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Decoding Disruption: Retail Finance

A simple guide to separating the wheat from the chaff in retail financial services.

Kevin Beardsley
Kevin Beardsley
Engagement Manager
Fahrenheit 212Michael Stenclik
Michael Stenclik
Senior Associate
Fahrenheit 212
It often feels like we can’t go a day without reading an article about the next great disruptive company in retail finance services. You know the story – hotshot entrepreneurs with a boatload of capital from top-tier VCs. They make a splash with some technology that will almost certainly “change the game” in a sector like mobile payments, lending, or online banking…

And while many of these technologies might make for great investments, it is inconceivable that they will all fundamentally disrupt their respective sectors and generate significant revenues and profits. Which got us thinking… How do you separate the wheat from the chaff? Is there a quick and dirty metric that will help you determine whether a financial service innovation will be an incremental improvement, or a game-changing technology with significant ROI for its investors?

Establishing the metric

There are many commonalities among disruptive innovations in retail financial services – things like technological superiority, owning a proprietary network, or design and ease of use.

It’s easy to look at those features and think they are the core of innovation. But game-changing innovation that produces new revenues and new profits is not just a fancy new technology, a more appealing form factor, or a superior device.

Real game-changing technologies – the ones that shake sectors from lending to payments to their core – are the ones that unlock an entirely new definition
Real game-changing technologies – the ones that shake sectors from lending to payments to their core – are the ones that unlock an entirely new definition of:

  • Who is transacting.
  • Where they are able to transact.
  • When they are able to transact.
  • How easily they can transact.
  • How much they are able to transact.

Said another way: Game-changing technologies allow completely new groups of consumers to transact in situations where a transaction was not readily accessible before.

Let’s look at three of the biggest retail financial service innovations in the past century to bring this to life:

  • Credit / Charge cards – Delivered on a simple promise: “buy now-pay later”. They fundamentally changed how much a person could transact by offering instant access to liquidity – meaning your ability to make a purchase was no longer constrained by the amount of cash in your pocket or bank account.
  • ATM Machines – Delivered on a simple promise: Access to cash without going to the bank. ATMs fundamentally changed where and when you are able to access cash – and freed access from defined bank branch locations and regular business hours.
  • PayPal – Delivered on a simple promise: Transact online with an individual. PayPal redefined who and how easily individuals could transact online by drastically reducing the cost and delay associated with mailing physical money orders or cash.

Each of these innovations targeted a different format (card, machine, online) and a different type of pain point (how much, where / when, who / how easily) but they all fundamentally achieved the same thing:

They allowed consumers to transact in new situations.


Applying the metric

Let’s have a little fun and apply this metric to a few financial service technologies out there today. In this exercise we will be judging the company by asking a single question:

Does the technology allow a consumers to transact in new situations?

For each technology, we will apply a Buy/Hold/Sell recommendation.

Mobile Card Readers (hardware dongle and application):
What it is: Mobile POS systems, like Square or PayPal Here, are dongles plugged into a smartphone or tablet, along with a supporting software application. They allow individuals and small businesses to accept credit and debit cards without installing a fixed-line system like Verifone.
The metric applied: This technology allows a fundamentally new group (who), independent businesses and individuals, to accept credit card transactions in-store for the first time (where / when).
Conclusion: Buy

Mobile Wallet Systems:
What it is: Mobile Wallet Systems, like Google Wallet or Vodafone’s SmartPass, digitally store credit / charge card information, and allow consumers to make in-store purchases with their smartphone.
The metric applied: Almost everybody with a mobile wallet application on her smartphone also has a credit card. It neither allows a new group of consumers to transact (who), nor does it provide a fundamentally more convenient purchase experience (how easily).
Conclusion: Sell

Microlending (e.g. Lending Club, LendUp):
What it is: Building on the back of international success stories like the Grameen Bank and, domestic startups like Lending Club and LendUp have emerged to offer more favorable terms of credit to small scale and high risk consumers. They promise lower rates by circumventing the traditional banking infrastructure and allowing individuals to transact with each other directly (Lending Club), or conducting more comprehensive risk analysis to reduce the risk of consumer default (LendUp).
The metric applied: The technologies expand access to credit (how much) to a broad group of consumers that were previously “underbanked” (who).
Conclusion: Buy

Cryptocurrency (Bitcoin)
What it is: Bitcoin is a decentralized digital currency that exists independent of any central authority (e.g., the US Treasury). It is regulated by a computer algorithm and maintained by a global peer-to-peer network.
The metric applied: Bitcoin’s popular application as a currency for illicit purchases indicates that it can unlock new transactions for an underserved group of consumers. However, in order to be a game-changer it needs to demonstrate mainstream applications that are federally sanctioned.
For example: Could Bitcoin unlock a fundamentally more efficient way to scale transactions at the micro level (e.g. Below $1, as Coinbase is attempting)? Or perhaps it could provide access to a store of wealth and unlock new transactions among the world’s unbanked?
Conclusion: Hold. We are optimistic, but it’s too early to tell.


Game-changing technologies in retail financial services are the ones that fundamentally redefine Who is transacting, Where they are able to transact, When they are able to transact, How easily they can transact or How much they are able to transact.

Importantly, they do not come from existing players doing the same things slightly differently. Incremental efficiencies and new form factors like mobile wallets and automated wealth management platforms can be good businesses, but they represent a reshuffling of the value chain in an existing transaction – they do not actually redefine the volume or size of transactions taking place.

So as you sort through the stampede of financial technology startups, the companies to keep your eye on – the potential game-changers – are those that achieve a single, simple goal: they allow new groups of consumers to transact in new situations.


Five Metrics