Fintech

From startup to incumbent: the innovation cycle

From startup to incumbent- the innovation cycle. Image: Shutterstock, Rebell
Written by Chris Skinner

Chris Skinner outlines the innovator to incumbent cycle, when business models are understood, regulated and become compliant.

I keep coming back to this chart, as it typifies a lot of my thinking right now …

Chris Skinner illustration.

I mentioned the Uber example of this cycle, which began as a startup, but as it grew into an upstart, it started to be attacked by the incumbents. Then the regulators woke up and started to consider the implications of the insurance of drivers, the employment status of the drivers, the safety of the passengers, and so on. Then the upstart becomes the incumbent as the regulator restricts its innovation risks to be more in line with the industry it has attacked. Eventually, there’s a new business model that has evolved the regulations thanks to the innovation, and this new business model has a new compliance structure that must also be adhered to.

You could say that we see this in most other cycles of change. Take music. It began with Napster, which morphed into iTunes and now Spotify, but with each change cycle, a new structure of guidelines is produced that must be adhered to. The same with film and film downloads and other services.

This is therefore what we see now with digital currencies, fintech disrupters and crowdfunding lenders. They begin with an innovation model that’s unlicensed and unknown, but as risks become noted, their models have their wings clipped to be more in line with the requirements of the incumbent service providers.

A great example is bitcoin. Bitcoin begins life as an innovative libertarian dream of money without government. It soon encounters issues where losses mount with Mt.Gox, Bitstamp and even the Bitcoin Foundation, and people call for protection of their bitcoins. The result is that the regulator steps in and creates a ‘bitlicense’, something that looks like a bank license but is specifically for bitcoins. Following such regulatory moves, the innovation begins to be institutionalized and is used in a new hybrid form between the incumbents and the innovators. Eventually, the innovation becomes the incumbent and the cycle starts up all over again.

This is demonstrated in many other forms. Let’s take Facebook. When Facebook started, it was up against Friendster, Friends Reunited, MySpace and more. Gradually, over time, Facebook spread its wings and created risks in terms of privacy, data usage, data sharing, advertising and more. This has led to regulatory structures that manage the Facebook ecosystem, and now Facebook is the incumbent and many new innovators are trying to attack and defeat it. In fact, I could lay another chart over this one, which is the innovator to incumbent cycle.

Chris Skinner illustration.

Uber moves from startup to upstart, and so a target for all players to attack, and eventually becomes an incumbent once its business model is understood, regulated and compliant. Airbnb moves from startup to upstart, and so a target for all players to attack, and eventually becomes an incumbent once its business model is understood, regulated and compliant. Facebook moves from startup to upstart, and so a target for all players to attack, and eventually becomes an incumbent once its business model is understood, regulated and compliant. PayPal moves from startup to upstart, and so a target for all players to attack, and eventually becomes an incumbent once its business model is understood, regulated and compliant. M-Pesa moves from startup to upstart, and so a target for all players to attack, and eventually becomes an incumbent once its business model is understood, regulated and compliant. Bitcoin moves from startup to upstart, and so a target for all players to attack, and eventually becomes an incumbent once its business model is understood, regulated and compliant.

 Read part two here, or skip to part three.

– This article is reproduced with kind permission. Some minor changes have been made to reflect BankNXT style considerations. You can read the original article here. Image: Shutterstock

About the author

Chris Skinner

Chris Skinner is an independent commentator on the financial markets through the Finanser, and chair of the European networking forum the Financial Services Club, which he founded in 2004. He is an author of numerous books covering everything from European regulations in banking through to the credit crisis, to the future of banking.

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