In part one of the discussion on 'Disruptive Innovation' theory, we discussed how there is debate over the term 'disruption' and 'innovation' as well as 'Disruption Innovation' theory itself as it relates to the financial services industry. Now we dig deeper into a specific example of disruptive innovation in banking.
In the first part of this series, we discussed how there is almost universal agreement that the financial services industry is being disrupted by new competition, new technology, new consumer behaviors as well as new regulatory pressures. We also reviewed a few rules to live by as you create a proactive position as co-disruptor rather than that of a retreating incumbent. Now, it’s time to show a hypothetical example of how disruptive innovation can occur in banks and credit unions.
Let’s pick a financial solution where the financial services industry is perfectly positioned, yet has not met the potential expected for usage or growth – bill paying services. Most banks and credit unions provide this service either through a 3rd party or internally, where payments are made from a customer’s bank account to any number of billers. Yet, despite the fact that is has been 14 years since online bill pay allowed folks to go paperless, only 50 percent of U.S. consumers currently pay bills online.
According to a report from Javelin Strategy + Research, financial institutions, credit unions included, have dropped the ball with a huge market segment that simply overlooks them when it comes to digital bill pay. Noted the Javelin report titled ‘2013 Online Banking and Bill Payment Forecast,’ (Bill pay) adoption will remain unacceptably ﬂat through 2018 unless financial institutions take action to upgrade services, counter misperceptions about paying bills at FIs, and speciﬁcally target 29 million Americans who are only one step away from paying bills at their bank or credit union.
“The priority list of holdouts is topped by a newly identified segment of nearly 11 million ‘digital drifters,’ deﬁned as consumers who bank online and use mobile banking but do not pay bills at their primary FI,” the report said.
Why still so low and so fragmented acceptance after all of this time? For one reason, banks and credit unions tend to require that only accounts specific to their organization be used to make payments and most 3rd parties, while more flexible, charge fees. Moreover, most organizations still require that payments be initiated by the customer or member in individual sessions in which the consumer must log in and pass various security checkpoints within a limited amount of time to avoid being involuntarily logged off.
In other words, the current state of online or mobile bill pay is an electronic replication of the tedious chore of check-writing, except that there’s more security hoops to jump through (and we won’t even discuss the consequences if you fail to achieve one of these checkpoints after a third attempt).
Innovative Disruption Case Study
Now, let’s consider the alternative of using manilla.com as our starting point. With your permission, Manilla will intercept and pay your bills on time, seamlessly at no cost to the consumer. Billers pay for the service and it’s actually an easy sell to them because it eliminates an enormous load of expensive paper document generation, mailing and retention responsibilities. It’s also easy to sell to bill-payers, not just because it’s free, but because it’s can be entirely automatic. And for consumer, logging on to just the one system is a far simpler task than:
- Logging on to all kinds of different sites with different user names and passwords
- Executing at precisely the right time after the bill has been generated but before the last day to pay
- Paying, but not overpaying, one’s bills in a way that guarantees there will never be a late charge of any kind incurred
Consider the ease of mind that having such an ultra-cheap and ultra-effective billpay ‘insurance’ would bring to a consumer that wants to pay off their various bills monthly, without the fear an exorbitant late charge or an increase in interest rates.
“The increased availability of consumer insight, low cost of entry, technological advances and under-sold solutions provides opportunities for innovative disruption in banking.”
This still leaves a place for collection agency functions, since Manilla doesn’t stop anyone from authorizing more than they have available to spend. But even in this scenario, Manilla could, after a relatively short experience with a given customer, recognize occasions where a customer might be routinely running short of cash or conventional credit for short periods of time.
It’s during these cycles of feast and famine that Manilla could increase their knowledge about an individual consumer’s payment habits. It would then be easy to offer pre-authorized bridge loans to qualified consumers to automatically smooth out the rough spots – and for some this would be a godsend. What’s more, Manilla need not have any capital or reserves of its own to create such loans since they could easily facilitate peer-to-peer loans amongst their customers that are better capitalized at that moment.
Consider that with only a little more customer history, a slightly more advanced version of today’s Manilla could offer to create a flat, single-amount weekly or monthly billing level for any of its customers in much the same way the utility companies do today. Using the experience of utilities, we know that one does not need to be in active need of financial intercession to benefit from a flattened rate for one’s bills.
In the process of paying bills for customers, Manilla is learning more about its customers than the customer’s bank or credit union ever knew. At the same time, this process erases much of the data on which conventional credit ratings and loan approvals are based since all of Manilla’s customers will be paying their bills on time, making all Manilla customers look identical from a credit bureau perspective.
The above case study has ‘disruptive innovation’ written all over it, but the creative soul can still go further without stretching the boundaries of credibility.
Expanding The Opportunity
Consider the potential of Manilla making massive payments on behalf of a great number of payers each day to a relatively limited number of billers. What might happen in cases where the same or similar solution is provided for many to select organizations such as gas companies, electricity providers, health insurance firms, etc., is that Manilla is in an excellent position to negotiate the consolidated interest of thousands of payers with respect to such providers – something that’s only been achieved on a very small scale in retail firms like Sams Club and Costco.
In addition, if you consider that billers almost always either contract out their billing to a 3rd party or run it themselves as a cost center, Manilla could reduce the costs of billing to those that use 3rd parties by putting billing and paying under the same roof – eliminating at least one level of intermediary and its associated cost. Going further, Manilla could then offer the same cash-flow leveling service to billers as they did previously to consumers. The benefit of cash flow management, while definitely a benefit to a family, is no less than a value to many businesses.
The Risk Of Incumbency
I don’t think we need to go much farther to make it clear how risky it is for the financial services industry to believe in their own sanctity. In the example above, banks and credit unions were first to offer bill payment services but have ignored the opportunity, leaving others to provide the services. This seems to always be the case with disruptive innovation; Kodak had digital image capture first … Sony produced pocket sized music players LONG before and significantly better than anyone else. The list is extensive.
Is the portrayal I’ve conjured up actually going to happen? Let me ask you this: How much are you willing to bet that it’s not? Everything? So, let me leave you with this sobering thought: There are all kinds of industries growing up around services the financial services industry could (and should) be providing. Every every one of them has the potential to lead down a similar path to make what you do redundant.
It’s time to think about the instances where new entrants are eating away at the edges of traditional financial services, offering alternatives that don’t seem of paramount importance at the time, either due to minimal perceived lost revenues or even the ability to reduce costs. But how many of these ‘minor’ disruptive innovations does it take to completely transform an entire industry?
Just ask some of the retail, transportation and communication firms that are no longer with us today.
Rick Mueller is a production and product development manager turned PhD student driven to continue the work begun by Clay Christensen. He manages the Disruptive Innovation Group on LinkedIn and serves to advise selected teams and individuals seeking to initiate and/or avoid disruption. You can follow Rick on Twitter and LinkedIn