In Customer Experience

There are two fundamental types of innovation; incremental innovation and radical innovation. Incremental innovation is the improvement of existing products and processes in a linear fashion. Radical innovation is the creation of entirely new products or processes. Neither type of innovation is more important or necessarily more profitable than the other. Ford Motor Company made a tremendous profit in the 1960s by being the first major auto manufacturer to introduce the intermittent windshield wiper (an incremental, but highly valuable innovation). Conversely, the Segway Personal Transporter, which was hailed as a radically innovative product that would “be to the car what the car was to the horse and buggy”, hasn’t even paid for its $100 million development cost since it was released in 2002.

Harvard professor Clayton Christensen looks at innovation a little differently. He sees all innovations as being either sustaining or disruptive. Sustaining innovations are usually innovations in technology which, like incremental innovations, improve existing products and processes. Disruptive innovations, on the other hand, are innovations in marketing that disrupt existing markets by radically shifting consumer demand. From Christensen’s perspective, a product can be radically innovative but not necessarily disruptive. For example, the automobile was a radical innovation in technology but it wasn’t a disruptive innovation because it was too expensive for most people to replace their horse and buggy with. The mass produced Ford Model T was a disruptive innovation because it was affordable enough to displace the existing products in the transportation market.

What I like about Christensen’s approach is that it seeks to measure the value of innovations subjectively in terms of how much value they have to their users rather than the objective novelty of the innovations themselves. This is perfectly aligned with the product design philosophy of the late Steve Jobs. He believed that in order to create a disruptively innovative product, you had to the design and package the product to intuitively meet the needs of its intended users. As a result, he focused on designing products that seamlessly facilitated valuable user experiences. He didn’t invent portable MP3 player technology. He took that technology and “invented” the iPod—a device that seamlessly enabled consumers to listen to music. As a result, the iPod (not the dozens of other digital audio player products introduced earlier) became a major disruptive force in the music and consumer electronics industries.

So what does this have to do with banking? The experience of banking hasn’t dramatically changed in the last 100 years. I would argue that the credit card was the last truly disruptive innovation that was introduced in the financial industry and that was introduced in the 1950s! This is strange when you consider the litany of other industries that have been transformed by the numerous new technologies that have been invented in that time span. I think the reason for this relative period of calm is that banks have done an excellent job of keeping their products and processes closely aligned with consumers changing expectations of what a financial experience should be like.

With that said, I would argue (as my colleague Eric Lindeen already has) that mobile technology (smartphones, tablets, 4G data networks, etc.) might precipitate an end to this period of calm. Here’s why. The rapid adoption of mobile technology and the capabilities that technology is giving our society as a whole is slowly changing our expectations for how we experience everything. Having a sufficiently powerful and connected mobile device allows us to quickly and easily perform all kinds of tasks. That capability (to do things in a much more convenient manner) is transforming our expectations for how convenient everything should be. “I can buy movie tickets on my phone! Why do I still have to drive to the branch to deposit a check?”

As this expectation of increased convenience becomes more common, industries that fail to deliver that experience using new technologies will be offering an embossed invitation for upstart competitors to introduce disruptive innovations.

Let me end this post by sharing an example of a potential disruptive mobile innovation in the financial industry.

Most large financial institutions have bought into the idea that mobile technology is going to have an impact on financial payments. Why pay with cash or a credit card when you can just sign into an app on your smartphone and waive it over the register? Most banks have plans to adopt some version of this mobile payments vision. The problem is that the process of getting out your phone, signing into an app, and waiving your phone over the register isn’t any more convenient than paying with a credit card (in fact, you could argue it’s less convenient). It’s the perfect example of incorporating new technology without providing the type of experience that the technology has led consumers to expect.

In contrast with this approach to mobile payments, the alternative payments provider Square is trying a something different. Their Card Case app allows for consumers to make payments with their Square-enabled smartphone without ever having to take the phone out of their pocket! Here’s how it works. A merchant that accepts Square payments downloads the Square register app and uploads their inventory. As a consumer who has downloaded the latest version of the Card Case app, all you have to do is walk into the merchant’s store, pick out what you want to buy, and buy it simply by giving the cashier your name. The phone, which has been in your pocket the entire time, automatically detects when you enter the geographic area of the store and checks you in with the merchant’s register app. When you go to check out, you tell them to “put it on my tab” and, after confirming that you match the name and picture on your Square account, the transaction is processed and a digital receipt is sent to your account. No swiping, no opening up an app, no dealing with paper receipts. Card Case takes an already easy and efficient experience and makes it even better. That is innovative.

Will Square’s Card Case app significantly disrupt the payments industry? That remains to be seen. However, the Square Card Case app does demonstrate that there are innovative ways of revamping the payments experience. Financial institutions need to embrace the disruptive possibilities of mobile technology if they want to keep pace with consumers’ changing expectations and avoid being on the wrong side of the financial industry’s next disruptive innovation.

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