Not a day passes without more millions pouring into start-ups bent on disrupting retail financial services. Yesterday it was the payments start-up Zooz with US$12 million, today it’s the peer-to-peer lending platform Funding Circle with US$65 million. Venture capitalists have obviously sniffed an opportunity in an industry characterized by high margins, underserved customers, and accumulated inefficiencies.
The economics of start-ups are ruthless, and you shouldn’t expect many of these upstarts to survive or expand beyond their narrow niche. Still, don’t miss the wood for the trees. As my colleague Bill Doyle and I write in our new report on digital disruption hitting retail financial services, conditions are now ripe for financial services to join the music and publishing industries in experiencing the power of the digital punch.
Why have financial services been spared so far? The playing field has never been level: Prohibitive regulation, formidable distribution networks, and expensive information technology have all protected established banks, insurers and wealth management companies. But this tilt is now changing, and the defenses of the past are turning into a straightjacket for the incumbents. As consumers increasingly conduct their business through digital touchpoints, branches have become an expensive throwback. And maintaining complex IT systems running COBOL from the 1970s diverts funds and energy away from digital financial innovation; disruptors, on the other hand, have robust software development tools and Internet-based services like Amazon's A9.com that don't require them to own infrastructure or hire employees to run it. Digital technology has also enabled new business models that often bypass regulation altogether.
While most start-ups will fail, some will gain a foothold as they engage customers in new ways. As has been demonstrated in other complicated, regulated markets, such as hospitality and transportation, digital disruptors like Airbnb and Uber can quickly win market share and grow from start-ups to critical players in a few years. It takes only a few to succeed and change markets for good.