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FinTech

Embracing disruption through partnership

Dr. Andrew Fletcher  Director, Thomson Reuters Labs™ – London

Dr. Andrew Fletcher  Director, Thomson Reuters Labs™ – London

Entrepreneurs pioneer ideas that give them temporary advantage over their competitors and force the economy to adjust to the new reality. We can look back to the mechanization of agriculture, the Industrial Revolution and the invention of the computer as major shifts that sparked those advantages to entrepreneurs, forced the economy to adjust and had major impacts on labour markets, existing businesses and on our way of life.

It’s often said history repeats itself. Artificial intelligence, blockchain and other technologies grouped into FinTech are already creating a “gale of creative destruction” (first described by economist Joseph Schumpeter) in the Financial Services sector globally. Those that adopt, adapt and repurpose themselves to the advantages at the heart of the Findustrial Revolution will be the winners, creating new value and new opportunity.

The decentralized approach brought by blockchain is worth noting due to the massive potential for creative destruction in both established and new application areas. As part of London FinTech Week 2015 we hosted a hackathon, jointly sponsored by IBM and Lloyds Banking Group, where participants explored the potential of blockchain to disrupt the IPO and insurance markets. We recently invested in Fluent, a technology start-up that enables real-time, low-cost, simple and secure invoicing and payments along global supply chains via blockchain technology. And these are just two examples of how we are looking at a range of blockchain opportunities, collaborating with start-ups and customers to move quickly and be part of the transformation this emerging technology brings.

We are definitely not alone in our exploration of the FinTech landscape; we estimate that about 80% of the Financial sector run at least one FinTech-focused innovation program. That landscape is filled with about 20,000 start-ups, hundreds of bank-backed hackathons, strategic investment funds, accelerators and R&D labs. For many established players, facilitating creative destruction and embracing disruption is often difficult – filled with ambiguity and dilemmas.

The innovator’s dilemma

Twenty years ago Clayton Christensen, a professor from Harvard Business School, noted this ambiguity and dilemma in his book, The Innovator’s Dilemma. Its core concept of disruptive innovation seems even more relevant today, yet for such a well-known buzzword it is frequently misunderstood. Disruption is not a catchall for any time that a new upstart comes along and takes a chunk of your business. It is fundamentally related to new technology and how it establishes itself in new business models and in new markets.

The argument goes that meeting the needs of existing customers is always conflicted with embracing new technology, because those new technologies will inevitably have shortcomings that prevent them meeting the needs of those existing customers. Instead of being embraced by the majority, new technologies will be picked up in new or smaller adjacent markets that do not have such strict requirements, and that are initially exploited by start-ups willing to take a risk, establish that small market opportunity and grow it. It is only then, once it has been refined and developed further that the technology finds its use in broader, established markets, and now the start-ups are the ones best positioned to disrupt.

As an example, Netflix launched with a value proposition that had little appeal to Blockbuster’s core market. In a world where people rented on impulse in store, Netflix offered an online directory and a multi-day wait to receive a movie in the post. Blockbuster could have offered the same, but they were not inclined to meet the needs of that new market because it didn’t fit their retail model of generating foot traffic, and supplementing renting movies by selling snacks in store and being able to charge late fees for overdue rentals. Netflix was happy to focus on improving their technology and not go head-to-head against Blockbuster’s retail strategy. Netflix changed the game by creating a technical race that Blockbuster ultimately lost and, when streaming became established, also lost their core customer and their business.

So what should an established player do when faced with such disruption? Christensen offers a solution to the innovator’s dilemma, approaching new technologies and the markets they offer through “skunkworks,” new entities isolated from the parent organisation. An example is Google® X, a completely separate company whose sole purpose is to go for the “moon shot” of disruption that the parent company is less likely to tolerate.

Embracing disruption in the finance industry can be particularly difficult because regulation, set up to protect the end customer, can stifle innovation. However, some FinTech start-ups use this to their advantage, partnering with regulators early on so they are poised to create new products and innovate quickly. London-based Seedrs was the first equity crowdfunding platform in the world, working with regulators from the outset to create the market they wanted to enter.

In such a new area we’re working to track the spread of crowdfunding as a global phenomenon, partnering with the University of Cambridge, Tsinghua University and the University of Sydney on the first comprehensive study of crowdfunding, peer-to-peer lending and other forms of alternative finance across the Asia Pacific region. And last September Thomson Reuters started working with Crowdnetic to increase transparency in the crowdfunding market and bring their data to a mainstream audience through Eikon.

What’s clear from these examples is that technology is more quickly allowing entrepreneurs to tap into a global “long tail” of opportunity.

The long tail

The concept of “open innovation” is not new, but the modern focus to embrace a more collaborative approach came from the landmark book on the topic by a professor from Berkeley, Henry Chesbrough. In his model, the traditional development funnel within a firm is opened up to embrace ideas coming from outside in, and vice versa. This has the advantage that new ideas are explored in partnership with start-ups, universities, suppliers and, importantly, customers. Not to be confused with outsourcing, or traditional supplier relationships, this approach is built around innovation ecosystems that are sustained through partnership and collaboration.

Launched in October 2015, Thomson Reuters Labs™ – Waterloo Region is part of an incubation and co-working space called Communitech. The local Labs team in Canada is part of a wider Thomson Reuters group bringing data science skills and expertise in building partnerships with universities and start-ups. Crucially, this group does not act in isolation but, by working across the business, engages directly in solving customers’ problems. For example, the first project is a partnership with ThinkData Works to help finance professionals link to the opportunity of open data.

Open innovation brings value in many ways, but one is the concept of the “long tail.” This expands what a company can accomplish in two important ways:

  1. Not all the smart people work here. By embracing a wider ecosystem and sharing the challenges crucial to your business, ideas can come from the significantly larger set of the population who don’t work for you.
  2. You can’t do everything for everybody. With an open platform you can meet the needs of a long tail of customers by working with partners and serve market needs that you never could on your own.

In a global economy, new ideas, new start-ups and partnerships come from a much broader network. Accelerator programs are providing a way for companies to tap into a wider network, bringing value to those start-ups from open assets and APIs.

Thomson Reuters is partnering with: Stone & Chalk in Sydney; FinTech Sandbox in Boston; Citi in Tel Aviv; Barclays in New York; and Startupbootcamp in New York and Singapore. Embracing open innovation and the “long tail” helps all parties accelerate their efforts.

Through the use of technology to create global networks, platforms and even entire ecosystems, companies can innovate openly.

And not just in their core markets, but all along the continuum of global and emerging markets, tapping into the long tail of opportunity. Now that’s embracing disruption!


FinTech by the numbers

Infographic crunches the numbers in the $17 billion FinTech investment industry
Sources: Thomson Reuters, McKinsey, White House TechHire Initiative, Accenture

Areas of opportunity

  • Amplified information
  • Automation & empowered analysis
  • Networked trading
  • Counterparty pairing
  • Enterprise data integration
  • Enhanced risk management
  • Virtual infrastructure

Learn more

Visit Innovation @ ThomsonReuters.com to learn more about how we are pairing technology with human expertise and how you can get involved.

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