Why most innovation in fintech is not disruptive enough

I recently read about Professor Clayton Christensen’s fascinating model for identifying and dealing with disruptive innovation, and will attempt to summarise it in this post.

We’ll touch on the differences and dynamics between disruptive innovation, sustaining innovation, and efficiency innovation. Although they interact with each other, the appropriate approaches and defence strategies differ. I then provide my own thoughts on how this framework relates to fintech for incumbents, startups, and venture capitalists.

What is disruptive innovation?

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Coined by Professor Clayton Christensen of Harvard Business School in his book “The Innovator’s Dilemma“, disruptive innovation uses new technology and business models to serve new or low-end customers with inferior or simpler products at a lower price point.

Disruptive innovations expand markets, and are distinct from sustaining innovations (making better products) and efficiency innovations (lowering cost and making the same products cheaper), which tend to serve the same markets better.

Incumbents become disrupted when they focus on their higher-end more profitable customers while their lower-end is ceded to other companies. This is a sensible and intelligent management decision seeking the profitability metrics that the stock markets demand.

Successful disruptors then move up the value curve by maintaining early advantages (such as lower costs) and making incremental improvements to the product, and start taking core customers from incumbents.

Is Uber a disruptive innovator? Yes and no.

Uber vs taxis

Uber is a sustaining innovator as it didn’t start with low-end customers of taxis; nor did it turn non-consumers into consumers. It also didn’t start with a lower quality product, and is in fact of higher quality than the existing taxi experience.

Uber vs limousines

UberSELECT is a disruptive innovator as it is less expensive than limousines, has an in inferior product (no advance bookings), and created a new market by appealing to people who didn’t usually book limousines.

Why does this distinction matter?

The taxi industry and the limousine industry need to have different approaches in response. Using Christensen’s framework, taxis might be better off focusing on improving their core product by investing in sustaining innovation, and the limousine industry’s response could be to create a lower-end unit, defending against the challenger.

Four points to note about disruptive innovation

Disruption is a process

Two realities about incumbents

The cycle of innovation

I am an incumbent. What’s my takeaway?

I am a fintech startup. What’s my takeaway?

I’m a venture capitalist. What’s my takeaway?

Where do blockchains come in?

Conclusion