Looking at N26/Revolut through Disruption Theory
I responded to the above post on LinkedIn on the topic of N26 and their plan for significant investment in Ireland. My reply was light around my usage of N26 and Revolut (I have accounts with both, however, it is still something I'm only using lightly for now, as something for small purchases).
However, I also acknowledged in my reply that
"it’s still unclear how much of a true disruption this is to the main banks however"
As the topic of most relevance here is whether N26/Revolut etc are disruptive, I thought I’d step back and considered it through the lens of Disruption Innovation, as pioneered by Clay Christensen, in his seminal book, The Innovator’s Dilemma (Amazon)(Apple Books). His description is around ‘sustaining technologies’ and ‘disruptive technologies’ and states:
“Most new technologies foster improved product performance. I call these sustaining technologies. Some sustaining technologies can be discontinuous or radical in character, while others are of an incremental nature. What all sustaining technologies have in common is that they improve the performance of established products, along the dimensions of performance that mainstream customers in major markets have historically valued. Most technological advances in a given industry are sustaining in character. An important finding revealed in this book is that rarely have even the most radically difficult sustaining technologies precipitated the failure of leading firms……
……Disruptive Technologies, “however, “distinctly different from sustaining technologies. Disruptive technologies change the value proposition in a market. When they first appear, they almost always offer lower performance in terms of the attributes that mainstream customers care about…….But disruptive technologies have other attributes that a few fringe (generally new) customers value. They are typically cheaper, smaller, simpler, and frequently more convenient to use. Therefore, they open new markets. Further, because with experience and sufficient investment, the developers of disruptive technologies will always improve their products’ performance, they eventually are able to take over the older markets. This is because they are able to deliver sufficient performance on the old attributers, and they add some new ones.”
Taking this perspective and looking at N26 or Revolut, and comparing them to the ‘traditional’ banks, you could definitely say that N26/Revolut offer lower facilities (they both started as just basic current accounts). However, they also tick the boxes of being “cheaper, smaller, simpler and frequently more convenient to use”. In addition, and as alluded to with the lower facility options, both, however, are progressively adding new features such as savings accounts, the options to purchase shares or cryptocurrencies, physical cards, etc.
So, from the ‘traditional’ bank perspective, is this ongoing activity seen as sustaining or disruptive? We’re all transitioning to the digital economy and while it could be regarded as ‘discontinuous or radical’, you would think that we’re also still dealing with money, only now that these transactions are paid for using our phones and smartwatches, not using cash or a card (and therefore it’s hypothetical that the new upstarts are drawing in a lot of new users solely due to low/no account fees). I.e. all of this is just a sustaining technology.
Here’s a slight hurdle, however, and for this, I’ll refer to the current debate around Tesla and whether Tesla cars are a disrupter in the automotive space. The perception of people much smarter than myself was that Tesla was not a disrupter as for the most part an electric motor and some batteries were something that could be easily replicated by the legacy automakers. It’s potentially accurate as we see many of the major automakers preparing for a slew of releases in 2020 that will go head to head with Tesla’s electric vehicles. However, as Scott Galloway acknowledged recently, he was completely wrong on Tesla for one important reason: “it is never wise to bet against a company with a great product” and by all accounts, the Teslas are fantastic products.
So, do we think N26/Revolut provide fantastic enough products to out-compete the legacy banks? At present, you could argue the products were built purely for the modern mobile-Internet era however that does not necessarily mean they aren’t trivial to replicate.
This does bring up one other factor. Taking the Tesla analogy again, automakers are aggressively discussing the impacts of electrification and recognising the number of job changes and production changes that are required, and appear to be attempting to aggressively make those changes and to remove the legacy systems (reductions in head-count as well as the recognition that the number of components in an electric automobile is an order of magnitude lower) and yet as electric vehicles require little to no servicing, it is unclear how they will transition this part of their business. With the ‘traditional’ banks, they are saddled with legacy systems that “were installed four to five decades ago” and they’re struggling to dig themselves out of this hole of their own making. While the banks were happily ‘sweating the assets’ and maximising returns on their original computer investments, it now turns out that many of the coding languages and knowledge bases have been replaced leading to a shortage of skilled people who understand these old coding languages. Further, anyone who does understand them can now happily name their price to go and work on them! Bank of Ireland alone, as an example, now believes that its IT refresh project could now reach €2 billion ($2.3 billion), significantly higher than the €500 million ($566 million) the bank initially planned to invest.
So, while the upstarts can rapidly innovate as they built their products on clean slates, the legacy banks are struggling to make the internal technological and process changes required to make the most of the new paradigm shift that is ongoing. In that case, could we have another Kodak on our hand? In Kodak’s case, they were one of the pioneers of digital cameras but were unable to make the internal transition to the new business model. Senior management knew what was going to occur, however, unfortunately,
middle managers and the culture of the organization made it impossible for the company to capitalize on that investment.
Could we have a similar scenario with the ‘traditional banks’ or will they succeed in making the transition? I’d be willing to bet some will make the transition, however, there is also a risk, quite a few won’t. Only time will tell!
References
Christensen, C. M. (2016) The Innovator’s Dilemma. Reprint edition. Boston, Massachusetts: Harvard Business Review Press. (Amazon)(Apple Books)
Digalaki, E. (2019) Bank of Ireland’s tech modernization push is facing budget overruns, Business Insider. Available at: https://www.businessinsider.com/bank-of-ireland-project-omega-over-budget-2019-3 (Accessed: 11 December 2019).
Swisher, K. and Galloway, S. (no date) ‘Pivot: The screw-up-billionaire, quantum computers, and the skewering of Zuckerberg’. (Pivot). Available at: https://podcasts.apple.com/us/podcast/screw-up-billionaire-quantum-computers-skewering-zuckerberg/id1073226719?i=1000454866665 (Accessed: 12 December 2019).
‘Clayton Christensen’ (2019) Wikipedia. Available at: https://en.wikipedia.org/w/index.php?title=Clayton_Christensen&oldid=929182515 (Accessed: 12 December 2019).
Lucas, H. C. and Goh, J. M. (2009) ‘Disruptive technology: How Kodak missed the digital photography revolution’, The Journal of Strategic Information Systems, 18(1), pp. 46–55. doi: 10.1016/j.jsis.2009.01.002.