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My business is helping companies speed up innovation - often by partnering with tech startups.  A wilder ride compared to my days leading innovation at Fortune 100 companies.  But lately, I've experienced enough déjà vu to get a platinum medical marijuana card.  Maybe you've heard of “multiple discovery”.  The theory says that similar inventions happen simultaneously because of converging technologies and common problems.  Among mobile payments and loyalty startups, easy money is fueling what I call “marginal discovery” - slight variations on similar ideas.  For every truly outstanding startup, five or six have a faulty premise, fail to solve a problem, or choose “cool” over simple.  To protect the innocent, I've turned my list of frustrations into a set of “rules” to help budding entrepreneurs and experienced executives steer clear of the weed dispensary...

Note: I love that new blood is entering the industry to innovate payments.  The fresh perspective can be invigorating - and very successful (like Dwolla, Stripe, and Square).  However, it's easy for promising innovators to make small, but costly miscalculations on merchant economics, technology, or consumer behavior.  Here are 10 things I think they should consider:

The 10 Rules

1.  Solve a real problem.  Here are some questions to see if you’re solving or creating a problem:

Are you introducing extra steps for consumers or merchants?  If so, are they worth the extra effort? 

Will transactions take more or less time than what’s there now? 

Will your solution require significant technology investment? 

Is there a clear business case to fund those investments? 

Are there big obstacles to achieving critical mass (like availability of NFC-capable phones)? 

2.  Be invisible (It’s not about you...) People who work in payments eventually start to believe that consumers care and think about payments as much as they do.  They don’t.  Like good service at a restaurant, the best payment and loyalty systems are barely noticeable.  The ugly truth is cards are still a fast, convenient (albeit “dumb”) transaction type.  Unfortunately, the process of creating smart, digital transactions often means introducing new interactions and decisions.  It’s a lesson we learned with the launch of Zync at American Express - consumers don’t want that much interaction with their payment product.  It’s a means to an end, not an object of desire, like an iPhone, a Rolex or Denzel Washington. 

3.  Solve the merchant’s problem, not the consumer’s.  Aside from hard core gadget geeks, most consumers aren't clamoring for new ways to pay.  That doesn't mean there’s no room to improve the experience, but the real value is in helping merchants out of their bind.  A surplus of merchants is chasing a shrinking base of consumers.  Unfortunately, wealth is concentrating so quickly that brands might soon outnumber people.  So payments and loyalty startups must help merchants sell more products, more frequently, and to more people.  And most of the low hanging fruit is gone.  Now, they’ll need to dig deep into data and individual interactions. 

4.  Target emerging markets, where limitations equal opportunity.  While many US startups are splitting hairs on the fringe of mobile indifference, emerging markets are leapfrogging into mobile.  While the aggregate numbers look small, the challenges are big.  So is the profit potential.  SMS powers entire economies in Africa and will soon in India - where market education and fragmentation remain difficult.  Success will require a dedicated “ground game” with lots of small victories. 

5.  An e-wallet is not a business.  Despite the breakout success of Square, there is virtually no market for standalone digital wallets.  Low margins will keep outsiders (including banks) from buying or marketing their way to mass distribution.  Only wallets that control the platform (or sell to someone who does) will succeed.  Four parties own pieces of the mobile checkout “platform”: mobile networks, phone operating systems, banks, and merchants.  We are on the verge of a major battle for which player controls that wallet.  And, there will be blood...and ultimately, coopetition. ( As I wrote here, I think retailers have the upper hand.) 

6.  No more QR codes!  This little novelty never took off – and likely never will.  Consenting adults will not suddenly become checkout clerks, wandering the planet meticulously scanning things on walls, sales flyers, or product tags.  Few outside of Japan have used QR with any success.  And QR doesn't exactly have the global appeal of sushi.  In fact, it’s not elegant or fast or especially fun to use.  It slows down checkout.  Even chains like CVS/Duane Reade now bypass code scanning in favor of phone numbers to manage loyalty checkouts. 

7.  NFC is hardly a slam dunk.  The value of NFC to merchants is questionable.  Retraining staff and customers is a big undertaking.  If NFC takes off, it will start in closed loop environments where the merchant pushes for adoption.  One success might be the Starbucks app.  Even then, it won’t go viral.  It will take at least three years for a critical mass of phones to have NFC chips.  And each checkout experience will still be different and disorienting.  Oddly, NFC checkouts can be slower than credit cards.  Just wait for those dirty looks from fellow caffeine addicts as you fumble to unlock your phone, launch your app, tap it, and wait for the beep.  You’ll be lucky to escape with half a macchiato and only one black eye.  I agree that it’s not too soon for companies to plan for NFC, but I’d spend more time working on cross-brand interoperability than developing yet another wallet with a standalone experience. 

8.  Social will not save you.  Social features are a weak, par-for-the-course feature that mainly works when there are overwhelming offers like $5 for a $10 Starbucks card or $10 off at Amazon.  Countless failures have shown that friends don’t let friends stream purchase data.  Social can also be a crutch.  I've seen too many companies rely on Twitter or Facebook for acquisitions with no plan for untangling themselves if one of them doesn’t want you to succeed.  As I wrote here, platform risk can become a huge problem. 

9.  There’s big money in saving banks from becoming commodities.  The consumer’s payment choice is often buried deep inside Amazon’s, Google’s or Apple’s wallet.  Banks fear generic purgatory more than anything.  In fact, my math says that payments might become like milk at the supermarket – a loss leader that lures you in to buy higher margin services.  If you’re a startup that can make banks indispensable in this value chain, I have a few willing customers...

10.  It’s all about service and services.  If there’s just one lesson I learned from working at American Express, it’s that superior service defines people’s perception of and loyalty to your company.  Not only does anything that faces consumers demand superior service, it means offering services.  Phones and wallets are platforms for new, higher margin services. ( You can contact me to explore what those might be.  Can't expect it all here for free!) 

A Dose of Context

If you’re reading this in Forbes, there's a good chance you live in a paradise full of iPads, cereal choices, and medically-enhanced TV housewives.  Not surprisingly, American startups aim to solve a narrowing list of first world problems.  In mobile payments and loyalty, things get even harder.  Banking is a cash-rich, glacial industry with a protective layer of regulations that keeps entry barriers high.  So banks can afford to throw big money at even marginal experiments – or simply wait.  Even the most disruptive entrants (like Paypal) have never driven a major incumbent out of business.  Never.  It’s a big pie and so far, everyone's gotten a piece.  This lack of urgency and high profitability lures competition, but has yet to create the kind of punishing disruption we've seen in other industries. 

Lucky for startups, banks aren't the only game in town.  Most promising startups will likely partner (or be acquired by) platform owners, industry incumbents, or retailers.  Platform owners like Google, Amazon, Apple, Starbucks, mobile providers and a handful of startups are likely to re-shape the industry...eventually.  It's definitely going to get interesting. ( Sign up here to get updates on my future musings on innovation.)