The gateway to disruption, as defined by Clayton Christensen, is the creation of products for underserved or unserved markets -- typically shunned by existing enterprises that are too busy chasing the high-margin businesses. Eventually, however, the low-end providers begin eating their way up the food chain. Just ask Toyota or Microsoft about their beginnings, servicing low-budget consumers.
Now, similar disruption is hitting the financial services sector. One example is crowdfunding, in which startups can bypass banks and venture capitalists for startup capital. In addition, there is a new wave of startups offering products for financially underserved customers, offerings loans and other new financial services.
A new report out of the Center for Financial Services Innovation (CFSI) and Core Innovation Capital explores this emerging industry of new startups for underbanked customers, which it calls "FinTech." As the name suggests, they are technology startups offering financial services. The CFSI report draws the parallels between Silicon Valley-style startups and those now entering the financial services space:
"The same technologies that are driving the growth of startups from Silicon Valley to Atlanta are reinventing the marketplace of financial services for underserved consumers. Emerging companies are capitalizing on increasingly robust and inexpensive computing power, ubiquitous consumer Internet and mobile access, and growing demand for comprehensive digital networks. These companies are improving access to effective, high-quality products for underserved consumers while developing technology with broad applications beyond the underbanked market."
The underbanked market in the United States is currently estimated at $78 billion in annual revenue, serving 68 million consumers across 22 different financial product types.
Forces favoring disruptive startups include the following:
1) The uncertain economy: The CFSI report cites "the slow and uneven decline of cash usage in the American economy, and the impact of the financial crisis on credit scores, interest rates, and the availability of credit. Shifts in the financial needs of underserved consumer segments – such as recent immigrants, recipients of Social Security and other government benefits, and baby boomers with insufficient retirement savings – are also stimulating product innovation."
2) Uncertainty over regulation: In the wake of the financial crisis of 2008, the threat of ever-tighter regulation looms over the industry. This may slow established companies down, but, as CFSI puts it, tech and social-savvy startups may "enjoy a comparative advantage if they can structure products to successfully navigate the regulatory landscape, tolerate the risks associated with still-pending regulations, and stay ahead of the regulatory curve by designing high-quality products with a consumer-focused orientation."
3) Established financial firms are bogged down in their own infrastructures. "FinTech startups developing new transaction networks or alternative approaches to credit may prove able to disrupt dominant incumbents in the underbanked market, particularly where the institutional infrastructure of entrenched players hampers their own ability to innovate." In addition, CFSI adds, larger players may find it more feasible to partner with more nimble startups who are opening up new markets.
4) Financial 'supply chains' are unwieldy: "The financial services industry features a complex supply chain involving banks, payments networks, clearing systems, processors, distribution partners, and end consumers, among other players," the CFSI report notes. FinTech companies may be nimble enough to insert themselves at particular points in this chain -- and in the process, open up greater access to underserved markets.
5) Consumers are drawn to digital: There's been an increasing migration of finance to digital formats "backed by muscular computing power," the report states. Not that consumers are complaining: "Financial technology companies that attract significant business will be those that capitalize on the increasingly digital lifestyles of underserved U.S. consumers with weak attachment to traditional financial institutions but strong affinities to social networks, as well as those who continue to prefer cash for daily transactions but
also require electronic payment options. "
This post was originally published on Smartplanet.com