The Proliferation of Financial Technology February 2016
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In recent years, disruption has become one of the most common terms in use to describe what app-based transportation provider Uber Technologies (San Francisco, California) has done to the taxi industry, what Apple (Cupertino, California) and its iPod music player have done to the music industry, and what Amazon.com (Seattle, Washington) has done to the book-retailing industry (if not the larger retailing landscape in general). The term uberize—which refers to technology's ability to dramatically affect and suddenly undermine the profitable operations of companies in an increasing variety of industries—has become part of the Silicon Valley, California, innovation vocabulary. But terms can see overuse, and their meanings can become distorted. Business-information provider Factiva (Dow Jones & Company; New York, New York) found that use of the terms disruptive innovation and disruptive technology has skyrocketed in recent years: The terms appeared in slightly more than 500 articles in 2010 but appeared in more than 2,000 articles in 2014. And recently, Clayton M. Christensen, the very person who introduced the term disruptive innovation, felt compelled to coauthor an article that clarifies what he meant when he began using the term. In the article, which appeared in the December 2015 issue of Harvard Business Review,Christensen, Michael E. Raynor, and Rory McDonald explicitly argue that Uber is not a disrupter and that the company's technology does not represent a disruptive technology.
The process of FinTech's affecting the traditional financial industry has already begun, and many reasons for why the global financial-services industry is vulnerable to disruption exist.
Although the term disruptive might see overuse and incorrect application, incumbents had better pay close attention whenever the term appears, because true disruption will have an impact on their business models. For example, incumbents in the financial-services industry—which encompasses retail-banking companies, investment-banking companies, credit-card companies, and a variety of other types of companies that manage money—are under attack from myriad start-ups. Some of these start-ups are making use of disruptive technologies, and others are employing new concepts. The financial-services industry might even become uberized—if the term refers to only a sudden change in the industry's fundamental structure and competitive environment. Although uberize is a bit of a buzzword, a growing number of analysts and even financial executives do expect large parts of the financial-services industry to change rapidly. FinTech is another new buzzword and refers to emerging technologies that see use in financial services and have the potential to upend the industry. The process of FinTech's affecting the traditional financial-services industry has already begun, and many reasons for why the global financial-services industry is vulnerable to disruption exist:
- Because of a large number of positive experiences, consumers are more willing to use the services of start-ups now than they were in the past. In addition, many consumers' trust in traditional financial institutions has suffered as a result of the Great Recession of 2007 to 2009.
- Except PayPal Holdings (San Jose, California), the major players in the finance industry today have been the major players in the industry for decades; however, consolidation and bankruptcies have changed the landscape of the industry, which gives start-ups a number of market niches and segments to explore.
- Most financial institutions are large and relatively lethargic, so they have been slow to take advantage of emerging technology. In contrast, start-ups use technology to establish competitive advantages.
- Start-ups are adept at using a combination of technologies to create benefits for customers. They have identified ways to lower costs and provide consumers and enterprises with superior services by taking full advantage of new technologies, including cloud-computing, big-data, analytics, artificial-intelligence, and mobile technologies.
TransferWise (London, England) provides a strong example of how start-ups can use new technology to change the financial-services industry. The start-up, which enables customers to transfer money overseas without paying the high fees that are common for such transfers, emerged in Estonia in 2010 and now operates from London, England. The company claims that it is now transferring $750 million per month via its platform and growing at a rate of 15% to 20% on a month-to-month basis. In January 2015, Business Insider looked at the company's potential, comparing TransferWise's platform with Apple's Apple Pay cardless-payment system. Business Insider describes Apple's technology as conservative: "It doesn't disrupt the existing banking structure—it reinforces it. TransferWise's success, meanwhile, directly translates into a hit against the banks' bottom line. Every TransferWise payment is a payment not transacted by the banks" ("Why TransferWise's $1 Billion Valuation Will Terrify The Banks," Business Insider, 26 January 2015; online).
As FinTech start-ups gain greater traction and prominence, growing amounts of funding will pour into new start-ups that target promising opportunity areas within the financial-services industry. Venture-capital firms—including players such as Accel (Palo Alto California), Andreessen Horowitz (Menlo Park, California), Battery Ventures (Boston, Massachusetts), and Benchmark (Menlo Park and San Francisco, California)—are already investing heavily in FinTech start-ups and technologies. These venture-capital firms see potentially large payoffs and are willing to make substantial bets.
A great deal of FinTech activity is occurring in a handful of financial and technology centers, including London, England; New York, New York; Singapore, Singapore; and Silicon Valley, California. These centers compete to attract new start-ups from around the world and often provide regulatory environments that are highly conducive to start-up companies. Entrepreneurs also gain advantages by operating in these centers. For instance, entrepreneurs can benefit from proximity to the venture capitalists, incubators, and start-up networks that often operate in these centers.
As support grows, start-ups will find niches in which to establish themselves. These niches can then help some of the start-ups capture consumer attention and grow their businesses. Consumers can expect to see an increasing number of beneficial applications and substantial cost reductions in some financial services. Incumbents can expect to encounter a range of competitors that may eventually challenge their core business. Regardless of whether the financial-services industry will see disruption or become uberized, the industry has already begun to change.