Is disruption the most abused term in modern business parlance? Perhaps the best line on disruption belongs to Peter Thiel, a billionaire tech entrepreneur:
“disruption has transmogrified itself into a self-congratulatory buzzword for anything new and trendy”
Even Clayton Christensen – the originator of the modern theory of disruption – opined the term has become abused. His argument is anchored on his very narrow ‘theory of disruption’. Classic ‘Christensen’ style disruption only occurs via two distinct pathways:
A low-end entry which addresses an underserved part of the market; or
A new market foothold which creates a market where none existed before, turning non-consumers into consumers.
The low-end entry under-performs on a couple of attributes the incumbent’s key customers value highly. The incumbent remains focused on serving their valuable, higher end market. But quickly this low-end entrant learns and bridges the gap to these higher end customers, and the incumbent cedes its market to the new entrant [1].
Fintech represents a classic Christensen style disruption. It is a rapidly growing sector, particularly in Latin America. The largest fintech in Latin America, and one of the largest in the world, is Nubank. It has raised $2B since its inception in 2013, putting its valuation at ca. $30B. Pierpaolo Bierbieri, the CEO of Ualá, a smaller Argentinian fintech, recently discussed the challenger’s market entry playbook in a podcast with Professor Scott Galloway.
The market logic begins with recognising about 50% of adults in Latin America lack access to a bank account: the ‘unbanked’. In Mexico, around 70% of adults are unbanked. They have never had a card, unable to pay for anything other than with cash. The problem and the opportunity that presents is very real both at an individual and country level.
At the individual level, the ‘unbanked’ can only engage in cash transactions. Their economic activity is confined to people and businesses within close geographic reach. It also means they have no access to a savings or investment pathway; they cannot have a credit history so they cannot get a loan. The ‘unbanked’ system perpetuates a cycle where the poor are disadvantaged.
The various governments in the region – from both the left and the right – recognise that within 10 years, every part of the economy will be digitised. If you don’t give these people access, how are they going to be participants in the economy? And a large portion of the population excluded from commerce hurts the economies.
Why haven’t the incumbents addressed this obvious need?
As Christensen observed, the incumbents are focused on the profitable segment of the market. According to Bierbieri:
“some of the most profitable banks in the world are Mexican and Brazilian and Argentinian … during the [banking] crisis some of the banks were more eager to sell their home franchises than they were to give up their Mexican franchise because there is little competition … you took money at 2% and lent at 11%”
One of the incumbent’s challenges is that the traditional banking system operates with an analogue business model: papers; branches; legacy technology systems. This imposes heavy costs. By contrast, the challengers can do everything digitally. They don’t need branches; they don’t need paper systems and they have no legacy technology systems.
At first the challengers’ products are too limited to meet the needs of the incumbents’ profitable customers: viz.
“at first it's only the unbanked that sign up for Ualá, because it's just a card and an account. But then when there is investment products and better money market experience and merchant acquiring products and insurance products then wealthier people say ‘wait, why am I paying this incumbent bank an opening fee, maintenance fee, a renewal fee for my card that doesn't give me any benefits whereas these guys are doing it faster, cheaper, better. And my kids have access to Ualá. Why don't I’? And then they sign up” … Pierpaolo Barbieri – CEO Ualá
The first response of the incumbents was lobbying, arguing that fintechs are unsafe. The incumbents are now all rushing to digitise. This pattern is repeated often. This was the taxi industry’s response to Uber [2]. It was the airline industry’s response to Southwest Airlines when they were a new entrant [3].
Just how disruptive will fintech be on the incumbents? Will the incumbents be displaced by these challengers? It seems unlikely. The incumbents are investing heavily in their digitalisation. Displacement typically occurs when the challenger’s model makes obsolete the incumbent’s sources of advantage. Blockbuster’s competitive advantage was its massive inventory and its footprint: these went from advantage to liability once Netflix offered streaming.
Evidence from other sectors suggests the incumbents may cede perhaps ca. 20% of the market to these disruptors but we will have to see how this plays out.
So what? Here are three questions to ponder:
Is there an unserved/underserved market in your sector? How could technology enable this market to be served albeit by a ‘lesser’ product?
What would a loss of 20% market share do to your unit economics?
Is legislation a significant barrier to entry to your sector? What does it look like if that ‘advantage’ disappeared in the next five years?
As always, good luck.
DDB … a strategist’s view
[1] As powerful as his theory is, his narrow framing has led him to argue at different times Uber was not disruptive (ask a taxi driver) and the iPhone was a sustaining innovation, not disruptive (ask Blackberry/Nokia executives). He later suggested the iPhone was disruptive: it disrupted the PC.
[2] Ironically, Christensen argued that the iPhone and Uber were not disruptive. His very narrow application of the term ‘disruption’ is an over-reach and has caused a lot of confusion. But that’s for another blog.
[3] Southwest entered the market flying only intrastate, which they argued successfully allowed them to step around what was at the time federally controlled pricing of airline faresIs disruption the most abused term in modern business parlance? Perhaps the best line on disruption belongs to Peter Thiel, a billionaire tech entrepreneur:
“disruption has transmogrified itself into a self-congratulatory buzzword for anything new and trendy”
Even Clayton Christensen – the originator of the modern theory of disruption – opined the term has become abused. His argument is anchored on his very narrow ‘theory of disruption’. Classic ‘Christensen’ style disruption only occurs via two distinct pathways:
§ A low-end entry which addresses an underserved part of the market,
§ A new market foothold which creates a market where none existed before, turning non-consumers into consumers.
The low-end entry underperforms on a couple of attributes the incumbent’s key customers value highly. The incumbent remains focused on serving their valuable, higher end market. But quickly this low-end entrant learns and bridges the gap to these higher end customers, and the incumbent cedes its market to the new entrant[1].
The fintech sector represents a classic Christensen style disruption. Fintech is a rapidly growing sector, particularly in Latin America. The largest fintech in Latin America, and one of the largest in the world, is Nubank. It has raised $2B since its inception in 2013, putting its valuation at ca. $30B. Pierpaolo Bierbieri, the CEO of Ualá, a smaller Argentinian fintech, recently discussed the challenger’s market entry playbook in a podcast with Professor Scott Galloway.
The market logic begins with ca. 50% of adults in Latin America without access to a bank account: the ‘unbanked’. In Mexico, around 70% of adults are unbanked. They have never had a card, unable to pay for anything other than with cash. The problem and the opportunity that presents is very real both at an individual and country level.
At the individual level, the ‘unbanked’ can only engage in cash transactions. Their economic activity is confined to people and businesses within close geographic reach. It also means they have no access to a savings or investment pathway; they cannot have a credit history so they cannot get a loan. The ‘unbanked’ system perpetuates a cycle where the poor are disadvantaged.
The various governments in the region – from both the left and the right – recognise that within 10 years, every part of the economy will be digitised. If you don’t give these people access, how are they going to be participants in the economy? And a large portion of the population excluded from commerce hurts the economies.
Why haven’t the incumbents addressed this obvious need?
As Christensen observed, the incumbents are focused on the profitable segment of the market. According to Bierbieri:
“some of the most profitable banks in the world are Mexican and Brazilian and Argentinian … during the [banking] crisis some of the banks were more eager to sell their home franchises than they were to give up their Mexican franchise because there is little competition … you took money at 2% and lent at 11%”
One of the incumbent’s challenges is that the traditional banking system operate with an analogue business model: papers; branches; legacy technology systems. This imposes heavy costs. By contrast, the challengers can do everything digitally. They don’t need branches; they don’t need paper systems and they have no legacy technology systems.
At first the challengers’ products are too limited to meet the needs of the incumbents’ profitable customers: viz.
“at first it's only the unbanked that sign up for Ualá, because it's just a card and an account. But then when there is investment products and better money market experience and merchant acquiring products and insurance products then wealthier people say ‘wait, why am I paying this incumbent bank an opening fee, maintenance fee, a renewal fee for my card that doesn't give me any benefits whereas these guys are doing it faster, cheaper, better. And my kids have access to Ualá. Why don't I’? And then they sign up” … Pierpaolo Barbieri – CEO Ualá
The first reaction of the incumbents was lobbying: they argued that fintechs are unsafe. The incumbents are now all rushing to digitise. This is a commonly repeated pattern: the incumbent’s first response is almost always to lobby against the new entrant. This was the taxi industry’s response to Uber[2]. It was the airline industry’s response to Southwest Airlines when they were a new entrant[3].
Just how disruptive will fintech be on the incumbents? Will the incumbents be displaced by these challengers? It seems unlikely. The incumbents are investing heavily in their digitalisation. Displacement typically occurs when the challenger’s model makes obsolete the incumbent’s sources of advantage. Blockbuster’s competitive advantage was its massive inventory and its footprint: these went from advantage to liability when Netflix offered streaming.
Evidence from other sectors suggests the incumbents may cede perhaps ca. 20% of the market to these disruptors but we will see how this plays out.
So what? Here are three questions to ponder:
§ Is there an unserved/underserved market in your sector? How could technology enable this market to be served albeit by a ‘lesser’ product?
§ What would a loss of 20% market share do to your unit economics?
§ Is legislation a significant barrier to entry to your sector? What does it look like if that ‘advantage’ disappeared in the next five years?
As always, good luck.
[1] As powerful as his theory is, his narrow framing has led him to argue at different times Uber was not disruptive (ask a taxi driver) and the iPhone was a sustaining innovation, not disruptive (ask Blackberry/Nokia executives). He later suggested the iPhone was disruptive: it disrupted the PC.
[2] Ironically, Christensen argued that the iPhone and Uber were not disruptive. His very narrow application of the term ‘disruption’ is an over-reach and has caused a lot of confusion. But that’s for another blog.
[3] Southwest entered the market flying only intrastate, which they argued successfully allowed them to step around what was at the time federally controlled pricing of airline fares
