovation, new business opportunities, network effects, and co-opetition. The theories and its descriptions in the chapter were based on seminal works from prominent scholars and later developed to theories adapted to the financial infrastructure. The theories were investigated to understand how banks and other actors within the payment ecosystem were related and what necessities needed to be taken into consideration for future discussion. When gathering the literature, it was essential to ensure the trustworthiness of the source. Therefore, secondary data was critically gathered from peer-reviewed articles from published journals, if-else discussed to ensure the relevancy and validity of the content.

Moreover, to increase the perspective of the impact of instant payments for cross-currencies, reports, and literature discussing the subjects were reviewed. The reason for using non-journal literature was the limited amount of research compiled in peer-reviewed secondary studies.

Meanwhile, more studies have been published in terms of public material, consultancy reports, surveys, and information from websites of actors involved in the payment infrastructure. The published material mainly derived from consultancy firms, Sveriges Riksbank and SWIFT. The documents were used to add further perspectives on the researched phenomena, which enabled triangulation (Creswell, 2013, p.199) and validation of the empirical findings. In combination with the empirical findings, the documents confirmed or denied previous knowledge in the area of instant payments for cross-currency, and they contributed to the discussion when aiming to answer the research questions. However, source criticism have to be considered due to the choose of using non peer-reviewed reports in the creation of knowledge base. This choose was made to be able to include a deeper level of specific data, but it might also contribute to a lower reliability. However, due to a careful selection of reports conducted by prominent consultant firms, the overall reliability is not considered particularly reduced.

3.3.2 Interviews

When the case was set, and a sufficient level of knowledge was obtained, interviews were performed. The interviews were conducted as a part of qualitative research. Twenty-one interviews were conducted, and the collection of interviews is described in Table 2 and

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expanded with more detailed information in Appendix A. It is a collection of representatives from different sectors of the financial industry. The interviewees were carefully chosen to people in managerial positions, ensuring their knowledge in the area of instant payments in cross-currencies and how it could affect their corporate customers. Furthermore, the majority of the interviewees had long experience in payments, and several had also worked in large corporations. Half of the representatives were working at large and commercial banks. Also, the Riksbank, clearinghouses, non-conventional banks, Nordic Payment Council (NPC), and instant payment projects and corporates were represented. Besides, an expert was interviewed to offer an objective perspective, separated from the industry.

Table 2. Information about the actors interviewed

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The method used in the interviews was semi-structured. This was used since the research area is complex, immature, and rapidly changing. Using this method left space for the interviewees to explain the topic further. Also, the possibility to ask relevant follow-up question were given if there was any ambiguity, as well as allowing the elaboration of new questions desired to be answered (Gill et al., 2008; Rowley, 2012). The questions during the interviews were structured according to themes, and different templates were used depending on which actor interviewed since the various collection of actors required adjustments of questions. The interview protocol is presented in Appendix B. Due to the circumstances of Covid-19, all interviews were conducted by telephone except for one. All interviews were recorded and, after that, transcribed to facilitate coding and analysis.

All interviewees got a question about anonymity, ending up in everyone choosing to display their names, title and company in the report. The alternative of keeping their participation anonymous was always an option. However, there are validity risks with producing a study with full names, since the participants answered the questions in the name of a company. This means that there might be issues is not fully expressing thoughts and opinions, due to a desire to protect the company they represent. This issue was minimized by presenting the statements with could be experienced somewhat controversial without names in the chapter Empirical Findings.

3.3.3 Surveys

Data from chosen surveys were conducted in order to obtain a more comprehensive collection of data to compare the interviews with. The two surveys investigated were the CGI Transaction Banking Survey 2019 by The Global Treasurer and CGI (2019) and the World Payments Report 2018 by Capgemini and BNP Paribas (2018). The CGI Transaction Banking Survey 2019 was mainly used to collect data from a corporate perspective, but also to verify bank- specific data. This survey is conducted each year to create a better understanding of attitudes and emerging trends in banking services and to identify how the corporate practitioner’s needs match the needs of finance professionals. In the 2019 edition, 136 corporate representatives working in their organization’s treasury or finance function have responded together with 251 representatives working as banking services providers. Secondly, the World Payments Report 2018 by Capgemini and BNP Paribas (2018) is used to add on the corporate perspective. This survey is based on an executive survey of a total of 101 respondents.

3.4 Research Quality

Generally, the research quality depends on the methodology used and how well it is presented.

To achieve high validity and reliability of a research, it is important to ensure that the findings are considered correct. Further, the data must be gathered and analyzed consistently, which could be guaranteed with optimal methods and critically reviewed literature (Yin, 1994;

Saunders et al., 2009, chap.5).

Preparing for Takeoff in the Payment Industry

Preparing for Takeoff in the

Payment Industry

Co-opetition as Value Creation

FRANCESCA BERN

OTHILIA ÖSTERLING

Förberedelser för avstamp i

betalindustrin

Värdeskapande genom co-opetition

FRANCESCA BERN

OTHILIA ÖSTERLING

Preparing for Takeoff in the Payment Industry

Co-opetition as Value Creation

Francesca Bern

Othilia Österling

Förberedelser för avstamp i betalindustrin

Värdeskapande genom co-opetition

Francesca Bern

Othilia Österling

Acknowledgments

Table of Contents

List of Figures

List of Tables

Abbreviations

Glossary

1. Introduction

2. Literature Review and Theory

3. Methodology