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FinTech

How banks can think like start-ups

Disruption is one of the most common terms in business these days. You can hardly open a magazine or newspaper without seeing the word. But what does it really mean?

For me, disruption is a radical form of change that occurs not just when a new technology arrives on the scene, but when a visionary sees potential in it to reinvent or reshape an existing business. The inventor of a new technology isn’t always the disrupter. Xerox PARC developed the graphic user interface—the computer mouse—but Apple and other companies disrupted the industry with it. Disrupters aren’t immune to disruption. AOL reinvented the way we communicate, only to be supplanted by better e-mail systems and then social media.

Disruption isn’t restricted to the consumer world. Global financial services firms’ markets are subject to it as well. Recent innovations won’t put them out of business, but they are being forced to think differently about how they operate and what their futures hold.

The biggest disruption in finance is coming on two fronts: digital currencies and financial technology, or FinTech. Bitcoin, once seemingly a fringe approach to transferring money, is now seen as a disruptive force that could become widely used.

Meanwhile, FinTech firms are paving new ground in mobile payments, peer-to-peer lending (which cuts out banks), and crowdfunding, in which individuals can fund start-ups and potentially reap rewards. Banks will need new strategies to deal with all of these disruptive market forces, or to counter with their own offerings.

Platforms and the network effect: Why small firms are big disrupters

Today, an innovative concept can go from a sketch on a napkin to reality almost overnight, and quickly become the “new normal.” People used to Xerox a document, now they “Uber it” when taking a car.

How are start-ups disrupting entrenched industries such as the traditional banking system? After all, large firms hire the best and brightest, have vast amounts of money to spend on research and development, and are supported by a regulatory apparatus that while onerous is essentially dedicated to keeping them in business.

Speed and scale, two key elements of disruption, happen because new entrants are building their businesses on Internet-based platforms hosted in the cloud.

Initially at least, these don’t require large real estate or staff outlays, and they can be quickly built out if the technology takes hold and grows in popularity. Some platform companies grow incredibly large and still require very little infrastructure; Airbnb and Uber are great examples. Facebook has a market cap of about $356 billion and 14,000 employees. General Motors has a much smaller market cap, about $50 billion, yet it operates 400 facilities on six continents, and has about 215,000 employees. Quite a difference.

Large banks more closely resemble GM. They have numerous business lines, each supported by legacy strategies and technologies. Siloed divisions may not interact well, and top executives face a challenge when seeking to understand everything that’s happening across the enterprise, and how different business lines affect each other.

Platform start-ups, on the other hand, are nimble because they focus on one thing, and they do it well (or they don’t, and they quickly fold). By the time banks catch up, the barrier to entry may already be too high—not because of the cost, but because newcomers have established their brands and have already infiltrated markets and inked deals with customers.

Aside from their agility and smaller size, platform companies also benefit from what I call the network effect. Users spur growth by spreading the word among their social and professional networks. As more customers embrace a platform, it becomes attractive to others. They join, drawing even more people in what amounts to a self-reinforcing cycle of growth. Eventually even the laggards come on board.

Leveraging legacy businesses while thinking like a startup

What can financial services firms do to manage disruption? For one thing, they need to start seeing themselves as platform companies, break down silos, increase transparency and the flow of data, and look squarely at the future. And they can take advantage of their size.

Banks don’t need to abandon their legacy businesses and customers, but they do need to pay close attention to shifts in the financial space so that they can begin to anticipate change instead of being forced to react to it. The task isn’t impossible. Microsoft’s legacy businesses are still thriving, but under chief executive Satya Nadella it’s moved forward into cloud computing and other platform areas, even at the risk of cannibalization. Some banks are already taking steps forward. Deutsche Bank, UBS, Santander, and Bank of New York Mellon recently announced they are working on a digital currency to manage trades through blockchain, the underlying technology for bitcoin. And several large U.S. banks will jointly launch a person-to-person payment service called Zelle, which will compete with products such as PayPal’s Venmo.

Thomson Reuters has been a platform company for some time (we consider ourselves one of the world’s oldest FinTechs), as have been some of our peers. With a platform strategy and a focus on partnerships, we can offer financial services firms the widest possible variety of tools—including data, analytics, and apps—to help them stay ahead of disruption, and perhaps become disrupters themselves.


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What do you see as the next big disruptor? Let us know in the comments below.

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