DISRUPTIVE INNOVATION AND FINANCIAL TECHNOLOGY
In business theory, disruptive innovation is the kind of innovation that develops value networks and new markets. Finally, it disturbs an already current market and price networks, thus dislocating the established market-leading businesses associations and products (Gabor and Brooks 2017, p. 422). In most cases, disruptive innovations incline to be formed by foreigners and entrepreneurs in small business startups rather than being produced in existing market-leading companies. Market leaders in their business environments cannot pursue disruptive innovations whenever they arise since they seem to be unproductive (unprofitable) enough at a glance (Christensen et al., 2017). Besides, in such kind of environments, the development of disruptive innovations take minimal capitals away from supporting innovations that are required to strive against current market rivalry. Disruptive processes develop slowly compared to the conservative method, and the risks that are linked to disruptive innovation are sophisticated than the other evolutionary innovation methods. Nevertheless, when the disruptive innovations have been positioned in the market, they accomplish much faster diffusion, and the influence of it on the already reputable markets is of a higher degree (Gomber et al., 2018, p.231).
Camelia (2018), postulates that various firms whose engagement is in the financial service industry, have faced a recent emergency of renovations that are dramatic. The firms have also experienced dramatic business disruptions. Thus, the financial sector is looking for ways and new pathways toward successful business models. The process has been initiated by creating an enhanced customer experience together with developing new business approaches that may result in the transformation of services. Observers in academics and the financial industry believe that the innovations are linked to financial mutiny than just a set of fewer impactful variations in industrial technology in totality due to main developments in efficacy in both client informedness and centricity. In this regard, companies in the financial service industry carry out various functions that enable commercial, economic movement in new economies.
According to Gomber et al. (2018, p.231), financial service industries are defined as firms whose primary function is in retail banking, all insurances other than well-being, commercial lending, loan banking, credit cards, asset advisory and administration of assets such as mutual funds, hedge funds among other. The financial service industry recorded 7.2 percent of the total GDP (gross domestic product) in the economy of America in the year 2016. Besides, in the same year, the financial services represented 5.1 percent of the total gross domestic product in the economy of Europe. There were a total of 2.5 million people who were working in the sectors that offered services in finance during this period.
How Disruptive Innovation Creates Business Values In The Financial Services Business.
Conferring to (Board, 2017), operations in business values are found to be a key feature on financial services, which includes system design, forecasting, analysis of performance and productivity, management of operational risks, pricing, and management of revenue. Financial services are spearheaded by several key components, which include repeated service interactions, high volumes, and heterogeneity in customers, and the service encounter should use technology. Christensen et al. (2017) point out that the financial service industry has put in place new approaches, and they are changing dramatically. These include the availability of new products and services whose operational basis is different. This means that there is limited human involvement in the aspects of transactions, and the processes are reinforced by machine intelligence, where this is applicable and participation of humans in cases that can add value. Besides, the approaches that are now used in the financial services industry are also changing because a new basis has been created aimed at harmonizing investments across business competitors and partners as well. All these have been a success because of the reduction of transaction servicing via cross-border breaks. The management of customers has received new methods, not to mention the organization of operational threat over new artificial intelligence.
In the recent past, the launch of machines that are managed by human intelligence has begun to drop because of the introduction of a source software such as the tensor flow library that supports machine intelligence. Furthermore, the drop in the usage of human intelligence machine is due to the availability of infrastructure that is easily scalable like the Google Cloud (Christensen et al., 2017).
The introduction of the innovation has permitted new participants into the business market, thus creating role goods that aim certain customer sets concerning their characteristics. However, this approach has been found to have adverse effects on financial services because the incumbents have shown that companies that are highly besieged are criticizing every product in the market, thus unbundling financial services. Disruptive Innovation representations have forced most industries to become more client-centered over more operative hustling. They have also transformed how scholars think about operations in financial services. Gabor and Brooks (2017, p. 427) argue that Disruptive Innovation with substantial operational changes in financial services has led to significant improvements. Hence, transitioning to changes that ensure client acquisition and retention, branchless banking, monitoring, approving, and scoring of credit, and real-time transactions have been witnessed.
Further, Board (2017) postulates that many scholars have been concerned with operations in financial services, and the business value and productivity. Strategies in retail banking, designing of systems and process performance in operations in trade finances, analysis of economic effects of progress in technology on banking, new approaches in science management, and support vector machines together with other financial services algorithms for scoring on customer credit.
According to Christensen et al. (2017), financial services have been created through disruptive innovations. They have been delivered through systems that are complex in business processes, operational and organizational structures, different choice behaviors that are subject to restrictions on regulations, ethics, and legal structures. Disruptive innovations have also created business value processes that take into account human talent and capital. New entrants and incumbents always seek to improve the experience of their customers and users about their business products, capabilities, and services. These innovations have recorded a significant difference from the traditional way of running financial services because disruptive innovations have a new set of data that is in abundance. This data continuously grow in maturity concerning infrastructural and integrated systems that are used to process the data. Gabor and Brooks (2017, p. 432) argue that disruptive innovations have also created business values that respond to the emergence of recognition of patterns, mining of data, learning of data machines, and other tools that are used in digital sensing in the financial services.
Additionally, more awareness has been broadcasted to business start-ups and has been proven to be very supportive rather than being perceived as competitors in the same business space. The pre-conditions have now been made available to generate and co-generate business value via changing costs besides the flow of benefits as well as to authorize the central ground-breaking actions of small businesses that are emerging. Disruptive innovations have endeavored to develop strategies that will continue to improve continued experimentation in business performance high competitive markets. The innovations will also enhance learning and adaptation. This means that disruptive innovations through the strategies that have been put in place create business values through experimenting through experimentation (Gomber et al., 2018, p.238).
The financial services industry works best of distinct supports of disruptive innovation. Most paramount, disruptive innovations, as stated earlier, require significant volumes of capital for innovations in skill for the financial facilities in a competitive worldwide economy. Additionally, most start-up businesses have established new technologies for the finance industry (Gomber et al., 2018, p.242). They have also designed new services that are aimed at addressing the financial needs of the customers in very direct, futuristic, and valuable ways. Lastly, disruptive innovations have helped transform the business models and customer access through the extension of customer access outside the branches and past the regular hours of banking. The process has achieved higher personalization levels founded on cardinal detecting and extensive analysis of facts. Thus, disruptive innovations have substituted the out-of-date banks and the associated facilities in new ways such as industrial processes that are financed and crossbred services that are offered in new striking non- banking networks (Gabor and Brooks 2017, p. 427).
Opportunities and Risks from Disruptive Innovation in the Financial Services Industry
Venkataraman and Venkatesan (2018, p. 25) point out that disruptive innovations create both evolutionary opportunities and competitive threats for the financial service industry. Thus making it possible for the incumbent financial institutions and platforms that are considered to be alternative to develop partnerships that are more integrated and to learn and share capabilities of each other. The innovations in the financial services industry that are disruptive are, however, not disruptive existing payment processes; instead, they modify the processes in the front end to improve merchant and customer experience. Therefore, disruptive innovations present the following opportunities to the financial service industry that is meant to strengthen the financial sector through the employment of various strengths and strategies compared to the traditional way of banking.
Opportunities
Disruptive innovations in the financial service industry allow for increased client access by using the already existing ecosystem in the payment network to enable the customers to connect to parties that are already in the system. Among the interested parties is a large number of merchants who permit customers to pay conveniently. This is done through an open-loop mobile banking form of innovations. Conversely, the aim of closed-loop mobile banking innovations is consolidating the POS and payment network as a single so that a more flexible experience can be created. The opportunities require customers, merchants, and issuers to participate. In most cases, it allows the customers to fund the transactions through the traditional ecosystem of payment networks (Saal, Starnes and Rehermann 2017). According to Leong and Sung (2018, p. 76), disruptive innovation provides solutions in mobile merchant payments. Innovations in the apps concerning integrated payments and streamlined payment solutions.
Karagiannaki, Vergados, and Fouskas (2017) argue that the future of banking payments through disruptive innovations creates the following characteristics and opportunities in the banking sector. Payments will be cashless. Innovations in payments will make electronic payments more advantageous, and thus it will displace cash payment, thus making it attractive to clients since they can even pay in small denominations. Most operations will become more automated and virtual. Thus, more processes of payments will be invisible to the end-users, thereby changing their behaviors and needs.
Concerning merchants, Gold and Ali (2019) point out that disruptive innovations have created opportunities for merchants to enter the payment ecosystems directly through the private label solutions, thus allowing them to gain a broader understanding of the client’s spending patterns. Also, disruptive innovations have created the ability for financial institutions to provide more specialized programs is giving rewards to capture the interest of specific segments of spend networks. Customers can maximize the collection of awards without compromising the continuous experience. Customers also have the ability to raise their potential in debt since the production of many credit cards is now easier which helps in offsetting the liability through the management functionalities of mobile wallets
Another potential opportunity brought forth by disruptive innovations is that the merchants aim at potentially decreasing the charges paid in total merchant service as private label cards are adopted more widely among each merchant’s client base. There is also increased competition for new customers from the new entrants, which includes merchant credit cards. It also poses opportunities in a stronger competitive position for more influential niche players (Saal, Starnes, and Rehermann, 2017).
Risks
Over time, there will be a potential increase in the amount of available merchant card choices since many customers will be using fewer cards, thus leading to a significant decrease in competition and innovation. Gold and Ali, (2019) further explains that increase in risk will be aided by the fact that need for physical cards is eliminated by the deployment of the digital wallet will remove the limitation of the number of the card that one can take or use.
According to Karagiannaki, Vergados, and Fouskas (2017), another potential risk associated with the introduction of disruptive innovations in the financial service industry is that it leads to decreased opportunities to scale when it comes to credit cards providers. There will be a potential decline in the efficiency of rewards programs that will be organized because incase the credit cards are only used for most rewarding transactions. Most rewarding in the sense that they are the sales with the lowest margins. The traditional players who are unwilling to participate in smart solutions will be displaced. Disruptive innovations can also lead to potential rewards for race arms and backward optimization.
References
Board, F.S., 2017. Financial stability implications from fintech: Supervisory and regulatory issues that merit authorities’ attention. June, Basel.
Camelia, L.F., 2018. Investigating the perception of fin-techs: disruptive innovation in the banking industry?
Christensen, C.M., McDonald, R., Altman, E.J., and Palmer, J., 2016. Disruptive innovation: Intellectual history and future paths (pp. 1-52). Cambridge, MA: Harvard Business School.
Gabor, D., and Brooks, S., 2017. The digital revolution in financial inclusion: international development in the fintech era. New Political Economy, 22(4), pp.423-436.
Gold, M., and Ali, P., 2019. FinTech Challengers and Incumbents’ Responses: A Window into Innovation Strategy Modes within Australia’s Financial Services Sector. Available at SSRN 3467855.
Gomber, P., Kauffman, R.J., Parker, C., and Weber, B.W., 2018. On the fintech revolution: interpreting the forces of innovation, disruption, and transformation in financial services. Journal of Management Information Systems, 35(1), pp.220-265.
Karagiannaki, A., Vergados, G., and Fouskas, K., 2017. The impact of digital transformation in the financial services industry: insights from an open innovation initiative in fintech in Greece. In the Mediterranean Conference on Information Systems (MCIS). Association for Information Systems.
Leong, K., and Sung, A., 2018. FinTech (Financial Technology): what is it and how to use technologies to create business value in fintech way? International Journal of Innovation, Management, and Technology, 9(2), pp.74-78.
Saal, M., Starnes, S. and Rehermann, T., 2017. Digital Financial Services.
Venkataraman, R., and Venkatesan, T., 2018. The Future of Indian Investment Advisory Firms–A Cost Efficiency Approach. International Journal on Recent Trends in Business and Tourism, 2(4), pp.24-28.