Disruptive Fintech

The Coming Wave of Innovation in Financial Services with Thought Leadership Provided by CEOs

James Deitch

• Publisher: De Gruyter
• Year: 2019
• Print ISBN:
  9783110649413
• eBook ISBN:
  9783110651430
• Topic: Commerce
• Subtopic: Services financiers

Throughout history, innovators have disrupted existing financial services norms to change the landscape of the marketplace. Disruptive Fintech briefly traces fractional reserves, the creation of bank currency that traded at a premium to bullion value, central bank regulation, securitization of assets and loans, the current state of digital currency and electronic payments. The author then looks toward the future of fintech and the forces of disruption that will change the landscape of financial life as we know it.

Using over 100 interviews with thought leading CEOs, this book develops a methodology to identify financial services that are ripe for innovation and discusses how innovative thinking can be used as a disruptive weapon to attack incumbents and create effective new fintech models. The book discusses

• How to relate historical innovations and disruptions in financial services to the current landscape
• How to follow a process to identify the threats facing incumbent processes and businesses, and how innovative thinking can be used as a disruptive weapon to attack incumbents and create effective new fintech models
• How many fintech innovations will be constructed by re-arranging or re-purposing existing core processes

In this insightful book, author James Deitch, CPA CMB, argues that some of today's high-flying fintech innovators will flourish, but many may perish as the fire of innovation consumes those fintechs that are slow to monetize their promises.

Chapter One The Drivers of Disruption

Many consider technology the driver of disruption. It’s a common mistake. After all, technology feels as if it’s the driver of so much in our culture today. When it comes to disruption, however, it is not.

What is the true driver of disruption? Thought leadership. Yes, thought leadership may manifest itself by using technology, but technology is usually just the tool of disruption, not the core driver.

I’ve interviewed over two hundred chief executive officers and “C-Level” executives as research for my books. The thought leadership apparent in many of these executives indicates that the intersection of culture, strategy, process, and people is the “secret sauce” leading to disruption. The use of technology as a catalyst to thought leadership and as a tool for disruption is clear to me. The thought leadership of these executives in the form of transformative thinking distinguishes them as “mavericks.”³ It’s a misconception that technology itself is a disruptor.

It’s no surprise that many consider Amazon a technological disruptor. It was and is nothing of the kind. Jeff Bezos, the CEO and founder of Amazon, advanced thought leadership when Amazon boldly billed itself as the “Earth’s biggest bookstore” even though sales initially were drummed up solely by word of mouth, with Bezos himself assembling orders and driving the packages to the post office.⁴ Of course, Amazon used technology to create the marketplace by converging a large selection of books with the logistics to deliver those books anywhere, anytime. Bezos’s disruptive act, however, was the thought leadership of conceiving of a marketplace so pervasive as to be the “Earth’s largest bookstore.”

Amazon’s Challenge to Retailing

The first major online challenge to powerful department and chain stores (including bookstores) was Amazon. At the time, most regarded Amazon as a curiosity in the emerging technology known as the internet. Internet was dial-up, and internet speed at 56,000 bytes per second was regarded as fast. (Today, 15 megabits per second is considered average, but it is in fact fast enough to stream a high-definition movie.) All in all, the internet of the time was clunky, and dominated by AOL.

As Christensen noted, Amazon was an entrant at the bottom of the market, with lower margins, a small target market of internet shoppers, and a simple model that focused on books. Amazon was initially a very inferior method of shopping for most Americans. “I love to page through a book before buying it. This Amazon thing won’t work,” an acquaintance of mine insisted back in 1999. Based on this belief, he even shorted the stock—a bad idea, it turns out.

Amazon’s trajectory moved rapidly. According to History.com, Amazon.com launched in July 1995. By the end of 1996, Amazon had racked up $15.7 million in revenues, and in 1997, Bezos took the company public with an initial public offering that raised $54 million. In 1998, Amazon extended beyond books and started selling music CDs; by the following year it had added more product categories, such as toys, electronics, and tools.⁵ Despite all of this, however, book-selling superstores Borders and Barnes & Noble were not worried.

In a 1998 New York Times article, Elizabeth Babin, Barnes & Noble Vice President and Treasurer at the time, contended that the advantages of internet selling were overemphasized. “The money saved by direct sellers on stores and inventory is only part of the picture. Amazon does not have to carry the $1.5 billion of hard assets that Barnes & Noble does. But it does have to pay to generate ‘virtual foot traffic’ in its virtual marketplace.” According to the New York Times, Amazon spent $39 million in 1997, more than a quarter of its total revenue, on marketing and selling, $21 million of it for advertising, including banners on popular Web sites like Yahoo and Excite, to attract customers.⁶

“This is the same as paying for location to increase foot traffic,” Elizabeth Babin said. Going forward, those traffic-creation costs would be much harder to forecast for Amazon than for Barnes & Noble. Joy Covey, Amazon’s chief financial officer, said in the same article that she had little idea how much the company would have to spend on its relationships with Yahoo and others. The players’ bargaining power is evolving from day to day, she asserted: Next year it could be Amazon calling the shots, or it could be Yahoo, or America Online, dictating prices and terms.⁷

An Amazon screenshot from October 13, 1999 doesn’t seem to auger what Amazon had in store for Borders and Barnes & Noble, nor for the retail industry as a whole. The page is a time capsule back about 20 years. See at the bottom of Figure 1.1 the “Library of Literature” and “Scads of Sports Stuff” description under the “Many Merchants, Fabulous Finds” heading.

Figure 1.1: Screenshot of Amazon’s home page as of October 13, 1999.⁸

Elizabeth Babin did not recognize the $1.5 billion in inventory that Barnes & Noble carried to cater to its higher end and demanding customers would turn out to be a liability. Christensen’s theory that catering to high-end customers that preferred physically shopping in the store would “unwittingly open the door to ‘disruptive innovations’ at the bottom of the market. An innovation that is disruptive allows a whole new population of consumers at the bottom of a market access to a product or service that was historically only accessible to consumers with a lot of money.”

A screenshot of February 18, 2004 turns up an Amazon branded Visa card, as well as Amazon’s “1-Click” transaction innovation. Notice that books are now not the focus of the Amazon home page in Figure 1.2.

Figure 1.2: Screenshot of Amazon’s home page as of February 18, 2004.

The Amazon home page shows a push to online versions of books via the Kindle in Figure 1.3. Kindle was even available for a Blackberry. (Innocently, a young millennial researcher for this book asked, “What’s a Blackberry?” during the drafting of this text. Time flies!)

Figure 1.3: Screenshot of Amazon’s home page as of February 18, 2010.

Skipping ahead ten years, the February 1, 2014 Amazon home page in Figure 1.4 brings us Kindle again and promotes gift watches and NFL tee shirts. No physical books in sight.

Figure 1.4: Screenshot of Amazon’s home page as of February 1, 2014.

Finally, Figure 1.5 is Amazon’s home page on May 31, 2019. It’s a simple, clean look that features ease of search, and free shipping as fast as today. Search and free shipping are the beginning of the purchase process, culminating in fast and free delivery to your home or office door.

Figure 1.5: Screenshot of Amazon’s home page as of May 31, 2019.

Amazon’s stock was initially offered at a split-adjusted $1.97 and is currently just under $2,000 per share. Amazon’s market capitalization is about $900 billion, up from just over $50 million at its initial public offering.

In 20 years, Amazon grew from a small online bookseller to one of the world’s largest e-commerce sites. Amazon’s Gross Merchandise Value sold in 2018 was about $240 billion.⁹ This compares to Walmart’s $514 billion in sales.¹⁰ During that same 20-year period, the list of major book, music and video retailers that failed¹¹ included:

• B. Dalton
• Blockbuster Video
• Borders Books
• Camelot Music
• Crown Books
• Disk Jockey
• Hollywood Video
• Media Play
• Sam Goody
• Tower Records
• Virgin Megastores
• Waldenbooks
• Wall to Wall Sound and Video

On June 7, 2019, Barnes & Noble was acquired by hedge fund Elliott Advisors for $638 million, closing another chapter in the bookseller’s history and a far cry from Amazon’s $900 billion market capitalization.¹²

The Amazon Effect: Beyond Books

According to a Wall Street Journal article published on May 30, 2019, Blockbuster failed to see the transition from companies spending big mainly to get bigger to companies spending big to get smarter.¹³ Getting bigger—or scale for scale’s sake—does not necessarily result in economies of scale. While Walmart scaled, it did so by continuously optimizing its supply chain efficiency and pricing power. Like Amazon, logistics (not size) is a differentiator for Walmart. The Walmart logistical engine drove the demise of many retailers, from small-town mom-and-pop stores to chains like K-Mart and Sears.

Walmart learned from and adopted the lessons available in the wake of the Amazon Effect. It deployed scale as a competitive weapon.

A disruptor in China has done the same thing. Alibaba Group Holding Limited, a Chinese multinational conglomerate holding company, specializes in e-commerce, retail, internet, and technology.¹⁴ What’s more, Alibaba has a global focus, and attempts to eliminate friction in business-to-business commerce on an international scale. The company was founded in April 1999. Like Amazon, Alibaba offers electronic payment services, a variety of security and delivery services, shopping search engines, and cloud computing services.

As of 2018, Alibaba’s gross merchandise value was estimated in excess of $768 billion,¹⁵ more than Amazon and Walmart combined. Amazon and Alibaba created a combined $1 trillion in gross merchandise value sales in 2018. Neither company existed at the beginning of 1995.

That’s the power of disruption.

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Table of contents

• Title Page
• Copyright
• Contents
• Dedication
• Acknowledgments
• About the Author
• Foreword
• Introduction
• Chapter One The Drivers of Disruption
• Chapter Two A History of Disruption from 600 BCE to Today… and Beyond
• Chapter Three Data-Driven Identification of Undervalued and Overvalued Assets
• Chapter Four A Conceptual Treatment of Fintech
• Chapter Five Demographics Driving Disruptive Forces
• Chapter Six Can Disruption Be Planned and Orchestrated?
• Chapter Seven Boot Camp for Disruption: A Disruptor’s Guide to Innovation
• Chapter Eight A Disciplined Approach to Intentional Disruption
• Chapter Nine Your Margin Is My Opportunity
• Chapter Ten The Disruptive Path Forward
• Appendix 1 The Mavericks
• Appendix 2  Financial Crises 1775 to 2010
• Index