Shaken finance is at last stirring

The the­o­ry of dis­rup­tive inno­va­tion isn’t quite as con­tro­ver­sial as the the­o­ry of intel­li­gent design, but it’s get­ting pret­ty close. On the face of it, sim­ple enough – unex­pect­ed inno­va­tions reach new cus­tomers and low­er prices. The kick comes in the tail. Clay­ton Chris­tensen, who pitched the the­o­ry back in 1995 in The Innovator’s Dilem­ma, argues that dis­rup­tion is usu­al­ly fatal and old-school incum­bent com­pa­nies either shrink or die. If it’s true, that’s bad news for banks.

“Finance is ripe for dis­rup­tion,” accord­ing to Rachel Bots­man, author of What’s Mine Is Yours: Col­lab­o­ra­tive Con­sump­tion Is Chang­ing The Way We Live. “It ful­fils all four of the key cri­te­ria: there are fees that can be cut out of the process and peo­ple will ben­e­fit; it’s unnec­es­sar­i­ly com­plex; trust has bro­ken down; and peo­ple who have been exclud­ed from the sys­tem are get­ting new access. It’s where the media indus­try was five years ago or the music indus­try just as Nap­ster hit.”

She has a point. Bank­ing hasn’t real­ly changed since the days peo­ple would send live­stock to mar­ket and get a piece of paper in exchange, accord­ing to KPMG’s UK head of pay­ments Mark Hale.

But 2014 was pret­ty much the year of dis­rup­tive inno­va­tion, from new online banks, such as Fidor, and the rise of the robo-invest­ment advis­er, includ­ing Wealth­front, Motif Invest­ing and Bet­ter­ment, using soft­ware to build port­fo­lios in min­utes at a frac­tion of the cost of a pro­fes­sion­al.

Then there was the spread of crowd­fund­ing into the ven­ture cap­i­tal are­na and a new form of child-focused pre-pay deb­it card, Osper, aimed at teach­ing kids sound bud­get­ing, but inevitably eat­ing away at banks options in recruit­ing future clients.

Ms Botsman’s four rea­sons – fees, com­plex­i­ty, trust and new access – hold good across the board.

UNDERCUTTING BANKS

“You’ve had that expe­ri­ence when you get your mon­ey at the air­port and think, ‘I’m sure I haven’t got the best deal here’,” says Michael Laven, chief exec­u­tive and co-founder of The Cur­ren­cy Cloud, a rapid­ly grow­ing Lon­don-based start­up under­cut­ting banks on the cur­ren­cy exchanges. Found­ed by expe­ri­enced for­eign exchange traders and pay­ments experts, its XBP Con­nect API plat­form shaves as much as two thirds off trans­ac­tion fees for busi­ness clients, buy­ing on the cap­i­tal mar­kets and dis­clos­ing its price to clients then charg­ing a fixed fee.

Cur­ren­cy Cloud is busi­ness-to-busi­ness, but dis­rup­tive con­sumer cur­ren­cy star­tups, such as Azi­mo and Trans­fer­wise, are clients and pass sav­ings on, accord­ing to Trans­fer­wise co-founder Taavet Hin­rikus, who helped launch Skype.

“No tele­com com­pa­nies took Skype seri­ous­ly at launch,” Mr Hin­rikus points out. “But ten years lat­er it han­dles 30 per cent of inter­na­tion­al calls.”

Com­plex­i­ty, mean­while, has tra­di­tion­al­ly been the finan­cial world’s defence against une­d­u­cat­ed intrud­ers, argues Philipp Moehring, head of all things Europe at Syn­di­cates, launched last year by Angel­List, a ven­ture cap­i­tal intro­duc­tion site.

Com­plex­i­ty has tra­di­tion­al­ly been the finan­cial world’s defence against une­d­u­cat­ed intrud­ers

Syn­di­cates resem­bles the orig­i­nal invest­ment clubs gath­ered in Lon­don cof­fee hous­es in the late-1600s. The site lets accred­it­ed investors co-invest with sophis­ti­cat­ed angel investors who know how to pick a good deal. The ven­ture cap­i­tal com­mu­ni­ty hasn’t wel­comed him with open arms, Mr Moehring admits. “The VCs want to have their own pro­pri­etary info because they don’t want any­one else to see where they are invest­ing. Our phi­los­o­phy is that there is no pro­pri­etary infor­ma­tion any­more, there is no black box. That’s how it works these days. Wel­come to the new age of invest­ment,” he says.

Skype now han­dles 30 per cent of inter­na­tion­al calls

As for trust? “You might expect con­sumers to trust long-stand­ing brands such as banks when it comes to new tech­nol­o­gy like m‑commerce,” says Aunkur Arya, gen­er­al man­ag­er mobile at mobile pay­ments proces­sor Brain­tree, which han­dles pay­ments for Rovio, Airbnb and Uber. “But real­ly it has been start­up mer­chants intro­duc­ing the con­sumer and build­ing trust.”

There’s a rea­son for this, argues Trustev chief exec­u­tive Pat Phe­lan. “There is essen­tial­ly no exact deter­mi­na­tion that you are who you say you are on mobile, because your hand­set doesn’t have an IP address,” he explains. Cork-based Trustev looks at 280 dif­fer­ent data points in every mobile trans­ac­tion, includ­ing bio­met­rics, typ­ing speed and loca­tion, to build up a “dig­i­tal fin­ger­print”. His tar­get? Ver­i­fied by Visa.

Founder of Osper, for­mer maths teacher and ex-Spo­ti­fy exec­u­tive Alick Var­ma, is less aggres­sive. He secured £6 mil­lion in fund­ing in June and is cur­rent­ly rolling out his shiny pre-paid orange deb­it card, aimed at eight to eigh­teen year olds, across the UK. But his stat­ed aim is encour­ag­ing young peo­ple to save mon­ey. “Kids aren’t sav­ing, they don’t under­stand how to bud­get and one in five eight to eleven year olds use their par­ents’ cred­it cards with­out per­mis­sion,” he says.

SNAPPING UP CUSTOMERS

Osper’s app is down­loaded to par­ents’ and kids’ phones, allow­ing every­one to keep an eye on spend­ing. By under­cut­ting bank deb­it cards on age – banks issue to 11 year olds – he’s snap­ping up con­sumers ear­li­er than his rivals.

Under con­ven­tion­al dis­rup­tive inno­va­tion the­o­ry, incum­bents strug­gle in the face of nim­ble new­bies, like wool­ly mam­moths lum­ber­ing to their doom in a show­er of tiny arrows launched by maraud­ing hunter gath­er­ers. But there’s some evi­dence to sug­gest this isn’t nec­es­sar­i­ly what will hap­pen in finance. Some star­tups, such as Lon­don-based PayLiq­uid, have been launched specif­i­cal­ly to help finance com­pa­nies adapt. Chief exec­u­tive and founder San­jay Sond­hi has built a mobile-first order-to-cash cloud-based sales solu­tion that back Bar­clay­card Any­where, which allows star­tups, trades peo­ple and small busi­ness­es to take card pay­ments on their smart­phone.

And there are signs that banks are catch­ing on. Research by New City Agen­da, a think-tank, claims Britain’s largest banks will take a gen­er­a­tion to change their cul­tures. But Bar­clays’ recent­ly launched fin­tech accel­er­a­tor pro­gramme has already seen its first star­tups emerge and Lloyds is back­ing a “star­tup­boot­camp” scheme, sug­gest­ing inno­va­tion cul­ture is spread­ing with­in some banks.

“Antho­ny Jenk­ins [Bar­clays chief exec­u­tive] has been push­ing the bank to embrace the tech­no­log­i­cal rev­o­lu­tion,” says Dar­ren Foulds, Bar­clays man­ag­ing direc­tor, mobile bank­ing and Pin­git. “Three years ago we had no native apps. Typ­i­cal­ly change pro­grammes take two-and-a-half years to push through, but we pro­duced Pin­git in sev­en months.”

Launched in 2012, by 2014 it han­dled £609 mil­lion in pay­ments and one home­buy­er used it to pay a £23,000 deposit. The bank now updates its mobile app every six weeks. “Our cus­tomers check their mobile app 26 times a month com­pared with six times a month for phone bank­ing and going into branch­es twice a month,” says Mr Foulds.

Is it enough to keep Clay­ton Chris­tensen hap­py? Maybe it doesn’t mat­ter. Dis­rup­tive inno­va­tion is cur­rent­ly fac­ing seri­ous aca­d­e­m­ic chal­lenges in the Unit­ed States, led by Harvard’s Pro­fes­sor Jill Lep­ore, who ques­tions whether the the­o­ry has been over­sold. Looks like someone’s dis­rupt­ing the dis­rup­tors.