Wikipedia says “A disruptive innovation is an innovation that creates a new market and value network and eventually disrupts an existing market and value network, displacing established market leading firms, products and alliances.” The term was defined and phenomenon analyzed by Clayton M. Christensen beginning in 1995. Let’s take a look at some of the disruptive innovations in Finance.
Mortgage Backed Securities
Lewis Ranieri is called “The father of mortgage – backed securities”. A bond trader at the famous or rather infamous Salomon Brothers, he coined the term securitization. Wall street is filled with fancy words, this is one among them. I am sure many are not familiar with him but he single-handedly changed our lives more than Google, iPod and YouTube put together. He took the average person’s mortgage which usually had small payoffs, bundled such thousands of mortgages into securities to sell to investors. Here the yield or return was high whereas the risk was low. That is the beauty of these bonds. We have heard “high returns at high risks” but here was a bond which gave high returns at low risks because everyone assumed that each person pays his mortgage. This idea created wealth in wall street like never before. But this is one of the major causes of the infamous 2008 crisis. One person’s simple idea which was brilliant created the havoc that was the worst financial crisis. This disruption was slow but inevitable.
Further back in time was Charles Ponzi, the man who created the notorious Ponzi Scheme. There have been many frauds that worked on the same idea, but he was the inventor. The scheme was rather very simple. Take money from investors by guaranteeing them maximum returns of nearly 50 percent within 45 days. Once the word spreads, new investors come in. He paid the old investors, the money ,given by new investors and the cycle continued. The investors were getting amazing profits, kept on reinvesting and Charles Ponzi became a millionaire. He drew suspicion after a financial journalist began investigating. The returns which were promised were not getting delivered. Several investigations revealed that the business was not legitimate and this led to the arrest of Charles Ponzi. Near home, The Saradha chit fund scam operated on the same grounds.
These were the things of the past. Coming to the present, Financial Technologies or FinTech companies have been identified as the major disruptors of the Finance world. They have one trait in common. All of them want to fix the financial problems. Here are a few FinTech companies to look out for:
- Innovate Finance: This U.K. based organization is focused on supporting the next era of technology-led financial services innovators and entrepreneurs. Together they are bringing new financial products and services to consumers and enhancing the diversity, resilience and inclusiveness of the sector.
- Trulioo: This company is working to build online trust by verifying identities. The firm also helps financial technology companies follow a wide range of international regulatory compliance requirements, including Anti-Money Laundering (AML) and Know Your Customer (KYC) rules.
- Nymi: This is a wristwatch that aids consumers and businesses unlock their mobile banking apps when they have ineffective or easily-breached passwords. The technology uses biometrics, including identifying people by their heartbeats.
- Lenddo: This company recognized that the global financial crisis took away loan opportunities for millions, while people in developing countries never got a chance, despite much hard work. The company took a chance in lending to them with Lenddo, which has done 10,000 e-loans to 500,000 global members. This software solution is helping individuals obtain credit through a new online model for microfinance, as well as helping to create and strengthen a new middle class worldwide.
However, the major disruption is “The Bitcoin”. Invented in 2008 by unknown programmer or set of programmers under the alias Satoshi Nakamoto it is a digital asset consisting of a peer to peer payment system without any intermediary. This means no more transaction costs which the bank usually charge. It can be used in every country, The account cannot be frozen and there are no prerequisites. Bitcoins can be purchased at exchanges using dollars, euros, yen and many other currencies. The Bitcoin is stored in the digital wallet. It can be used to buy anything. The verification is done by “miners”. The transactions are maintained in the ledger called Blockchain which uses bitcoin as the unit of account. This ledger is available for all to view and the software is open source.
All this information may be a lot to digest, but keep learning! As Warren Buffet puts it, “Read 500 pages every day. That’s how knowledge builds up. Like Compound Interest.”
This article was written by Apurva Kulkarni (PGDM, Batch 21, XIME-B)