MasterCard Inc. wants to get new payments tools out of the labs faster and into cardholders' wallets.
The Purchase, N.Y., company announced Thursday that it had created a research and development unit, MasterCard Labs, to accelerate the process of turning innovative ideas into real products that can generate real revenue.
MasterCard said the move would help it gain a competitive edge in the payments industry, especially in rapidly evolving areas such as mobile banking, data security and person-to-person payments.
Observers said the strategy fits with newly named chief executive Ajay Banga's stated goal of spurring new product innovation using MasterCard's current capabilities.
"We're carving this off from existing work, existing resources, and creating this team to just truly, fully focus on innovation," Rob Reeg, MasterCard's president of global technology and operations, said in an interview Thursday. "What we expect to get out of it is quicker time to market."
Analysts said the strategy would further establish MasterCard's reputation as a payments industry innovator.
"You can't move fast enough," said Philip Philliou, a payments industry consultant and managing director with Philliou Selwanes Partners LLC in New York. "To have a dedicated R&D shop is one way to get ahead of the curve and, at a minimum, to stay current."
Not only is MasterCard Labs expected to develop new payments products, Reeg said it will also be looking for "fast failures," that is, quickly identifying ideas that ultimately are not commercially viable. "Not all those ideas are going to come to market," Reeg said, but at their core, some will be based on technology that could prove useful in other projects.
"We believe the labs gives us an opportunity" to develop technology that will benefit cardholders and issuers as well as ferret out "those things that aren't going to prove out very quickly."
Quintin Sykes, a managing director with the Scottsdale, Ariz., research firm Cornerstone Advisors Inc., said MasterCard Labs would give the card company a competitive advantage.
"It's about them retaining the share that they've got in the payments space but also growing," he said.
MasterCard has tapped Garry Lyons to oversee MasterCard Labs and serve as group executive of research and development. Lyons joined MasterCard after its December 2008 acquisition of Orbiscom Ltd., a Dublin payments technology company that he ran as CEO.
Since then Lyons has been overseeing the development and rollout of inControl, a service Orbiscom helped MasterCard design that lets cardholders set spending limits on their cards.
"Garry is very unique," Reeg said. "He's been part of building a start-up … into a business that obviously was very attractive to MasterCard."
Lyons has an "entrepreneurial mind-set" and is constantly thinking about how to turn concepts "into a commercial venture," Reeg said.
Lyons will report to Reeg and Josh Peirez, MasterCard's group executive of innovative platforms. The company would not make Lyons available for an interview Thursday.
One of Lyons' first tasks will be to create an "innovation index" to gauge the lab's effectiveness, Reeg said. Benchmarks likely will include revenue generated from products that do make it to market, how long it takes to go from concept to product and how quickly MasterCard can determine an idea is not worth pursuing.
Reeg would not discuss specific product plans the R&D unit is focusing on. Examples of the type of products MasterCard Labs could focus on include MasterCard MarketPlace, the shopping portal the company developed with Next Jump Inc. that could lead to other services that aim to help connect cardholders and merchants.
Reeg declined to say how big MasterCard Labs will be from a staffing perspective but said it will be made up of current employees from throughout the company and that new people will be added. Lyons will split his time mainly between Ireland, Singapore, MasterCard's corporate headquarters in Purchase, N.Y., and St. Louis, home to the company's global technology and operations business.
The structure of MasterCard Labs is an example of a "classic" R&D organization, said John Grund, a partner with the Linthicum, Md., consulting firm First Annapolis Consulting. "It's about learning and continuous innovation and testing."
Grund cited Capital One Financial Corp. as a payments company that has successfully embraced that culture and demonstrated a "receptivity to failure" in developing new services and going after new markets. "Not all companies do," he said.
The key to making an internal R&D operation successful is getting buy-in from the overall organization, Grund said.
"You really need a commitment from the top down, so this can't be short term in nature," Grund said. "By definition, research and development is a long-cycle process. You need a culture that's receptive to failures. Not everything is a home run. You'll inevitably have more failures than successes."
Grund said having an R&D organization in place is just one step. Actually executing on product-development plans and garnering support from the overall operation is the bigger challenge.
"In certain organizations you have short-term thinking," he said. "If the first innovation isn't a success, then you start hedging your bets" and get "too conservative."
"You're dealing in a very dynamic marketplace where you are going to place some bets and the overwhelming majority of them are not going to pan out."
Based on the company's promotion Monday of Banga, who will replace current MasterCard CEO Robert W. Selander in July, Grund said he is optimistic the new division will have the support it needs.
That MasterCard tapped a relative outsider to lead the new tech operation also is a positive sign, he said.
Lyons could "bring just completely fresh thinking to the table unencumbered by prior attempts, prior failures and pre-existing hypotheses," Grund said. "Appointing someone that's not legacy MasterCard" but "has a proven track record with start-ups" has "some merit."
Reeg would not discuss the budget for MasterCard Labs but said "there will be a significant dollar investment going through this process."
Banga on Monday said a chief goal was to promote new product development by building off existing technologies and relationships with other companies to limit the financial investment.
"I'm not talking about money when I say effort and energy," Banga told reporters during a conference call then.
MasterCards' issuers also could benefit, Philliou said.
Money constraints have made some issuers reluctant to invest in new technology, and for many of them, working with a well-known partner like MasterCard is "a way to minimize risk and advance new concepts," he said. "I think it's brilliant that MasterCard has taken the initiative."
Philliou said there is plenty of room for a company to advance mobile payments and P-to-P transfers in particular, concepts that many companies are studying but still are not widely available.
No company has emerged as a dominant player in those categories, which are attracting attention from payments companies, issuers, mobile phone manufacturers and wireless carriers looking to cash in on the explosion of smart phone use.
"No one's ahead of the pack at this point," Philliou said. "Until we see people waving their iPhone at a contactless reader and a transaction occurring, that's when we'll have mobile commerce."