Clay Christensen's insight that companies may do somewhat well refining what they know but fail to take advantage of disruptive innovation appears to be as true today as it was when he first published his work more than 16 years ago. For some time now I've been pondering whether mobile banking represents a disruptive or sustaining innovation in the financial services sector. It seems to be a good case of the sustaining vs disruptive innovation.
A 2011 report by McKinsey & Company identifies three key themes in mobile banking: convenience, digital commerce, and disruptive entry into new markets. The convenience theme follows a sustaining innovation path where existing activities (paying bills and reviewing balances) and customer service strategies are made more convenient by using mobile devices. The digital commerce theme extends traditional services in new ways such as allowing users to more easily establish their own enterprise exchanges. New markets include a significant number of people in developing countries who are using mobile banking exclusively.
Banks have been, to date, in follower mode according to McKinsey, investing marginally if at all in disruptive innovation approaches. Telecom companies have been more aggressively establishing a presence in mobile banking platforms, particularly in the developing world. These digital spaces allow service delivery with a minimum of infrastructure beyond what the telecoms already have in place for delivering their core services.
Peer lending groups may signal another interesting disruptive signal. Lending groups such as The Lending Club make use of online platforms to connect people with money to loan and people who need loans. Based on my analysis of their available online data, they turn down about $10B in loan requests and process $1.3B in approved loans between individuals. This is a small fraction of total exchanges but their ability to offer better interest rates to borrowers and better returns for investors than traditional banks makes it worth watching. Mobile banking and peer lending can work because of online platforms that work outside of traditional institutional infrastructure. They are scalable and replicable platforms which means their growth potential is high.
A hallmark of disruption generally comes in the form of a laughable pseudo-competitor that established players reference in jest. It is important to recall that when auto maker Hyundai started producing cars for North America, people laughed at their poorly made vehicles (I among them, I must confess)—we aren't laughing now. Disruptive innovation works like that. We fail to see how a downmarket entity (oddity) is worth worrying about.
A final interesting trend that I've been thinking of is the phenomena of people defecting from major banks and joining credit unions. According to an article last year on CNN Money, people in the US have been joining credit unions in record numbers. J. D. Power and Associates research suggests major bank defections are somewhere around 10% which is significant. When people tire of faceless bureaucracy and they have another option, it can be a powerful combination.
It is possible that disruptive innovations like digital lending platforms, mobile banking, or the resurgence of credit unions are the guises which at least some deep disruptions will be wearing when they quietly stroll down the marble-lined halls of power. An important, though rare enough, skill across all industries and fields will be the ability to sort out which innovations are disruptive and which ones are passing oddities.