Is Disruptive Business Model really imminent in Financial Services?

Moving from mechanization age (1st Industrial revolution) to introduction of assembly line (2nd Industrial revolution) and digitalization (3rd Industrial revolution) of recent times, Industrial sector is gearing to imbibe new generation of disruptive concepts – Industry 4.0 – the fourth industrial revolution (vision of Smart Factory based on concepts of Cyber-Physical Systems and Internet of Things)[i].

Against the background of blurring lines between manufacturing and services and increased emphasis on mass customization in other industries, financial services industry too remains in throes of bewilderment, struggling to imbibe many catchy but less understood phrases like disruptive innovation, disruptive business models, disruptive strategy, and constant disruption.

New generation firms like Covestor, eToro, Motif, Indiegogo have brought their unique way of innovation – introducing remarkable ideas of social investing, mirror investing, social trading network, crowd funding in the financial sector. Some of conventional financial firms have been increasingly investing in recalibrating their products and services capabilities to align with new ideas like – social media integration, self-directed and personalization capabilities, behavioural/sentimental analysis backed customer reach, omni-channel delivery amongst others. Also, there are few recent ventures relating with transaction processing platform/services, leveraging concepts from virtual currency scheme based block chain or shared ledger technology[ii]. However, any example of successful and full-fledged disruptive model like Uber, Skype or Airbnb[iii](changing market structure, introducing radical concepts of mobilization of social asset ownership and commoditization of services), still remains a rarity in the financial services sector.

So the big question remains – whether a full-fledged disruptive model is really a feasible idea in the financial services domain? Without taking any prophetic nuance or hard stance on future surprises, predicaments of financial sector in experimenting full-blown innovation or disruption could be explained by its inherent character. These ecological factors act as natural wave breaker and restrict flourishing of such innovation paradigm in the industry:

• Continuous spate of regulations keeping strict conditions about the ownership set-up, market structure, market information architecture as well as underlying business processes (e.g. Capital and Liquidity requirements, Suitability and Appropriateness, KYC, Customer Due Diligence, Customer asset protection, Segregation of assets, Price transparency, Market Abuse prevention, Transaction reporting amongst others)
• Fiduciary responsibilities setting normalized expectations about risk-return trade-off and segregation of owned and customer funds greatly scales down investment opportunities suiting to free entrepreneurial risks.
• Rigidity of processes intertwined with increasing set of regulatory compliance requirements, besides limiting innovation around business model and process architecture also adds to complexities and bottlenecks.
• Low scale ‘Network effects’ and limited market acceptability keeps influence of any such innovation idea critically narrow. Also, locked-in investment and replacement cost in event of infirmity of an idea unsettle economic benefits for early movers.

Ivan Pannin’s quote[iv] – Of the future, man knows least; yet, about this, he worries most, aptly summarizes the state of our present minds. Struggling to meet with increased regulatory requirements, growing customer expectations and evolving financial markets ecosystem, our view remains limited to clearly foresee contours of impending disruptive forces on the horizon.

But the very nature of disruption is quite unpredictable with astounding effects. So let’s remain open minded to welcome surprising bounties and prepare for pains from upheaval– whenever such disruption jolts the industry and whatever changes it may bring for the radical shift of the industry.

 PS: Please feel free to share your thoughts and ideas.

[i] Please also read: The Five Most Disruptive Innovations at CES 2015

http://www.forbes.com/sites/bigbangdisruption/2015/01/09/the-five-most-disruptive-innovations-at-ces-2015/2/

[ii] In context of virtual currency schemes, European Central Bank (ECB) observes that “The usage of VCS for payments remains limited for now, which implies that there is not yet a material risk for any central bank tasks, including promoting the smooth operation of payment systems.”

Please see the full report:https://www.ecb.europa.eu/pub/pdf/other/virtualcurrencyschemesen.pdf

[iii] Please also read: What Airbnb, Uber, and Alibaba Have in Common

https://hbr.org/2014/11/what-airbnb-uber-and-alibaba-have-in-common

[iv] https://en.wikipedia.org/wiki/Ivan_Panin 

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