GLOBAL FINANCING DISRUPTIVE INNOVATION: AN ANALYSIS OF FINANCING FINTECH SERVICES TO SMES AND LMES IN UAE AND GERMANY
Dr Eugin Prakash Pathrose
Associate Professor, Skyline University College
Lecturer, College of Business, University of Fujairah
Fintechs are newly founded technology-driven companies that provide financial services and products (Dorfleitner, Hornuf, Schmitt, & Weber, 2016). The terminology is a neologism that originates from finance and technology (Gomber, Koch, &Siering, 2017; Puschmann, 2017; Tiberius &Rasche, 2017). Currently, there is no universal academic definition of fintech (Dorfleitner et al., 2016). The Financial Stability Board defines fintech “as technology-enabled innovation in financial services that could result in new business models, applications, processes or products with an associated material effect on the provision of financial services” (2017, p. 7). Schueffel analysed different databases in order to find a definition that contains the major commonalities in more than 200 academic studies (2016).
Since these SMEs are not attractive for traditional banks, it might be that they do not consider financing fintechs as a strategic threat. As the findings of Dorfleitner et al. show that the most German banks do not consider fintechs – generally fintechs, not specifically financing fintechs – as a threat (2016). According to the disruptive innovation theory, incumbents often fail competing disruptive innovation because they do not consider it as disruption. First, the entrants serve low-end customers, which are not attractive for the incumbents, or non-customers, which are not served at all. Then, they improve their performance, which means functionality and reliability of the product or service, and serve mainstream customers and disrupt the incumbents. For example, when Netflix started its business in 1997, it was not attractive to the Blockbuster’s mainstream customers who typically rented new releases on impulse. The delivery through mail by Netflix took several days. However, as the technology allowed to change its business model to streaming video over the internet, it finally became attractive to Blockbuster’s mainstream customers (Christensen & Raynor, 2003; Christensen et al., 2015, 2004). Therefore, there is a strategic risk for traditional banks that financing fintechs are a disruptive innovation.
In order to evaluate the success of companies, different theories can be applied. For example, the market-based view, which is subjected to the structure conduct performance paradigm, implies that a company’s success mainly depends on the competitive market structure (Porter, 1980). According to Porter, strategic positioning means “performing different activities from rivals, or performing similar activities in different ways” (1996, p. 3). In contrast, the resource-based view implies the company’s success mainly depends on the internal resources of the company (Barney, 1986). In this context, the disruptive innovation theory can be considered as a more radical approach which can lead to destruction of competitors (Tiberius &Rasche, 2017). In a widely used context, fintechs can be seen as enabling disruptive innovation in financial services and markets (Peat, Kelly, &Broby, 2017).