disruptive-innovation

“Silicon Valley is coming,” JPMorgan Chase CEO Jamie Dimon warned in his annual letter to shareholders. Yes, FinTech startups are coming. In fact, there are currently 12,000 FinTech startups in the field. No doubt, most of them will fail but a few will succeed and disrupt financial service market. Of course, the million-dollar question is “How?!” I don’t have a crystal ball to divine the future, but history may teach us something. Let’s look at how technologies disrupted other fields (and themselves).

Case Study 1: Gmail. Gmail is a perfect example of the product that provides the same service as exiting ones but 100X better. When Gmail was out, it provided 1GB space while Yahoo Mail and Hotmail had only 10MB. So it was literally 100X better (actually more than that with other innovative features). And it was necessary because it is very hard to lure users from existing free services. Even though it was much better, Gmail just gets more active users than Yahoo Mail only recently. It is simply so hard to compete in a free service market, especially related to communication. In finance services, it is impossible to provide a service 100X better than others. An efficient market won’t let it happen. One may argue that the world is not as efficient as those in text book. But any arbitrage opportunities will disappear quickly as everyone will take advantage of them. Besides, how could banks make free services such as check account 100X better? Give out free money? Banks do that to lure users to open accounts. But it doesn’t really mean better service.

Case Study 2: Amazon. The largest online retailer provides high quality shopping experience while maintaining lower price. The open secrets are no B&M stores and highly automated warehouses among other things. Banks can do exactly the same things to reduce cost and still keep services in high standard. B&M branches are of very high cost. JPMorgan Chase estimates that a teller-processed deposit costs the bank 65 cents each, while a mobile deposit made with a smartphone costs just 3 cents. By eliminating branches and employing automation technologies, banks will be able to cut the cost significantly and provides a simple, customer-centric, anywhere, any time, mobile experience.

Case Study 3: Uber. A taxi company can quickly build a mobile app for users to book their service by a simple tap, just like Uber. However, the true innovation of Uber is the sharing network. Although finance services is a highly regulated industry, banks can still innovate at the same time. Lending Club and SeedInvest demonstrate the potentials of new business models such as peer-to-peer lending and crowdfunding. Established banks cannot satisfy modern customers by building a mobile app that is simply a frontend of existing services. Banks must act boldly to disrupt themselves with the opportunities of an always-on mobile world.

Globally, banks record profits of roughly $1 trillion. Back with a lot of brains and money, FinTech will seize a slice of this big pie by working on various alternatives to traditional banking. Apparently, the approaches of Amazon and Uber are the way to disrupt finance services.

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