Disruptive Innovation in FinTech during covid-19

Disruptive Innovation in FinTech during covid-19:

How should FinTech companies, startups, and established VCs think about disruption and blockchain?

During the Chinese New Year, I read about Professor Clayton Christensen’s fascinating model for identifying and tackling disruptive innovation, and I try to summarize it in this post.

Here we learn the differences and dynamics between disruptive innovation, sustainable innovation, and effective innovation. They talked to each other and the appropriate defensive approaches and strategies were different. Below I give my opinion on how this framework compares to FinTech for established companies, start-ups, and venture capitalists.

What is disruptive innovation?

In his book, The Innovator’s Dilemma, disruptive innovation, created by Harvard Business School professor Clayton Christensen, uses new technologies and business models to serve new or low-cost customers of inferior or simpler products at a lower cost.

Disruptive innovations expand markets and differentiate them from sustainable innovations (making better products) and efficiency innovations (lowering costs and lowering costs of the same products) that serve the same markets better.

Newcomers suffer because they target the most profitable customers, while those with lower incomes are sold to other companies. It is a wise and smart decision by management to research the profitability metrics the stock market needs.

Successful innovators then climb the value curve, retain initial benefits (e.g., cost reduction) and incremental product improvements, and begin acquiring customers from key companies.

Example: is Uber a disruptive innovator? Yes and no.

Uber vs Taxi: Uber is a sustainable innovator because it didn’t start with cheap taxi customers; nor has it turned consumers into consumers. It also didn’t start with an inferior product (it’s better than the existing taxi experience).

Uber vs Limousine: UberSELECT is a revolutionary innovator because it is cheaper than limousines, has an inferior product (no pre-booking), and has created a new market by attracting people who normally don’t book limousines.

Why is this distinction important? The taxi and limousine industries have to take different approaches to find answers. Using Christensen’s facilities, taxis can better focus on improving their core product by investing in continuous innovation, and the limousine industry’s response may be to create a low-cost unit and defend against the opponent.

Four points about disruptive innovation

Disruption is a process that starts at the edge and ends in the mainstream (e.g. early computers). The interruption takes time, so drivers often ignore options until it’s too late (eg Netflix x Blockbuster).

Disruptors build many different business models that the incumbents sometimes don’t understand, or think they don’t apply to their core businesses or markets until the disruption goes against the grain. If a common refrain ‘I’m not really becoming a threat, it’s getting cheaper, that’s a beacon for a disruptor.

Successful companies or products do not necessarily mean that innovation is disruptive – there are different ways and strategies to achieve success. For example, Uber and iPhones are successful as platforms, but Uber’s goal has been to make a better product than taxis (continuous innovation) and Apple’s focus has been on the developer ecosystem (iPhones are a disruptive innovation. Laptop, but ‘sustainable’ innovation” compared to each other) with smartphones).

‘Stop or stop’ is very simple: the best answer for incumbents is to strengthen relationships with key customers by continuously innovating or creating a separate company to serve low-cost customers with a low-cost product.

Two realities about the owners?

1. The mind of the incumbent is led by its most profitable customers. Therefore, they tend to invest in supporting innovation, low-margin flights, and inferior products, rather than competing with challengers.

2. The institutionalization of processes in established companies makes it difficult for individuals, even senior executives, to allocate resources to prioritize disruptive solutions for innovation.

therefore, incumbents rarely respond effectively to disruptive external innovations.

The cycle of innovation

1. Successful disruptive innovation funds and calls for sustainable innovation

2. Supports successful innovation funds and efficiency innovation requests

Efficiency innovation must reinvest capital in disruptive innovation, completing the circle. However, in western capital markets, this rarely happens due to the short-term search for the “gross margin” index.

– Capital is linked to efficiency innovations because the return on investment is faster, but in the long run, it is a false economy because disruptive innovation is the only innovation that expands the market.

I am sedentary. What is my lesson?

Returns are generally good at supporting innovation (e.g. creating new complex financial products). This is ideal for large customers, but repeat customers should not be ignored.

Residents probably invest little inefficient innovation (eg optimizing technology stacks). Without investing here, they can get stuck on a high-cost base and be unable to free up the capital needed to invest in disruptive innovations.

It is unlikely that new investors will invest enough in disruptive innovations (e.g. few or new customers). Disruption is a growing concern and according to the model, an adequate defense could be the creation of a business unit away from the day-to-day political and financial measures of the company. Google has decided to create a holding company called Alphabet, which will separate disruptive companies from its core search business. So far, analysts have realized this, and Alphabet’s stock price has responded positively.

For those responsible for scanning the scene for external threats, an important point is that different types of errors require different answers:

Step 1: Identity what kind of disruptions these FinTech innovations are

Step 2: See if these are legal threats or opportunities

Step 3: Implement the right response strategy

Earnings need to understand that investing in disruptive defense costs capital, at the expense of internal rate of return and gross margin percentage, and can only pay for itself in 5-10 years, unlike the innovative effectiveness of financing. it paid.

How does this relate to blockchains?

In this model, blockchains, a subset of distributed relational technologies, can be seen as an efficiency innovation when applied to the banking sector. Many of the comments are about the cost savings of implementing a distributed ledger for financial services, and the users of the technology are responsible for that. That said, incumbents should adopt these technologies if they see efficiencies and cost savings, but don’t feel threatened because the technology makes their business irrelevant.

However, can distributed ledgers also be a disruptive innovation? Well, in the long run, distributed ledgers could enable new businesses and support social models, replacing trust with technology-based security. However, this does not necessarily mean that it is a disruptive technology in this model.

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