Was music ever not going to be delivered digitally? Will cars never drive themselves? Will buildings somehow avoid becoming connected and automated?
Today, even the most mature industries are being transformed by disruptive innovations that enter the market both better and cheaper than current offerings—the Big Bang Disruptors. But these disruptions are not without warning signs. In hindsight, they all seem pretty obvious. Yet many executives act as if they don’t really know where their industry is going, if only because they don’t know when it’s going to happen.
Every business must learn to face what we call its “inevitable truth.” The inevitable truth details the death of one incarnation of the industry and its participating enterprises and the emergence of a new one, driven by new technologies that may not today be ready for prime time but which, everyone knows, are just a few generations of development away from taking over.
For video content, for example, it was clear by the mid-1990’s that the inevitable truth was on-demand digital distribution over the emerging commercial Internet. In the end, the technologies needed to fulfill that vision, including broadband networks and streaming technologies, took years to be developed and adopted by enough consumers to reach critical mass. Once they did, take-off was sudden.
Which makes it doubly dangerous for incumbents to sit back and wait. An uncertain timeframe is different than an uncertain outcome. Netflix, which began life mailing out DVDs, understood all along that its physical distribution model was only an interim step. Blockbuster Video, on the other hand, reluctantly launched a competing service just to keep up with the competition. While Netflix kept one eye fixed on the future, Blockbuster remained firmly reactive. The results speak for themselves.
Recently, our research has been focused on finding the inevitable truth for a wide range of industries. Perhaps none is clearer than financial services, including banks, insurances companies, lenders and payment processors.
Ask anyone in the industry, even today’s incumbents, and the answer is the same: financial services are moving towards a digital future, one in which consumers will buy a much wider range of products and in which the costs of service will decline dramatically, allowing the 2.5 billion consumers worldwide who currently don’t have bank accounts to participate in the financial system. Much of that activity, moreover,will take place on rapidly proliferating mobile devices.
Money is the core product of the financial services industry. For centuries, the exchange of value was tied to physical artifacts—bills, coins, metals, commercial paper—but only because there was no alternative. But like entertainment and other content, money is just a collection of information. Digital money is inevitable. It is clearly better, able to retain a complete history of its use and transfer. It is also cheaper, moving as bits around the world at zero marginal cost. No vaults. No armored vehicles. No counting, stacking, or storage.
While new forms of money—including the crypto-currency Bitcoin—are getting a lot of attention these days, the digitization of money is hardly new. Over the last several decades, large-scale transfers of value, including currency, securities, and debt, have migrated away from physical documents and other artifacts to take a purely digital form. Today, the world’s money supply is estimated at approximately $60 trillion, almost all of it natively digital. In 2013, the SWIFT network alone transferred a record 5 billion financial transactions, all of them in the form of bits.
The Big Bang innovations on the horizon for financial services are those that will carry the digitization of money from business-to-business transactions down to the consumer level, to the smallest-value exchanges. Today, there are literally hundreds of companies working on the micro-payments problem, looking to combine just the right set of technologies and business models to blow up incumbent payment systems in place today, including cash, checks, and debit and credit cards.
In Europe, alternative-payments players represented just 1.5 percent of the market in 2012; we estimate that figure will increase to nearly 15 percent by 2020—an annualized growth rate of more than 35 percent.
In some cases, the innovation is being done by start-ups with venture backing, as in the case of Square and LevelUp. In other cases, it is the incumbents, or alliances of them working with network providers and other technology leaders. These include eBay’s PayPal unit on the one hand, and the ISIS network, founded by the leading mobile network operators, on the other. Traditional banks are also looking to protect traditional payments models by adapting to new demands, which is evident in peer-to-peer mobile payment services supported by companies like Vocalink.
No one knows who will ultimately capture perhaps billions of dollars of profit in just the small but growing market for mobile payments. Today, there are a wide range of technologies being touted as winning solutions, including scan codes, near field communications, and mobile PINs. But most of today’s technologies appear kludgey; more like mailing DVDs than streaming on-demand.
Interim solutions, however, may be enough to stay in the game, so long as those offering them are aware of their limits and keep working toward the true disruptor. Knowing the inevitable truth is essential for innovators, in other words, but it isn’t sufficient to formulate a winning strategy. As mountain climbers are warned, “Don’t mistake a clear view for a short distance.”
Consider Square, the well-known start-up that offers a credit card reader in the form of a smartphone attachment. The company has been through several iterations of both its core technology and its business model since its founding in 2009. After a fast start, the company has been struggling both with scale and profitability, losing about $100 million in 2013 amid growing talks of a sale to a larger tech company such as Google or PayPal.
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Many of the obstacles facing start-up financial services companies like Square have little if anything to do with technology. Banking, insurance, securities and finance are all deeply regulated industries. So startups and large tech companies looking for a piece of the action tend to hover around the edges, rather than swallow the time, cost, and constraints of becoming licensed as the incumbents are. (Doing so would largely limit them to offering today’s products and services in any case.)
There is also little rationalization of different laws and regulations across national borders, another layer of complexity holding back disruptive innovation.
And in the case of digital currencies, national governments hold a strong monopoly on many forms of exchange, notably cash. While the economic reasons for national currencies may be fading, the political ones have not.
Alternative currencies, even when better and cheaper than paper and coins, are looked upon skeptically, or worse. In the U.S., regulators and Congress are putting increased pressure on new value systems. This follows a familiar pattern of governments and disruptive technologies. When it’s clear the disruptors don’t fit easily in existing legal categories, new ones have to be invented, often through trial and error.
So the big bang in digital currency may come later rather than sooner for the financial services industry. But in the meantime, those experimenting with it are learning valuable lessons and building up expertise they may be able to leverage in the future – particularly in selling to banks that are hungry for innovation. A recent Accenture report showed investment in so-called “fintech” startups has more than tripled over the past five years to nearly $3 billion in 2013. Meanwhile banks have been forming in-house venture-capital arms with hundreds of millions of dollars allocated to fintech investment.
Consider Shopkick, a wildly popular smartphone app first launched in 2009. Shopkick partners with leading retailers to connect consumers with special offers that helps target products and refine marketing campaigns. Users are given points for everything from entering a store, to scanning certain products, to making purchases with linked credit cards. (Shopkick’s proprietary “ultrasound” technology ensures retailers only send push notifications to users that are actually inside a store, not in the parking lot or around the corner at a competitor’s store.)
The points, or “kicks,” can be exchanged for gift cards. Six million users have downloaded the app, making it one of the most popular shopping apps of all time.
For retailers, incentivized mobile phone engagement solves the critical problem of getting customers in the door, the first but most difficult step in making a sale.
Beyond that, retailing is likely to change as much as payments. According to Shopkick founder and CEO Cyriac Roeding, “Retailers need to adapt a truly omnichannel model – making it easy for shoppers to seamlessly shop at home on the couch, and then continue on as they walk into their local retailers will be invaluable in the coming years. That’s the future of shopping.”
That seamlessness requires smart collection and analysis of user data. In effect, Shopkick is creating a currency based on consumer behavior, a virtual exchange that allows consumers to efficiently trade information about specific actions valued by sellers for promotions and discounts. It’s a kind of “smart” money.
It’s also a good example of a product innovating at the edges of the financial services industry, forging strategic relationships, developing core technologies, and collecting real world data on consumer behavior. That in turn can feed future products and services that may far outweigh the value of the company’s current app.
Shopkick is more focused on the inevitable future for retail rather than for payments, but the two are almost certain to converge. Roeding may not know it yet, but the closer he comes to achieving what he calls “an even more personalized and useful shopping experience for consumers,” the more likely it is that the information he’s collecting to achieve that goal will define the inevitable truth for financial services.