Disruptive fintech and The Innovator’s Dilemma

Conor McAleavey
Conor McAleavey

What’s this all about?

With banking continuing to undergo significant disruption by fintechs, Head of Innovation at LEVERIS, Conor McAleavey, assesses what banks can learn from Clayton M. Christensen’s The Innovator’s Dilemma, a book that charts market leaders’ failures to adopt disruptive technology. Based on its findings, he questions whether some of today’s largest global retail banks will feature as the subject matter in future editions of the book.

Read on if you:

  • Have an interest in the future of banking
  • Want to know how technology can transform your bank
  • Don’t want your bank to fail
  • Are considering modernising your bank

I recently reread Clayton M. Christensen’s 1997 book on disruptive technology — The Innovator’s Dilemma.

For those unfamiliar with the publication, what the book tries to achieve is to understand why so many market leaders and incumbents fail to properly adopt, and capitalise on, disruptive technology. In fact, the tagline of the book reads: “When new technologies cause great firms to fail”. And many of the great companies that he studied did in fact fail.

The book is split into two parts: part one examines the reasons for the failures and the management decisions that led to those failures. Part two is dedicated to prescribing the solution to the innovator’s dilemma: “how executives can simultaneously do what is right for the near-term health of their established businesses while focusing adequate resources on the disruptive technologies that ultimately could lead to their downfall.

Clayton Christensen, Author of The Innovator's Dilemma

Rejecting disruptive innovation

What Christensen came to realise, through an abundance of research across numerous industries, was that organisations did not fail due to poor management or lack of foresight. On the contrary, it was decision-making that would have been considered good management under normal circumstances that ultimately led to their downfall.

In other words, the good management paradigms that allow companies to flourish when working with continuous innovations are the very reasons they reject disruptive innovations.

Towards the later stages of the book, Christensen outlines the conditions under which a few incumbents managed to succeed in the face of disruptive innovation. These conditions were almost ubiquitous across each company that managed to adapt and eventually thrive under the new business models created by disruptive technologies.

The key to all these conditions (and what makes them so pertinent for today’s banking industry) was that each one could really only be achieved by placing the disruptive technology in an autonomous organisation well removed from the main business.

These new standalone entities succeeded because it allowed their primary companies to:

  • Find new customers for the new technology (the kind who were not traditional customers of the incumbent organisation)
  • Foster a new culture of test and iteration essential for developing new markets
  • Establish their own cost structures appropriate for the lower profit margins of the new market segment
  • Create a growth plan around small opportunities which would not have satisfied the growth needs of the larger organisation
  • Avoid being encumbered by the resource dependence of the incumbent business

So what has this got to do with today’s global banking industry?

Almost every bank in the world currently finds itself in a similar place to the large companies that Christensen researched for his book. All banks on the planet are wrestling with some sort of innovation agenda in response to fintech encroachment and the disruptive innovations they have brought to the financial services market over the last decade.

Some are going down the high-risk route of core system migrations. Some are attempting to clean up their middleware. Some have chosen to go on the fintech partnership journey. 

Others have launched challenger brands, and many are opting for an overall transformation strategy which consists of two or more of the aforementioned strategies.

Based on the evidence of the many industries that went through technology disruption in the past, it would seem that only those banks that have incorporated a ‘challenger brand’ into their overall strategy have learned the historical lessons of managing disruptive technological change.

A revised edition on disruptive fintech and failed banks

In order to make the book’s case studies more up-to-date and relevant, Christensen has published revised editions on more than one occasion since its original release.

You have to wonder – when he again updates the book a few years from now, will some of today’s largest global retail banks feature in the updated case studies as once-powerful organisations that stumbled into irrelevance in the face of disruptive innovation?

Or will they have learned the lessons of the past and spun off an independent, autonomous organisation tasked with creating a brand new greenfield bank on cutting-edge technology? One with the appropriate cost structures, culture and autonomy to not only survive the age of disruptive fintech but in fact flourish and become even more relevant and dominant.

Time will tell.

This post was originally published by LEVERIS in March 2017.

Conor McAleavey
Conor McAleavey
Conor is Head of Innovation at LEVERIS. He really struggles to talk about himself in blog post bios.

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