There has been increased interest over the past few years in ‘FinTech’, where technology is used in financial services to solve problems differently or create new services. While FinTech is a broad term, some of these ideas can take business away from conventional markets, create new markets or combine the two. Few key ones are marketplace lending (erstwhile p2p lending), small business lending and Bitcoin payments. New companies in these emerging markets compete for customers with the mainstream market, but these markets differ in other aspects such as the main players, technologies, what they value and what they need help on. When I talk to the conventional technology and service providers (TSPs) that serve banks, most do not have specific product and market strategy for this market. Most of the presence is accidental and uses conventional solutions.
This brings to my mind what Clayton Christensen said in his book – The Innovator’s Dilemma. He said that companies thrive in a specific ‘value network’ and usually do not extend themselves to serve well in emerging ones. He defines a value network as the context within which a firm responds to customer needs, procures input, reacts to competitors and strives for profit. He says that a firm over time becomes more suited to succeed in one value network, but that makes it less suited to succeed in any other one. Value networks differ both by what they value and their cost structures. But other value networks do emerge that can take business away from the established ones, but are served by new companies.
In FinTech, new value networks are emerging for areas such marketplace lending, small business lending and Bitcoins as I mentioned earlier. Banks and the TSPs who serve them have limited presence in these emerging areas and even if they do, it is smaller than their dominant position in the mainstream markets. If you focus on selling to banks, the demand from this established market will appear attractive compared the uncertainty and the small size of these emerging ones, but you should not ignore these markets and should find a way to position your company for the future without moving rapidly away from the mainstream markets.
There are a few reasons why it is important for you to look at emerging FinTech value networks seriously:
- You cannot rely on banks to lead and pull you along as these networks grow since banks themselves might not be the best suited to lead in these new value networks.
- If you ignore demands from these emerging networks, new entrants will emerge to fulfil the technology needs and will become better at what these networks value and at the appropriate cost structure. This will make it hard for you to enter later when some of these networks become large and appear attractive.
- As some of these emerging networks grow, some of the growth will come at the expense of the existing markets thereby reducing the revenue potential of the mainstream markets.
What challenges have you faced to expand beyond serving banks? What works when you try to serve both the mainstream banking and emerging FinTech markets?