08/04/2016 04:30 EDT | Updated 08/04/2016 04:59 EDT

Fintech Isn't Disrupting Big Banks As Much As You'd Think

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The word "disruption" has come to define the relationship between start-ups and large companies, most notably in fintech.

But "disruption," in the true sense of the word, is looking less and less likely. Traditional financial institutions are no longer scoffing at Silicon Valley, they're using their tools to beat them at their own game. And the smart fintech startups actually understand this. They know that their fate is either to be acquired (and likely forgotten) or to be the seed of an idea that creates real change in the market, whether they succeed financially or not.

If I asked you who the leading robo advisers were, would you list fintech companies like Betterment and Wealthfront? If so, you would be wrong. Charles Schwab and Vanguard, both traditional financial institutions with long histories, have surpassed these start-ups with their own in-house robo offerings, in terms of assets under management. This is a remarkable turn in the history of digital disruption. This is the equivalent of Blockbuster launching an online streaming service that outpaces Netflix's subscription numbers.

While we have been trained to look for the next digital upstart and cheer when they defeat Goliath with a better interface, and cheaper, more convenient model, I would suggest that disruption pattern does not neatly apply to financial services, at least not today.

When Clayton Christensen coined the term "disruptive innovation", he was referring to something very specific. Disruptive innovation is when a new entrant joins the market with a cheaper product or service, and begins to eat the market from the bottom up. It usually starts from the bottom of the market because the product is less complete (though usually more novel technology) than the top of the market offerings. After surviving on thin margins and slowly taking away market share from the top players, disruptors invest their profits back into more and more features and marketing spend to work their way up-market until they have "disrupted" the incumbents by either taking them right out of business, or permanently knocking them into a lower competitive tier.

That is disruption.

Compare that with the robo adviser landscape. It's true that robo advisers, with their automated portfolio balancing, superior user interface, and rock bottom prices, began swooping up the millennial investor market. But then something happened. The media began sounding the "disruptor" alarm, and all the big wealth management firms listened. For the average investor, this is a very good thing. Now virtually all large wealth management firms have either incorporated robo advisers, or have publicly stated they are working on implementing them. This includes all of the "Big Five" banks in Canada. The original robo advisers now offer enterprise services and white-label themselves to sell into traditional wealth firms. It's a smart business move, but it can no longer be sensibly called "disruption."

The unsexy truth is, larger companies are better positioned to innovate than start-ups. They have more money, more man-power, a more trusted brand, and most of all, more ways to reach their customers. Out of all bank customers, some are technology enthusiasts who moved entirely to robo advisers as soon as they could. At the other end of the spectrum, some customers refuse to do any banking without talking to a human, face to face. The banks with robo advisers are able to capture all those customers. When a new fintech challenger arrives, big banks are able to iterate, adopt the challenger technology, and welcome the technology enthusiasts as customers. Robo advisers on the other hand, are simply not able to offer a "face to face" option to expand their "late adopter" market share.

Another big hurdle that fintech startups face in the quest for disruption is compliance. Banking and finance regulations are famously complex and laden in red tape. Consider the fact that Elon Musk, arguably the most boundary-pushing entrepreneur of the last decade, initially tried to make it in fintech, but was bogged down by the regulations and technicalities stacked against his fully digital bank concept (the final product was an email payments company that merged with PayPal). If Elon Musk can't disrupt banking as we know it, then I'm not sure who can.

This may not be the narrative that the world wants to hear about the nature of fintech and disruption, but it's the current market reality.

This is not to say that there are not genuinely innovative and fascinating fintech companies here in Canada that are changing the way we handle money. There are plenty of them.

But the fintech startups in Canada that are succeeding are either taking only a portion of the financial technology pie, such as lending or payments (Grow and Payso respectively) or they are directly helping financial institutions solve their own compliance problems, through identity verification or digital client onboarding (Trulioo and Agreement Express). None of these companies could be called disruptors, because they all sell to financial institutions in some way and help them become more effective, rather than trying to run them out of business.

Louis CK once said that if you describe your Wendy's sandwich as "amazing," then how can you describe your wedding day or the birth of your first child? It's too late, you've already wasted "amazing" on your lunch.

The same is true for fintech. Canadian fintech companies are doing truly innovative things to make financial services better for everyone. But at this point, we can't use the word disruptive. Maybe someday, but not yet.

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