I have had this point of view going round in my head for years, and it is an area I often get engage in discussions on – the desire for disruptive innovation shadowed by sustained innovation within banking. I actually recorded a YouTube video on this some years back, and everything I said I think still stands true today. You can find the video embedded at the end of this blogpost.
Two Types of Innovation
There are several types of innovation, but to me, there are two fundamental types: sustained innovation and disruptive innovation. Sustained innovation focuses on improving the status quo, while disruptive innovation aims to fundamentally change it.
For instance, consider the transition from candlelight to the light bulb. Sustained innovation in candles meant enhancing their brightness and burn time. The light bulb, however, used technology to revolutionise how we light a room, making candles almost obsolete. Similarly, the shift from horse and cart to motor vehicles also illustrates this point.
Banks and Sustained Innovation
In my view, in the banking industry, many banks and fintechs struggle to drive disruptive innovation. Instead, they often focus on sustained innovation, hoping it will eventually lead to disruption. I believe this is due to the biases ingrained in us from an early age. If you work in banking, you have a preconceived notion of what banking entails, which restricts innovative thinking. many bankers I talk with tend to look at the world from their perspective, and with a view on how banking has traditionally been done.
Traditionally, banks have been very product-centric. For a long time, the industry hasn’t changed much, with banks selling products to manage customers’ money. However, the world is shifting towards a more client-centric approach, driven by digital natives. The banks recognise this shift, but I at times feel that their arrogance is preventing them from mentally taking a foundational shift away from traditional business models.
Digitalization vs. Digital Transformation
To further illustrate the difference between sustained and disruptive innovation, let’s look at digitalisation versus digital transformation in banking. Digitalisation involves taking existing processes and making them digital. For example, moving paper-based processes online or using mobile apps for banking transactions. This is sustained innovation as it improves efficiency and customer experience but doesn’t fundamentally change the banking model.
Digital transformation, on the other hand, involves rethinking and redesigning banking processes from the ground up using digital technologies. It’s about creating new business models and revenue streams. For instance, open banking and embedded finance allows third-party developers to build apps and services around a financial institution, fundamentally changing how customers interact with their banks and how banks operate.
Revolut is a great example as a fintech that exemplifies disruptive innovation. Revolut started as a digital alternative to traditional banking, offering services like international money transfers at low fees, cryptocurrency trading, and integrated budgeting tools. Today Revolut has widened their scope and have stepped beyond banking and offering a rich experience to their customers. Its approach has forced traditional banks to reconsider their models and adapt to new customer expectations.
The Rise of Embedded Finance
A growing trend in the banking industry that aligns with the discussion of sustained versus disruptive innovation is embedded finance. Embedded finance refers to the integration of financial services into non-financial platforms, allowing companies to offer banking services directly within their products.
In terms of sustained innovation, traditional banks are starting to partner with non-financial companies to offer embedded finance solutions. For example, banks are providing APIs that allow retailers to offer credit services at the point of sale or enable ride-sharing apps to offer insurance products. These partnerships improve customer convenience and create new revenue streams for banks without fundamentally changing their business models.
On the disruptive side, companies outside the traditional banking sector are using embedded finance to redefine financial services. For example, non-banking entities offering integrated payment processing, loans, and even bank accounts, effectively becoming a financial services provider. This disrupts the traditional banking model by embedding financial services directly into the business operations of non-financial companies.
The Need for Outside-In Thinking
To navigate this transition, banks must break their traditional inside-out thinking model. Most banks view innovation from an internal perspective, but true disruptive innovation is driven from the outside-in. It often comes from adjacent industries and individuals without the same biases.
For example, big tech companies have been successful in disrupting the banking industry because they approach it from an outside-in perspective and as a digital first company. Without predefined notions of what banking should be, they can reimagine it and drive innovation.
Some companies, like Tesla, have managed to blend sustained and disruptive innovation successfully. Tesla has continued to innovate within the status quo while also bringing disruptive elements to the automotive industry – is Tesla a car producer or a technology company? Or maybe both!
Moving Forward
To move forward, banks need to collaborate with external organisations and individuals to challenge their biases and uncover new ways of operating. There are various methods to foster innovation, such as design thinking workshops and repeatedly asking “why” to dig deeper into problems. However, these methods will yield similar results if the same biases persist.
I’m keen to hear about your experiences with driving disruptive innovation. What methods have you found effective? If you’re a bank or a fintech looking to break down biases and drive innovation, I’d love to help and discuss this further.
Thank you for reading my thoughts again. I appreciate your comments and feedback, whether supportive or critical, as they drive our collective learning forward. Let’s continue this discussion. Have a great week, and talk to you again soon.
