Wednesday, September 17, 2014

Have American Companies Lost The Will To Innovate?
Fair warning: I'm going to rant.

Sometimes it's pretty depressing to see the current state of large American corporations. It's hard to find any evidence that they are trying to improve service, provide a better experience for consumers, or improve their products in a meaningful way. From my perspective, it seems companies are intensely focused on short term profits and have no appetite for long term projects to improve their wares.

Case in point: The Automated Clearing House system. This system is used by banks and the Fed to move money between banks and businesses. Every month, I get a payment for some online courses that I teach. That money is sent via PayPal. I then transfer it to an account I have at Captial One 360 (formerly INGDirect), then I move it to my checking account at a credit union. (I have heard too many horror stories in the past of PayPal going into someone's bank account and withdrawing funds unilaterally to settle a dispute, so I keep an intermediary account with virtually no money in it between PayPal and my main financial institution to prevent that.) From my checking account, I then move the funds to my brokerage account, where I keep the money I'm saving for my Tesla. This whole process, a total of 3 electronic transfers done via the ACH, takes a week, sometimes up to 10 days. Why? It's totally automated. In theory, it should be able to be done in seconds.

I wrote about this 8 years ago on my other blog, in relation to moving money to and from an account at, the peer to peer lending site. I actually got comments from the then CTO of, an engineer at, and an employee of Electronic Payment Networks, the only private ACH operator in the country. Their comments basically boiled down to "That's how the ACH works."

It wasn't until many years later, that I happened to catch this episode of NPR's Planet Money podcast that I got the real explanation. The show compares transferring money electronically in the U.S. with doing the same in England. In England, the process is virtually instantaneous - about 15 seconds. The show had a man in England transfer funds to his daughter, living in the U.S. His transfer went through immediately. A similar transfer in the U.S. between U.S. banks took five days.

The show mentions the fact that the system does not process transfers on weekends or holidays. "Why?", the hosts asked. Computers don't need time off. There was no answer, other than the fact that the system was built in the 1970s. Over 40 years ago and pre-Internet.
It's not like we can't improve the system. The Fed has been talking to banks about improving the speed at which the ACH operates. In 2012, there was a meeting to discuss implementing same day transfers - not even instantaneous transfers, mind you. Just transfers that would complete by the end of the day. But the ACH governing body, which is comprised of bank representatives, voted it down. Why? There were some concerns about fraud and the fact that it would be a big hassle to change. But, in a survey of people in the online payments industry taken about this subject, 20% of respondents said the biggest obstacle was "financial institution opposition due to cannibalization of existing revenue." Meaning, if faster transfers were possible through the ACH, fewer people would send money by wire transfer, which banks charge a hefty fee for.

So companies don't want to improve the system because it would require a lot of work, and hence create expenses, and it would reduce existing revenue. In other words, long term improvements are not being made because they would hurt short term profits.

But you can bet that if it would generate revenue for companies, it will be built. When I withdraw funds from an ATM, the money is deducted immediately from my bank account. When I make a purchase with a credit card, the sale is instantly posted to my credit card account. There's no 7 day wait here. Coincidentally, these systems were designed from the start to NOT use the ACH.

That's just one example. I see the same situation everywhere. Since this is a Tesla-related blog, let's look at the auto industry. There have been some half-hearted attempts at electric cars (*cough* Volt *cough*). Toyota was the first major car company to come out with a hybrid car - still not a full electric, but it's a start. Honda followed and slowly, American car companies are following suit. (Note they are following the lead of foreign automakers, not innovating the industry on their own.) Their hybrids are pretty much an afterthought, though. They only get about 25 - 35 MPG, compared to the Toyota Prius, which gets 50 MPG. It's pretty clear that American car companies just slapped an electric motor into an existing product to come up with a hybrid, rather than spend the time and money to develop one from scratch.

But American minivans have about 18,456 cups holders, TV screens that unfold from the roof, and hatchbacks that you can close with your foot!

This is the sorry state of American innovation today. The only innovations are cosmetic ones that are easy to implement without an impact to the bottom line. Major corporations are too concerned with short term profits to try anything that might disrupt the status quo. It's one of the drawbacks of a completely capitalistic system.

I firmly believe the only way we will see truly industry changing products, world changing products even, in this country is from new companies, such as Tesla, that are willing to upset the status quo because they have no vested interest in maintaining it. Once in a while, you may get an Apple, a company that changed the portable music player and mobile phone industries when they released the first iPod and iPhone. But look at how they did that: they made revolutionary change by entering markets they were never in before. Prior to the iPod, Apple made personal computers and software. Nothing else. Again - no competing pre-existing vested interest.

The problem with this environment is that overturning the status quo is difficult, even more so for a start up company. Just look at the opposition Tesla is getting from car dealerships and state legislatures that are preventing them from selling directly to customers. The dealership model is over 100 years old and was created to solve a problem that no longer exists. (Listen to this Planet Money podcast for more amazing facts about the dealership model that will blow your mind and also explain why you are treated so poorly at most dealerships.)

To overcome such huge opposition, Tesla has to do everything right - it has to make an outstanding, world class product, provide amazing support, and do so at a reasonable price. So far, they are doing it. But any potential stumble can give the established companies that they are displacing a chance to destroy them and cause the industry to revert to the current status quo, where the biggest improvement in next year's minivan will be that it now has 18,457 cup holders.

Luckily, Elon Musk seems to have the financial ability, the smarts, and the product to take on the establishment - and not just in the automotive industry, but also in the space industry with Space X. And he did it previously in the finance industry when he created PayPal. America needs fewer cup holders and more people like Elon Musk.


  1. When you say things instantly "post" to your credit card, do you really mean show up as "pending?". The posting to the account usually happens 2-3 business days after.

    1. Correct. The technology is there to associate that charge to your account instantly.