Applying the Disruptive Innovation Theory to Cross-Border Payments

“Why do once successful, large companies often fail to adopt disruptive technology?” 

The late Professor Clay Christensen at Harvard Business School posed this very question to his MBA students in the first class of his famous course titled: Building and Sustaining a Successful Enterprise (BSSE).

In a nutshell, disruptive technologies enable a new value proposition to initially address unmet needs in a market, and eventually overtake a mainstream market through continuous improvements. In many cases, the disruptive technology initially is adopted in a smaller, niche market, where particular new attributes of the technology are highly valued by customers— even though the technology may not initially satisfy some of the attributes that the mainstream market needs. 

However, through rapid improvements, disruptive technology gradually starts to capture mainstream use cases, and even creates new demand by making the product or service accessible to a larger pool of users. Prime examples of a disruptive technology include personal computers and electric vehicles.

Graph 1: Disruptive Technology S-Curve 
Technology 2 emerges to address Application B and eventually advances to address Application A (mainstream), replacing Technology 1. (Source: Clayton M. Christensen, “The Innovator’s Dilemma”)

Large incumbent firms typically neglect the initial rise of disruptive technology, noting that the technology is not mature enough and that the niche market it addresses is insignificant compared to their highly profitable mainstream market. Slow-moving legacy companies begin adopting the disruptive technology only after the technology satisfies key attributes that the mainstream market demands. By this time, the market is already invaded by early adopters who are eager to move up the market from the niche, lower-end market.

Graph 2: Trajectory of disruptive technology 
Disruptive technology initially takes root in the lower end market, and as its performance improves, it moves up to mainstream and higher-end markets.

It’s astonishing how well this theory explains what’s happening in the cross-border payments space at the present. RippleNet—a disruptive networking technology that is changing the way money moves—is literally shaking up the industry dynamics as Professor Christensen predicted through his theory.

When RippleNet initially emerged several years ago, a typical push-back received from large banks was that the network was not as large as SWIFT’s 10,000+ financial institutions and we saw less initial interest in adoption. On the other hand, adoption from payment providers or regional banks quickly increased due to the value placed on RippleNet’s speed, low-cost and transparency rather than the size of the network. More recently with the introduction of RippleNet’s On-Demand Liquidity service, which leverages the digital asset XRP to eliminate the need for pre-funding, financial institutions experience added benefits as the technology rapidly improves. 

RippleNet has become a complete game changer. While RippleNet was initially adopted in the remittance market, which is often neglected by large global banks who draw much higher revenue from corporate payments, the network is being adopted to address a wider range of use cases including small and medium size enterprises (SME) payments and is on the trajectory to further expand its addressable market. Early adopters of RippleNet enjoy the benefits of growing their business through expanded corridors and additional use cases. This phenomenon follows the disruptive innovation theory.

So what can established financial institutions do to not be left behind in the face of disruptive technology? 

Professor Christensen provided several recommendations for established firms on how to adopt a disruptive technology. First, it’s important for executives to understand that disruptive technologies provide a new value proposition. Comparing it to existing technologies along the same metrics often does not make sense because it addresses different customer needs. 

Second, management should not make a quick judgement on an emerging disruptive technology just because the initial niche market where the technology initially takes roots is not big enough for their large businesses. As history shows us, a new disruptive technology makes continuous improvements to move up the markets, expanding its addressable market much faster than we think. There is a higher chance for early adopters to succeed in the expanded market as they can build experience with the new technology. 

Third, given that a completely new network of values powers a disruptive technology, established firms may consider creating a separate organization optimized around the technology and around its new target customers—and is protected from any distortion or noise that existing business units may bring.

In the cross-border payments industry, we are currently at an important inflection point. Established financial institutions that leverage RippleNet’s On-Demand Liquidity service today, set the stage for tomorrow’s global payment industry.

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