\\\ WARNING /// DISRUPTIVE THINKING AHEAD

I am an observer. This is the way I approach the world. I’ve been thinking the thoughts that I’m going to share with you for eight years, and I keep on trying to refine the thesis to find out whether or not I’m smoking dope. I keep having conversations with smart entrepreneurs and investors, because, one day, someone might tell me something that I’ve observed incorrectly. If I’ve made a mistake or I need to refine my thesis, I will be open-minded. Yet, to be honest, the opposite is happening. The market is approaching where I’ve been. I understand how digital disruption is affecting traditional, non-tech businesses and the vital role digital enablers can play in helping them build digital revenues.

Disruption is a constant process of change in business. It’s always happening. Sometimes you get a good run of it — say a 20-year monopoly like Microsoft. But sometimes, it’s very short-lived. You can think of it in Darwinian terms. Charles Darwin didn’t say that the strongest survive, but that the most fit are the ones who can change — who have that adaptability. Companies and markets are in constant flux. It’s easy for those at the top, or deeply embedded in a large business, to think that they’ll simply stay there. But that’s not the case. What we know as we look back at history is that even the most profound monopolies give way to new business models, new empires, new industries, new market leaders.

I take guidance and signals from people like Carlota Perez (LSE Professor of Technology and Development) who have analysed the way that technology has changed the world over the past 300 years. She’s done the hard yards to be able to say disruptive technology or these ‘big bangs’ — be it the microprocessor or Arkwright’s mill or the combustion engine or the printing press — happen roughly every 60 to 80 years. There follows a process of embedding it into society whereby a new common sense emerges by the end of the cycle. Understanding this, we realise we don’t need to be smart enough to understand the cosmos; just humble enough to read history.

WE DON’T NEED TO BE SMART ENOUGH TO UNDERSTAND THE COSMOS; JUST HUMBLE ENOUGH TO READ HISTORY.

I try to anchor things in historical events, like how capital has always followed ideas (it’s not about the Medici family, it’s about Michaelangelo and Leonardo da Vinci. Queen Isabella put Christopher Columbus on a retainer but he’s the guy that found the New World). It helps put things in context and allows us to observe a pattern. I’m interested in patterns because that’s my business: to anticipate. When an entrepreneur tells me their vision of the future, and asks me to help bring it to life, it’s about listening to them and analysing their business model. But putting it in this broader historical context is one more part of the due diligence and helps realise that what they are doing isn’t so crazy because it bears a similarity to what happened 10 or 40 or 100 years ago.

BUILDING HIGHWAYS FOR DIGITAL CARS

If change is the constant, then the disruptors are the people who are challenging these monopolies or these market leadership positions. They are the people who have come up with the latest understanding of how the market is shifting. If that’s not you, and if you don’t have the capacity to see the early signs, then you have to find a consistent and systematic way to get hold of that information. I would argue you must find a way to engage the digital enablers.

Entrepreneurs are obsessed with the future. They have an insight, a secret about the way that the future is going to work, and they are obsessed with making that future the present. Large companies are not obsessed with that. Large companies are obsessed with how to scale products into very large operations to maximise profits.

In the case of financial services, I see a lot of companies spending a lot of money on big innovation programmes and hiring accelerators and creating cost centres, as opposed to building digital revenues. And I think the reason they are doing that is because they don’t really know what to do. They see the Facebook, Amazon, Apple, Google brigade and they are scared out of their minds. Then they see their baby brothers — Uber, Tesla, AirBnB — and the world is moving so fast. And they think, “Oh my God. Do we set up a corporate venturing fund? Do we buy companies? Do we buy an accelerator programme? What do we do?”

What they should actually be doing is analysing the winners and figuring out why they are winning, and then imitate, copy and steal. There is nothing wrong with that. If somebody is highly successful, figure out why, and figure out if you could do the same in your own particular way with your own particular assets. If we look closely at the winners, we see that all of these companies basically become platforms. They are engaging with the app economy and enabling all of these start-up companies to push their ideas and applications through their vast distribution networks. They become a highway for these digital cars. Why can’t financial services institutions become true platforms and use their scale and distribution networks in similar ways?

It is the ‘digital Davids’ who are figuring out next-generation customer applications — like what Nutmeg is doing with wealth management or what Money Dashboard is building. Large, traditional businesses are never going to get there. They don’t think these big thoughts, and they’re not obsessed with the future and what the next big thing is in their consumer insight. The Goliaths are obsessed with scaling, managing customer relationships and making sure it doesn’t all fall over — and that’s a good thing to be obsessed with. The ideal model is to leverage the strength of the larger firm’s customer base and build a highway into that market for the smaller firms. Goliath must dance with David.

Hence, a lot of financial services companies are still hiring consultants and buying companies, and just spending millions on accelerator programmes, and they are not actually testing and piloting applications and working with digital enablers whose whole focus is to build the sector’s future. While there are some good examples within the industry (see Schroders’ work with Nutmeg), there are still far too many ignoring or trying to outsource the problem, and much of it comes down to how people in large corporations are incentivised. If people are incentivised to get sales for existing products or to build profits, they will do what they are going to get paid for.

Why is there an opportunity for Bitcoin, or next-generation digital identity, or any such insights to become propositions that the digital Davids in the financial services bring to market? Because, fundamentally, the industry did not clean up its act after the crash. It is still doing things which are deeply untransparent, it’s still taking fees on many different levels, it’s still far too complex. We’re now living in a world of radical transparency, of trust worth trust. A world where people say: “You know, it’s all very nice that we’ve known each other for 17 years but I don’t trust you. I want to see the data.”

BALANCE SHEET IS DEAD, LONG LIVE DISTRIBUTION NETWORK

Apple Pay is fuelling the Apple business and is now threatening the banks (who used to be in control of their own networks) — just as it did music and telecoms. They are a new entrant into the business model because they got a grip of a whole bunch of consumers, and have become the organisers of the economics in the banking network. And the banks can’t believe it’s happened. This is because they did not align themselves with consumers, work out what they want, and then organise a set of economics to enable that to happen even more so.

I met with a London company recently that has basically created a solution to facilitate trading (bonds etc.) in a radically new way, and it’s just growing like a weed. The whole eco-system of the trading world between banks and asset management firms and traders, and who gets information from where, is changing completely. It’s another great example that the power is now in the distribution network and that’s fundamentally difficult for a lot of banks to understand, because they can’t control it. People in the industry are still thinking that the balance sheet is king. But entrepreneurs have now created ways to maximise a network effect. So you’d better find a way to engage with them and be valuable to them to help them build the network effect and make a better market for you. Just don’t believe you can control it because of your balance sheet.

BEYOND THE BANKS

Entrepreneurs are subversive people. I am a case-in-point. I want to change things. I’m not happy with the status quo. If I were happy with it, I wouldn’t have set up my own business. The act of setting up your own business is to say: “They’re not doing it correctly, and so I’m going to set up my own shop.” They’re used to working in unstructured environments because they are egotistical enough to think that they can make better structures. That’s not even greed, it’s ego.

Technological developments from these people are going to affect every industry eventually, not just financial services. Transportation, oil and gas, shipping, you name it, the world is being transformed by digital business models, and so from the Church, to the government, to schools, to the NHS, the entire separation of public and private is disappearing. Forty years ago it was impossible to think that British Gas would not be a publically owned entity, and then magically it became privately held.

As individuals are being empowered through technology, they are being empowered to live lives that 10 or even five years ago we couldn’t imagine. If you’re not the person about to rip up the rule book, maybe now is the time to engage with the people who are.

A RECIPE FOR DISRUPTIVE THINKING

Any entrepreneur who has had any amount of success has a secret. They understand something about the future for whatever reason. It could be a unique life experience, or they have a particular talent, or something happened that made them a twisted individual. They understand something about the future that normal people, who have been socialised and worked in normal circumstances, have not understood yet. A lot of people can be that way, but not everybody is driven to bring that obsession to the world. It’s a combination of understanding the inevitable, communication skills and the obsessive drive to actually make it happen, because they have to be comfortable with people telling them, “You’re crazy! It’s not going to happen like that.” They have to have a kind of resilience and an ability to withstand pressure, and to get the right people around them. They have to be leaders. A lot of people can have pieces of that but they could be too abrasive, or poor at communication, or they may lack drive and persistence, or they may have a flawed insight into the future. Those are the things that when you see them happening you say, “Tick, tick, tick, tick.”