How do you know that an innovation is going to have disruptive effects?
The short answer is, you don't.
Cisco's often times referred to as
a role model when it comes to dealing with disruptive innovation.
But John Chambers, the former CEO of Cisco,
has acknowledged that the firm seldom
spot trends early enough to go at them with internal innovation.
Instead, they acquire a company based on promising ideas.
But even in days like recessions,
Chambers have said that 90% never takes off.
So it's not easy to spot future disruption.
But to have a fair chance of doing it,
we need to better understand the process of disruption.
What are the specific innovations to watch out for?
Someone had a go at Clayton Christensen's collective writings and found
that he had described 77 different innovations with disruptive effects.
These innovations includes everything from mini computers and
PCs to the concept of online travel agencies,
Toyota's car manufacturing method, and department stores.
What all of these innovations have in common is that they used
fundamental technological developments as a basis for new ways of doing business,
new processes, and new business models enabled by technology.
When we talk about disruption in finance,
there is no single technology that will be disruptive.
But new technologies enables innovations that might become disruptive.
And in finance, digital technologies are now ripe to develop a series of
new ways of doing business that might change existing roles in the industry.
Can you think about any such innovations that use technology to do things differently?
Mobile payments that use
advanced technologies and smartphones is, of course, one of them.
Another would be P2P lending that is
wrote in digital networks and new ways of estimating risks.
On demand car insurance that used improve
connectivity and geographical tracking will be a third example.
These are just three innovations that have the potential to
rewrite the financial industry, but will they?
The answer to that question is still unknown.
Depends on what the actors in the industry
do to intervene in the technology or lifestyle.
Disruptive innovations fall over
a three-stage cycle: Initiation, Selection, and Stability.
The initiation phase is a phase of high uncertainty.
Many versions of technologies exist.
Many players are involved with their own offerings.
And well, it's typically a bit chaotic.
Normally, to be disruptive innovation, is in this stage,
targeting a low-end of the market who have
a very particular niche position in the market.
It's not something for demanding customers or for the masses.
This is a phase of high uncertainty because how do you
know which of the many versions of a product will be dominating in the end?
And how do you know that the cheap but poor product has
the potential to evolve into something cheap but good?
Most poor product, staple product.
So this is a stage we now see in mobile payments.
It started out as SMS payments.
SMS payments was a poor product but it was useful in some specific cases.
We know a variety of solutions: Apple Pay,
Google Pay, Samsung Pay, Masterpass.
Banks have their own solutions, Citi Pay.
And here in Denmark, we have Danske Bank's very successful mobile pay.
Coffee shops in supermarkets get their own solutions.
Technologically, we have seen SMS's and the use of telecom infrastructure.
We now see NFC and iBeacon's.
We have different fingerprint scanners and security technology at play.
But to be honest, mobile payments isn't that much better or cheaper than credit cards.
It's a product of promise but the disruption is still to be seen.
Many innovations that have been fought off as disruptive,
never evolve beyond this stage.
Some survive in the market niche but most of them just fade away.
What is critical for a disruptive innovation to take off is how it
develops in performance relative to existing alternatives.
Performance here means some ratio between cost and quality.
A innovation develops faster than
existing alternatives and after a while becomes a real alternative also for board market.
Will this happen in mobile payments?
To answer this, look at how the alternatives are developing.
Credit cards, cash, how much different Have they become in the last 10 years?
It's fair to say that mobile payments won't have an issue with the quality development.
What about the cost development then?
Well, history tell us that digital beats physical when it comes to cost.
Mobile payments would also piggyback on developments in
smartphones and digital networks that will make them more cost efficient.
So what will happen next in mobile payments is if we enter the phase
of natural selection into a few different alternatives?
This is what we have seen in the smartphone market with Apple and Google,
when we will now see it in payments.
We might see flavors like Citibank's version of Masterpass.
But at the core, we will have a few dominating alternatives.
Over time, quality will go up and cost will go down for
mobile payments when you start to use it for more forms of purchases like buying a car.
And we will have alternatives of buying an ice cream on
the beach even if we have that phone in the hotel room.
But will it completely replace cash,
credit cards, and checks?
Not all disruptive innovation is completely replaces everything else.
When we enter the stability,
this doesn't always mean that what already exists gets completely rejected.
Think of credit cards, this sort of disrupted cash.
But instead of cash disappearing,
the market gets segmented.
This can happen for payments as well.
Of course, maybe cash has more resilience than we think.
So to recapture, spotting future innovations that would disrupt finance is really hard.
Where we can start to look at the development in
digital technology that can make disruption happen,
we should then look at the many innovations that seek to create
true innovation and ask not which is the best one at this stage,
but which one will continue to develop faster.
Finally, we should follow these innovations to understand if they
are leading to market segmentation or full replacement.
If there is a market segmentation,
do we want to be in that market niche?
So to find the right horse to bet on,
but the sooner we find it the better
because when it's obvious to everyone else who is winning the race,
it might be too late to move.
Jonas HedmanAssociate Professor
Stefan HenningssonAssociate Professor
