I recently read a powerful article in the CFA Institute Magazine (March/April 2105) by John Rubino called The Disruptor Array. It clarifies many important forces that are driving “creative destruction” in the economic systems and models that we have developed over the past decades and it lays bare some of the implications we need to consider as business leaders in financial services.
I highly recommend you read the article: http://www.cfapubs.org/doi/pdf/10.2469/cfm.v26.n2.12
But if you don’t have the time, here are some highlights that jumped out at me.
Exponential Growth meets Simplification
If you want to understand digital technology and its disruptive force on many of our current business systems, there are two important concepts to start with: exponential growth and simplification.
People tend to think linearly, so the concept of exponential growth can catch us off-guard. According to Ray Kurzweil:
It’s also important to note that the disruptive technologies of the (near and coming fast) future will not necessarily be bigger and “badder”; they will be simpler and smaller. “A typical high-end sports car like a Mercedes S550 has around 1,600 moving parts; a Tesla [electric car] drive train has 19,” says Alex Daley, editor of Casey Extraordinary Technology newsletter in Stowe, Vermont.
“Automation is going to take over every single repetitive task,” predicts Louis Gave, co-founder of Hong Kong–based research firm Gavekal.
Robo-advisors in financial services are an early indicator of this trend. The growing "fintech" (financial technology) sector is entirely focused on deconstructing banking and financial services into it component parts and automating these parts so they are better, faster and often cheaper.
Distribution systems will be disintermediated and human intermediaries (distributors, advisors, agents, sales reps and administrators) will need to find new ways to add value.
“Software is eating the world,” as venture capitalist and Netscape founder Marc Andreessen famously said. And that software is reinventing financial services, one process at a time.
If you’ve been in the financial services industry for any time during the last 30 years, you are about to witness massive changes in the next five to ten years relative to the last 30. Massive. The way the industry worked when you started isn’t going to be the way it works in the near future. Maybe that’s why you feel like a deer caught in the headlights, unable to make a move, because it’s not clear what the right move is when things are changing so fast.
How to respond to disruption
The article offers some excellent practical advice for navigating and responding to these rapidly changing business landscapes:
- Get your head out of the sand. “Regularly survey the landscape of new innovations, even some of the goofy-sounding ones, and ask yourself whether or not it could disrupt your model.”
- Understand what is not disruptive. For instance, electric cars are additive to the current economy of automotive vehicles. However, driverless cars are disruptive.
- Old firms can develop new tech. Existing firms that are leaders in their space have advantages over start-ups and the smartest companies will develop or acquire technology that gives them ways to leverage their advantages.
- Beware of the virtuous cycle. Technologies built on artificial intelligence and big data get smarter as people use them – and this drives even greater adoption. Look for these opportunities in your business, and beware of competitors that seem to have mastered it.