“Once successful, why do large companies fail to employ disruptive technology?”
The late Professor Clay Christensen of Harvard Business School asked his MBA students this very question in the first grade of his famous course entitled: Building and Maintaining a Successful Business (BSSE).
In short, disruptive technologies enable a new value proposition to first meet unmet needs in a market and eventually overtake a mainstream market through continuous improvement. In many cases, the disruptive technology is initially deployed in a smaller niche market where certain new attributes of the technology are highly valued by customers – although the technology may initially not meet some of the attributes that the mainstream market requires.
However, with rapid improvements, disruptive technology gradually begins to capture the common use cases and even creates new demand by making the product or service available to a larger pool of users. PC and electric vehicles are prime examples of disruptive technology.
Large incumbents tend to neglect the initial rise of disruptive technology, realizing that the technology is not mature enough and that the niche market it addresses is insignificant compared to their highly profitable mainstream market. Slow legacy businesses will not begin adopting disruptive technology until the technology meets the key characteristics that the mainstream market demands. At this point the market is already occupied by early adopters who are eager to differentiate the market from the niche market of the lower price range.
It is amazing how well this theory explains what is currently going on in cross-border payments. RippleNet – a disruptive network technology that is changing the way money moves – is literally shaking industry dynamics, as Professor Christensen predicted through his theory.
When RippleNet hit the market a few years ago, a typical setback for large banks was that the network wasn’t as large as the 10,000+ SWIFT financial institutions, and we saw less initial interest in rolling out. On the other hand, acceptance by payment providers or regional banks increased rapidly as RippleNet placed more emphasis on speed, low costs and transparency than on the size of the network. More recently, financial institutions have seen additional benefits with the introduction of RippleNet’s on-demand liquidity service, which leverages XRP for digital assets to eliminate the need for pre-funding, as technology improves rapidly.
RippleNet has developed into a complete game changer. While RippleNet was originally launched in the remittance market, which is often neglected by large global banks that generate much higher revenue from corporate payments, the network is being introduced to handle a wider range of use cases, including payments for small and medium-sized businesses (SMB ) and is on the way to further expand its addressable market. Early adopters of RippleNet reap the benefits of growing their business through expanded corridors and additional use cases. This phenomenon follows the disruptive innovation theory.
What can incumbent financial institutions do to avoid being left behind in the face of disruptive technology?
Professor Christensen made several recommendations for incumbents on adopting a disruptive technology. First, it’s important for leaders to understand that disruptive technologies offer a new value proposition. A comparison with existing technologies using the same metrics is often not useful because different customer requirements are taken into account.
Second, management shouldn’t be quick to judge an emerging disruptive technology just because the initial niche market in which the technology initially takes root isn’t big enough for their large businesses. As history shows, a new disruptive technology is continuously improving the markets and expanding its addressable market much faster than we think. Early adopters have a higher chance of being successful in the expanded market because they can gain experience with the new technology.
Third, given that an entirely new network of values is driving a disruptive technology, incumbents may consider creating a separate organization that is aligned with the technology and its new target customers – and protected from the bias or noise that the existing one has Business areas.
We are currently at an important turning point in the cross-border payments industry. Established financial institutions that use RippleNet’s on-demand liquidity service today are creating the conditions for tomorrow’s global payments industry.