Cross Industry Innovation Changing the Way We Pay Research Paper Example

Abstract

In recent years, industry trends have seen the growth of innovation at a consistently fast pace. Many of these innovations have a significant impact on society and how it operates, and particularly on how business is handled across different industries. This literature review examines the relevance of innovation and its various types as they relate to cross industry impact of changes in the financial transaction services industry. This paper specifically takes an in-depth look at disruptive innovation and its evolutional affects on financial transaction products and services. The goal of this research is to evaluate the introduction of virtual cards and single use ghost accounts, as well as innovation in the banking and finance industries, and the effects this will have on the accounts payable and accounts receivable functions for the travel and tourism industry.

A Review of the Literature

Innovation, as it relates to industry, involves the application of new ideas to products, services and processes, and is defined by the level of value added to products, services or processes for organizations and benefits for consumers (Greenhalgh & Rogers 2010). This translates into an innovation being a solution that meets new needs or one that offers new ways to meet old needs. Accomplishing this requires changing or upgrading products or processes, as well as services, to make them more efficient and thus more effective in the marketplace. This often involves the implementation of new ideas and technologies. Greenhalgh & Rogers (2010) defines product innovation as ‘the introduction of a new product, or a significant qualitative change in an existing product,” and process innovation as “the introduction of a new process for making or delivering goods and services’ (p. 4).

This literature review considers the use of virtual cards and single use ghost accounts and how this affects the accounts payable and accounts receivable functions for the travel and tourism industry, by responding to the following questions.

1. What drives innovation?
2. What are some different types of innovation?
3. What is service innovation’s role in dynamic capability leveraging?
4. What is disruptive innovation and how does it impact the financial transaction products and services industry with the use of virtual cards and single-use ghost accounts?
5. How has disruptive innovation in the financial transaction products and services industry changed the process of how consumers pay for products or services, and how does this affect accounting functions, specifically in the travel and tourism industry?

From an economics standpoint, businesses in today’s global economy thrive on maintaining a healthy consumer base and repeat business in their specific industries. Consequently, innovation drives growth. Rapid advances in technology over the last few decades shows the need for constant improvement in organizational strategies to meet consumer demand for bigger, better and faster products, services and processes.

What Drives Innovation?

It is a fact that today’s consumers are more aware than consumers of the past.  Today’s consumers are extremely brand-conscious and have better access to product and service information via the Internet and other forms of electronic technologies. This enables them to easily compare products and services between competitors. Therefore, consumer demand is a major driver of innovation, as is easy access to new technologies. Other catalysts that drive innovation are organizational desire for growth and competitive positioning initiatives, which is often precipitated by an organization’s discovery of a new technology. Ultimately, however, it is more likely the consumer who determines what products, services or processes need reinventing and at what innovative pace, based on ever-changing social, economic and technological trends.

Greenhalgh & Rogers (2010) states, ‘Product innovations may be tangible manufactured goods, intangible services, or a combination of the two’ (p. 4). Knowledge@Wharton (2009) cites some examples of business industry-changing product innovations seen over the last three decades and they are:

• The Internet (e.g., broadband, advanced communications, social media and media file sharing)
• Personal computers and laptops
• Mobile phones, Blackberrys, PDAs, electronic tablets and other handheld devices
• Computer software
• Digital photography
• RFID technology
• ATMs
• New banking and finance technologies (e.g., PayPal, EZ Pass, virtual cards and ghost accounts)

These innovations get credit for positively impacting quality of life by creating increased efficiency and better standards of living in a global environment, and encouraging industry growth. Additionally, product innovations determine process innovations by changing the way people do business, such as someone conducting banking activities online as opposed to visiting the bank in person.

Types of Innovation

Innovation is categorized into various types, depending on what new ideas are being introduced and whether the area of focus is a product, a service or a process (Gerrish 2008). However, two common types of innovation seen in the business industry are Breakout Innovation and Sustaining Innovation (Christensen 1997).

Breakout Innovation

Breakout innovation causes radical changes and enhances performance of products, processes or services within existing categories, taking them to higher levels of significance. For instance, Coppendale (2004) uses the Motorola Razr as a noteworthy example of breakout innovation, and points out its significant sales success based on its new design. However, even though demand for the new phone increased, it still works the same as previous phones with the old design. The breakout innovation was delivering a new version of the same product, in this case, thus targeting new segments of the market and adding new value to the product.

Sustaining Innovation

Sustaining innovation is also referred to as incremental innovation and relates to product and service developments that keep companies competitive (Taylor 2012). For example, a sustaining innovation is one that may improve the performance of an existing service, process or product, such as improving a brand of laundry detergent with 25% more stain removal power than a competitor’s brand.  Therefore, a sustaining innovation actually evolves an existing product or service market, instead of creating a new one, while incorporating value-added improvements (Christensen 1997).

Christensen also describes another common type of innovation that is comparably different than sustaining innovation, and that is disruptive innovation.

Disruptive Innovation

In contrast to sustaining innovation, disruptive innovation is considered transformational and creates a paradigm shift that changes the direction of current market behavior toward products, processes or services, eventually rendering them obsolete (Taylor 2012). Additionally, this type of innovation disrupts value networks and has the ability to propel a company into a market leader position in its industry. Christensen (1997) states disruptive innovation applies different values to an existing market, thereby, creating a whole new market that takes over the existing market. In the business market, this refers to changing business models and trends, which lead to an evolution of business at industry levels (Christensen 2003). This sets in motion the disruption process within the industry for a specific product, process or service.

The Disruption Process

Markides (2012) explains that the disruption process begins when a product, process or service shows initial performance inferiority in the market, as measured by the non-interest of existing customers who perceive the product, process or service as not good enough. At this stage, the product, process or service is relatively inexpensive. This draws the attention of new customers who will initiate a spike in sales. At this point, if perception of the product, process or service evolves into something that mainstream customers appreciate, the price increases as well as sales, thus causing a disruption in the market. Christensen (2006) sums this up best, stating

The theory of disruptive innovation is grounded in research that has revealed how simpler, cheaper, and “good enough” innovations can find application in low-end market tiers and non-consuming customer groups. These innovations inevitably improve, march up-market and “disrupt” incumbents by gradually pushing them out of ever more complex and margin-rich product segments (p. 1).

Disruptive Innovation Examples

Examples of disruptive innovation include digital media vs. CDs and DVDs, PCs vs. word processors, digital photography vs. chemical photography, GPS vs. paper maps, cell phones vs. landline phones, or virtual cards and single-use ghost accounts vs. debit and credit cards. These innovations are credited with significantly changing their perspective industries by offering the market more technologically advanced products and services.

All are significant; however, this literature review focuses mainly on the disruptive innovation of virtual cards and single-use ghost accounts vs. debit and credit cards, as well as how these products affect the financial transaction products and services industry. Additionally, this review examines these products’ effects on accounts payable and accounts receivable functions, particularly for the travel and tourism industry. However, first the significance of service innovation, and how it relates to the leveraging of dynamics in disruptive capability, is examined.

Service Innovation

Its Role in Dynamic Capability Leveraging

In order to be truly competitive, an organization needs to focus innovation initiatives on services, as well as products. However, Chesbrough (2004) states, the intangible nature of services, relative to products, makes completing customer/supplier exchanges more challenging and involves creative planning and leveraging capability on the part of the supplier. It is also stated that customers are essential to defining and shaping, as well as integrating, service processes, which is in line with what is stated at the beginning of this literature review. Customers are major drivers of innovation. Consequently, companies are more aware of the significance the role of services plays in their organizations. Chesbrough (2004) reports that service industries are fast-growing aspects of today’s economic activity, and uses the fact that IBM’s annual revenues stem mainly from its IBM Global Services unit, as an example of this trend.

This leads way to the importance of developing value networks between customers and suppliers. Agarwal & Selen (2009) explain that value networks work in collaboration with each other to create new service offerings, and thus service innovation, which allows organizations the option of leveraging dynamic capabilities in capturing market opportunities. Dynamic capability leveraging is innovation capability that creates and exploits new products, services and processes (as cited in Pittaway, Robertson, Munir, Denyer & Neely 2004). This research examines how disruption in service innovation impacts the financial transaction products and services industry.

How Disruptive Innovation Impacts the
Financial Transaction Products and Services Industry

A service innovation is one that significantly changes an existing service mechanism to the point it overtakes the existing service process, due to popular consumer demand for the upgraded version of the service. This also pertains to product innovation. For example, in the financial transaction products and services industry, consumers enjoy the convenience of using debit and credit cards in lieu of cash to make purchases and payments. An upgraded version (by disruptive innovation) of these products, and the services connected to them, is the virtual card, which is linked to a single-use ghost account.

What are Virtual Cards and Single-Use Ghost Accounts?

Virtual cards, although they work the same as debit and credit cards, are not physical products that consumers receive from financial institutions. Virtual cards are issued with 16-digit virtual account numbers and three-digit account verification codes, usually via email, and are loaded from a customer’s bank account or credit card.

JPMorgan.com (2012) states that a single-use ghost account ‘is an electronic, credit card-based payment solution that acts like a check’ (para. 1). Single-use accounts are only good for a specific amount and for a specific timeframe. The consumer sets dollar value and the expiration of the one-time transaction associated with each single-use account.

In summary, a single-use ghost account ‘is an electronic card-based payment solution for larger, single purchases that combines the control of checks, the convenience and rebate revenue of a card, and the efficiency of e-payment’ (JPMorgan.com 2012).

Disruptive Innovation’s Affect on Accounting Functions in Travel and Tourism

The disruptive innovative effects of the virtual card/single-use ghost account industry encroaching into the mainstream, and initiating an evolution, of the debit/credit card industry, has an obvious affect on the accounting functions in various fields of business. This has precipitated changes in the process of how consumers pay for products and services. This is particularly true in the field of travel and tourism, for example.

An article on Tnooz.com (2012) reports that an increasingly growing sector of travel and tourism is the hotel industry, as influenced by the Open Travel Association (OTA) and industry push to regain control of price margins in hotel distribution. The article further states “geometric growth in the use of credit-card based payments by third party intermediaries in reserving and settling with hotels in the last ten years” is evident. Consequently, it is essential for cross industry innovators to focus on the continued evolution in payment functions, and how it affects the way consumers pay for products and services. As it relates to the travel and tourism industry, for instance, this certainly should not be ignored.

Travel intermediaries and credit card companies are veterans in the business industry and significantly influence customer to supplier transactions globally. Travel and tourism reservations are heavily funded through the use of credit or debit cards and a large volume of transactions are completed between travel places, hotels and third party intermediaries. This volume often puts a strain on accounting functions because on increased concentration on dispute and settlement issues arising from so many credit and debit card transactions. Consequently, the demand for more efficient methods of payment is high (Tnooz.com 2012). This is where the innovative process is upgraded via the implementation of virtual cards and single-use ghost account processing.

Benefits of Virtual Cards and Single-Use Ghost Accounts

Fraud reduction is a primary reason why consumers were quick to adopt the idea of using virtual cards and single-use ghost accounts. However, better accounting system functionality that includes being transaction-specific and having dollar limits imposed on them are also positive aspects of using them. The process is as follows:

Each purchase request, such as a hotel reservation is first electronically evaluated against a company’s pre-specified controls, including spend limits, merchant restrictions, acceptable usage dates, etc. The transaction is then assigned a virtual credit card number with which vendors can process payment using existing POS credit card networks. When the transaction completes, the credit card number expires and the account closes–never to be used again (Tnooz.com 2012, para. 12).

With this, accounting functions are enhanced because all data associated with each custom payment is saved and is accessed as needed.

Travel management is complex and businesses in this industry, such as hoteliers, can have a competitive advantage in the marketplace by utilizing virtual cards and single-use ghost account processes, thereby taking advantage of significant cost-savings and efficiencies in various areas of accounting functioning. For example, payment disputes and accounting discrepancies are more efficiently resolved. Additionally, travel intermediaries receive guaranteed, immediate payment, which increases cash flow, because the processes are electronic instead of paper-driven (Tnooz.com 2012).

Conclusion

Based on past and current market trends, experts predict that future trends will continue to move in the direction of technological advancement in the areas of product development, as well as service and process improvements. Innovation, particularly disruptive innovation, will continue to impact society across different industries. Thus, changing the way people do business and the way they pay for products and services. The growing use of virtual cards and single-use ghost accounts are examples of a powerful impacting trend in banking technology and accounts receivable/payable functions in this rapidly-moving, ever-changing world of business.

However, the question remains: What’s the next big idea?

Reference List

Agarwal, R & Selen, W 2009, ‘Dynamic capability building in service value networks for achieving service innovation’, Decision Sciences, vol. 40, no. 3, pp. 431-475.

Chesbrough, H 2004, ‘A failing grade for the innovation academy’, Financial Times, 24 September, viewed 25 September 2012, http://www.ft.com/cms/s/2/9b743b2a-0e0b-11d9-97d3-00000e2511c8,dwp_uuid=6f0b3526-07e3-11d9-9673-00000e2511c8.html

Christensen, CM 1997, ‘The innovator’s dilemma: when new technologies cause great firms to fail’, Boston, Massachusetts, USA: Harvard Business School Press.

Christensen, CM 2003, ‘The innovator’s solution: creating and sustaining successful growth’, Harvard Business Press.

Christensen, CW 2006, ‘Using disruptive innovation to create new growth’, lecture, University of Utah, viewed 25 September 2012, http://www.lib.utah.edu/info/gould-lecture/Gould%20Lecture%202005-2006.pdf

Coppendale, J 2004, ‘Achieving breakout innovation’, Manufacturing Engineer, vol. 83, no. 5, pp. 34-39.

Gerrish, R 2008, ‘Six Types of Innovation’, CBS Money Watch, 02 October, viewed 26 September 2012, http://www.cbsnews.com/8301-505125_162-31140315/six-types-of-innovation/.

Greenhalgh C & Rogers M 2010, ‘Innovation, Intellectual Property, and Economic Growth’, Princeton University Press.

J.P. Morgan.com 2012, ‘Single-use accounts’, viewed 28 September 2012,

http://www.jpmorgan.com/tss/General/Single-Use_Accounts/1147867297444

Knowledge @Wharton 2009, ‘Top 30 innovations of the last 30 years’, Forbes, 19 February, viewed 26 September 2012, http://www.forbes.com/2009/02/19/innovation-internet-health-entrepreneurs-technology_wharton.html.

Lauze, M 2012, ‘Three reasons why the evolution in travel payment functions cannot be ignored’, Tnooz.com, 15 February, http://www.tnooz.com/2012/02/15/news/three-reasons-why-the-evolution-in-travel-payment-functions-cannot-be-ignored/

Markides, CC 2012, ‘How disruptive will innovations from emerging markets be?’, MIT Sloan Management Review, 18 September, viewed 24 September 2012, http://sloanreview.mit.edu/the-magazine/2012-fall/54120/how-disruptive-will-innovations-from-emerging-markets-be/

Pittaway, L, Robertson, M, Munir, K, Denyer, D, & Neely, A 2004, ‘Networking and innovation: a systematic review of the evidence’, International Journal of Management Reviews, vol. 5, no. 6, pp. 137–168.

Taylor, A 2012, ‘Sustaining, breakout, and disruptive innovation’, Wisconsin School Business website, 05 January, viewed 24 September 2012, http://bus.wisc.edu/mba/arts-administration/blog/2012/1/5/Sustaining-breakout-and-disruptive-innovation.