Banking on Disruption:
Digitization, FinTech, and the future of retail banking

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June 26, 2017
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Executive Summary

Retail banking has long been a tech-intensive industry. However, the recent digitization of products and services coupled with the the emergence of tech-savvy millennials has created the context for unprecedented innovation and transformation in retail banking. This changing environment has enabled a new group of competitors who bear few similarities to traditional banks. Often dubbed “FinTech,” these financial service providers are attacking virtually every product category in retail banking, from payments, to wealth management, to lending.

The phenomenon has been widely assessed as “disruptive” by industry analysts, however, the underivative concept of disruption is far more discerning and powerfully prescriptive. The Theory of Disruptive Innovation explains the process by which technology enables new entrants to provide goods and services that are less expensive and more accessible, and eventually replace—or disrupt—well-established competitors. Through this lens, it is clear that true disruption is not as widespread in banking as some might believe.

In the first in a four-part series on disruption in banking, Digitization, FinTech, and the future of retail banking uses the Theories of Disruptive Innovation to assess the impact of FinTech on established organizations with a specific focus on three segments: payments, wealth management, and lending. Our analysis shows that in each product category, entrants do indeed pose a competitive threat to banks—but the conditions are not always ripe for disruption. Instead, many FinTech innovations are being launched to sustain or improve existing products, making them attractive for both new entrants and existing banks. So long as incumbent banks are incentivized to adopt these solutions rather than ignore them, disruption will be difficult for entrants.

But this does not mean disruption is impossible. The strategies of those entrants with maximum chances of success appear to be coalescing around two themes: 1) targeting an underserved market and moving upmarket into other products and services, and 2) focusing efforts around the contemporary marketing strategy of Jobs to Be Done, which aims to better understand the progress that individuals are trying to make in their daily lives.

Laterally, our analysis reveals that banks have two clear choices for market maintenance: 1) employ a sustaining strategy by adopting the innovations that are launched by entrants, so long as they build on existing performance, and 2) in the event that their business models cannot profitably support new innovations, build an independent business unit with fundamentally different DNA from which to launch new products or services.

As it stands today, disruption is indeed lurking. Whether FinTech entrants or incumbent banks, individual organizations must make a careful assessment of the disruptive and sustaining potential of innovations in their respective industries. Doing this will enable them to stay ahead of their immediate competition and thrive in this period of change.

You may also be interested in reading:

Banking on Disruption: The rise of online lenders and the FinTech fallout

Banking on Disruption: The hype and reality of disruption in consumer payments

Subhajit Das

Subhajit Das is a Visiting Research Fellow at the Christensen Institute from Tata Consultancy Services. Subhajit’s research applies the Theories of Disruption to the future of the banking industry.