Disruption, a false promise?


Alterations and revolutions

Yves Reding recalls the era of the computing democratisation with the first breakthrough technologies such as the microcomputer and the user-friendly interface designed by Apple in the 80’s. "Digital technologies are at the heart of the third industrial revolution. The technological acceleration we have known since then has been exponential. This third industrial revolution, that of a Smart world, and the fourth one expected by the end of the century, are clearly more disruptive than the previous waves, which respectively rested on the technologies of steam exploitation and electricity."

According to EBRC's CEO, it is time to realise that technology has become an autonomous system driving the world. Technological domination is only in its infancy and future generations will inherit the consequences of our actions, both positive and negative, planned and unforeseen, such as a potential fusion of man and machine. The technological ideology will have a major impact at the social, economic, cultural, moral and human level.

In the same way that horse-drawn cabs have been replaced by automobiles, digital technologies will bring their own series of transformations. By 2025, taxis will be replaced by autonomous cars, robotic surgical operations will become standard, and algorithmic medical diagnostics will be common.

In various key sectors, technology sets the pace of human evolution. The world is being dominated by algorithms. Today, for example, it is increasingly difficult to find objective and neutral information not influenced by previous research, by profiling or by behavioural analysis. The press is facing changes that could jeopardise its foundations of freedom and objectivity. Will the journalist of the future be a robot? How can we avoid this inevitable shift towards a society dominated by algorithms, Big Data and artificial intelligence?

Yves Reding advocates independent institutions acting as counterweights and legislative frameworks guiding these new developments. The European Data Protection Regulation (GDPR) shows that it is possible to regulate and to create safeguards to put man back in the driving seat of the digital world. It is vital for democracies to master technology and its impacts.

"Disruption" versus "Disruptive Innovation"

Technological acceleration is also pushing our society towards new disruptive business models, whether they are innovative or not. Disruption always heralds profound changes, but it does not necessarily generate innovation. Clayton Christensen from the Harvard Business School defines disruptive innovation based on five indispensable criteria ("The Innovator's Dilemma", 1997):

1. Improved accessibility: a product or service previously reserved for an elite becomes democratic and accessible to new clients

2. Simplification: the disruptor targets a smaller group of clients seen as new or unprofitable via a lower cost service that is however not necessarily more efficient

3. Low margins: the disruptor enters the market through the low end, continuously improving the product or service while keeping its low-cost structure

4. Competitiveness: new products or services are not seen as threats by the players already in place

5. Technological acceleration: the product or service suddenly becomes attractive thanks to a technological revolution

Therefore, even though Tesla is truly innovative with its battery and energy storage business for its electric vehicles, it does not invent new products, it simply improves them. Tesla does not open new markets and targets existing high-end automotive clients only. Conversely, Airbnb offers a new affordable market that hotels have not seen as a threat, and does so via technological applications improving service.

"Many young FinTech companies built on financial technologies are disruptive in the sense that they have new business models in the financial sector, but only a very small minority of them really create disruptive innovation. From a strategic point of view, a FinTech must develop a business model that will correspond as much as possible to these five disruptive innovation criteria, as this will enable it to set up what is practically a monopoly in the market."

To our FinTechs!

Luxembourg is ambitious in the way it intends to accompany the changes in the financial sector, to the extent that some believe that the current ecosystem will eventually be replaced or dominated by the FinTechs.

Disruption must be driven and guided by innovation and value creation

The banks of yesterday and today still are impressive institutions, a place for safe deposits, equipped with counters ready to serve the client. The bank of the future is a virtual one focused on mobility, connectivity, interoperability, Big Data, personalised services and possibly even the abolition of bank charges.

Banks have considerable assets, they enjoy the trust of their clients and have access to their personal data, which they will take advantage of to monetise them. By making better use of the data, they could, for example, create auctions for loans.

But the second directive on payment services (DSP2), which among other things deals with the aggregation of banking data, also opens these new opportunities for FinTechs. The disruption of the banking and financial world, driven by technology, will make it necessary to regulate FinTechs at the global level to prevent any new systemic economic risk.

EBRC has supported more than thirty FinTechs since 2011. Some had to give up since they were not successful in achieving a stage of innovative disruption. Success is based both on the innovation in terms of the business model and technology. The "technology push" narrative, i.e. thinking that technological innovation on its own is enough to achieve success, is an illusion. It is vital to be in step with the market and to anticipate the needs of clients ("market pull").

Each FinTech is unique and pushes the ecosystem forward, enabling the emergence of an invigorating industry. This is also happening at EBRC with many start-ups and clients united under the "Powered by EBRC" umbrella.

EBRC currently implements the ICT side of a new mobile bank, which largely meets the five above mentioned criteria. By the end of the year, this European bank - with 20 million potential captive users - will offer a simplified, low-cost technology that improves accessibility.

The need to control disruption

The world is evolving very quickly, driven by technology. Technology fascinates and we accept that it is leading the dance. Technology should remain a tool, a fantastic one for sure, but not an end in itself. The Luxembourg financial centre will face disruption. Will it be innovative? Will it generate value for the ecosystem?

Disruption must not only be controlled, but also guided by innovation and value creation. Technology and its effects must be controlled because technology has become autonomous and is no longer neutral.

But there are good news for the disruption caused by FinTechs: The European Commission should issue specific guidelines by the end of 2017.

To accompany this third industrial revolution, the approaching disruption of the financial sector, as well as to master digital technologies, it is vital for Luxembourg to acquire high-level digital skills as well as a rich ICT ecosystem of European scale.

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