Digital disruption is a key theme in the financial services industry this year.
The volume of venture capital that is being injected into the industry at a global level is at an all-time high and high profile investments such as Westpac’s investment in the peer-to-peer lender SocietyOne has brought the story closer to home.
While historically there are countless examples of industries reinvented through innovation, the speed at which business models are being challenged is startling to some.
Clayton Christensen was the first to coin the terms "disruptive innovation" and “continuous innovation” and make a clear distinction between them.
Continuous innovations in financial services might include the iterative improving of existing products and services to meet the demands of a competitive marketplace. Consider the introduction of fee-free banking, enabling multi-channel support for customers and the plethora of mobile apps that have been implemented to improve customer convenience.
Disruptive innovation is a different story.
According to Christensen, disruptors redefine markets by introducing new products and services that, while not immediately as sophisticated as currently available product, offer other benefits such as simplicity, convenience and lower prices and that appeal to new, less demanding customers. Over time, these new products gain a foothold and improve in quality and eventually set a new benchmark for the minimum viable product that defines a category.
Examples include email superseding postal mail, digital downloads usurping CDs and DVDs and online payments replacing cheques.
There is no doubt that Christensen’s work has transformed our thinking on innovation in the last 15 years. There have been outliers in recent history however, that have led some theorists to question the relevance of Christensen’s line of thinking in today's business landscape.
Since 2007, he has repeatedly said that Apple would not succeed with the iPhone. The iPhone was an example of continuous innovation, he said, not disruptive in that it didn’t follow his model of starting as a low end challenger to an existing higher priced and higher quality incumbent product. He was convinced that a newer, cheaper product would eventually appear and overtake the iPhone.
I agree with those theorists that propose that the iPhone and subsequent tablets have certainly been disruptive innovations. While they have not challenged the phone market so much, they have disrupted the PC market and continue to do so.
While cheaper products have appeared, they have not substantially affected Apple’s growth. Apple is successful not just because it markets (arguably) the best products, and certainly not because it has the lowest prices. It is successful because of the way customers feel when they use Apple products.
Like Apple, today’s disruptors don’t systematically follow Christensen’s path to disruption. Challengers like Twitter, Facebook, Skype, Paypal and Amazon aren’t encumbered by traditional thinking. They look for opportunities to try new things quickly and then adapt as required.
Financial services in the new order.
The financial services industry is no stranger to the threat of new competition. Over the last two decades, the industry has faced challenges from startups, telcos and even supermarkets all trying to move into payments and insurance services.
To date I would argue the industry has proven to be robust and has not been materially affected.
The technological barriers to market entry have lowered to the point that disruptors can enter financial services at a lower cost with more convenient products. It is becoming increasingly likely that even with regulators on the prowl, new entrants will be able to attack the traditional territory of incumbent banks and insurance companies.
The most successful disruptors target existing pain points for customers, where there are opportunities to substantially improve the customer experience or reduce the cost of the service. Whether it be taking out a complex loan or insurance or paying for financial advice, if, like Apple a new entrant can change the way that the customer feels when they transact while still offering a competitive proposition, they will prove a threat.
Consider Amazon Lending. Loans provided by Amazon are meant to serve as an alternative source of funding for those merchants unable to secure funding through traditional lenders. While it seems to be only a niche play today, I can foresee a world where Amazon enters into retail lending.
Peer-to-peer lending uses the power of crowd and the cloud to offer better rates Watch for Funding Circle, SocietyOne and Zopa to pose a genuine challenge. Zopa already has more than a billion US dollars in loans on its books.
Consider Google's recent acquisition of the BeatThatQuote price comparison service for car insurance. Consider the impact should Coles, Woolworths, Google, Paypal and Apple take advantage of the financial data they hold on customers.
So how should the banks and insurers counter disruptive innovation? Read on for more...