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Technology as better process

Aroop Gupta, 11/30/2016

We often talk about the extensible core in disruption theory and tend to think about technologies which are enabled a process. But are we looking at the Today I would like to propose two things for discussion. First technology only enables a better process and secondly it is a resource. Feel free to comment, agree or disagree.

For example if we consider e-commerce today, the extensible core is not computers, internet, mobile phones or tablets. The extensible core here is the efficient way of matching a buyer to a seller. It is creating an efficient and open marketplace for exchange of goods and services for a value. Now is marketplace something that e-commerce created. Well in my opinion - 'No'. Marketplaces have existed since the age of barter system (or may be even earlier). Technologies like internet, computers and mobile phones made the process more efficient and enabled business models that were not viable earlier. In other words the cost structures (monetary and non-monetary) of the process probably did not make goods and services viable for consumption.

So let’s talk about another example here – Internet, Big Data and online lending. Online lenders fund loans for people who have average to above average credit scores. Some connect borrowers to people who are willing to fund their loan requests via an online platform (also known as marketplace lenders) while other originate them from their own money. The credit worthiness of a borrower is evaluated using a proprietary credit risk scoring model. Such credit models supplement the shortcomings of the existing credit scores with the use of alternative data. This allows online lenders to extend credit to consumers who appear high risk when viewed through the traditional ways of credit scores. With the growing adoption of the internet and advancement in data mining technology, today we have access to huge amount of alternative data that lenders can leverage for credit risk assessment.

It was not that banks and lenders in the past were completely unaware of the benefits of alternative data in credit risk modelling. However without the internet, and technologies like Big Data, it was difficult and expensive to incorporate alternative data in decision making. This was called out by Federal Reserve Bank of Minneapolis in one of their articles in 2008. The bank called out the benefits of alternative data but also cautioned about the cost - “However, the costs of implementing a data reporting system are high. Many data furnishers would face making extensive efforts to consolidate their reporting systems into a central system. These costs may be greater than the perceived benefits. Proponents of the use of alternative data and scoring will have to do more to make a strong business case to potential data furnishers.” In short, back in 2008, the cost of alternative data outweighed the advantages it had to offer. Eight years down the line, we have online lender using them to make loans and taking away market share from banks.

Hence much before technologies like big data became popular, the lending community knew of the challenges with existing credit scoring models and the solution. However there were fewer or no resources available at that time to enable the process in a manner where the benefits would outweigh the cost (direct and indirect). Hence, my understanding is that the extensible core of a disruptive business model is often a better process. Technology is a resource that enables the process.

So instead of trying to fit technologies into existing business models, we need to look for business models that contradict traditional thinking. Business models that look to change the value proposition or go after a non-consuming customer base, by leveraging a new process. These business models may or may not be feasible today however, it is only a matter of time before we see a technology emerge that enables it.

To summarize the discussion, technology is the answer but it is important to know what the right question is. The question possibly is a business model contrary to traditional thinking that is unviable today but waiting for a technology.