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The evolution of the financial technology ecosystem :

an introduction and agenda for future research on
disruptive innovations in ecosystems

Author(s): Palmié, Maximilian; Wincent, Joakim; Parida, Vinit; Caglar,

Umur

Title: The evolution of the financial technology ecosystem : an

introduction and agenda for future research on disruptive
innovations in ecosystems

Year: 2020

Version: Accepted manuscript

Copyright ©2019 Elsevier. Creative Commons Attribution–

NonCommercial–NoDerivatives 4.0 International (CC BY–NC–
ND 4.0) license, [Link]
nd/4.0/

Please cite the original version:

Palmié, M., Wincent, J., Parida, V., & Caglar, U., (2020). The
evolution of the financial technology ecosystem : an
introduction and agenda for future research on disruptive
innovations in ecosystems. Technological forecasting and
so cial change 151. [Link]
10.1016/ [Link].2019.119779
Financial technology ecosystem evolution: An introduction and agenda for future research

on disruptive innovations in financial services ecosystems

Abstract

At a time where many mature industries are fundamentally shaken up by disruptive

innovations, prominent examples such as Apple and Uber demonstrate that, currently, disruptive

innovations often originate in the ecosystems or system level rather than ‘standalone’ firms.

Unfortunately, the academic literature has so far paid little attention to the role of ecosystems

development and evolution in relation to disruptive innovations. To overcome this limitation, our

study defines what ‘disruptive innovative ecosystems’ are and shows the impact that the financial

technology (FinTech) ecosystem has had in disrupting the financial service industry. We offer an

agenda for future research on disruptive innovations and ecosystems, and discuss the evolution of

the FinTech ecosystem. Overall, our study indicates that disruptive innovative ecosystems are not

only in need of but are deserving of further attention.

Keywords: Disruptive innovation, digitalization, ecosystems, financial technology,

FinTech, Artificial Intelligence, entrepreneurship, incumbents

1. Introduction

Our times are characterized by an increasing number of disruptions that fundamentally

disturb and re-order the way in which firms and industries operate (Kumaraswamy et al., 2018;

Snihur et al., 2018). Not surprisingly, academics and practitioners alike have developed a strong

interest in disruptive innovations and seek to better understand how such innovations impact firms

and industries (Christensen et al., 2018; Hopp et al., 2018; Ozalp et al., 2018). At the same time,

scholars and managers have also developed a deep attraction to dynamic, multi-company systems

as a new way of organizing economic activity, i.e. ‘ecosystems’ (Adner, 2017; Jacobides et al.,

2018; Scaringella and Radziwon, in press).

These two areas of interest crucially intersect because many disruptive innovations are

developed and commercialized in and by ecosystems rather than ‘standalone’ firms (Fuller et al.,

2019; Kumaraswamy et al., 2018; Ricciardi et al, 2018; Walrave et al., 2018). Unfortunately, our

knowledge of how ecosystems around disruptive innovations emerge and how they disrupt existing

industries is still severely limited (Kumaraswamy et al., 2018; Ozalp et al., 2018). Overall, only a

few studies thus far have examined the disruptive innovation–ecosystem intersection. These

studies have predominantly analyzed how existing ecosystems are affected by disruptive

innovations (Ansari et al., 2016; Medialdea et al, 2018; Ozalp et al., 2018; Snihur et al., 2018). In

contrast, the emergence of new ecosystems around disruptive innovations and the impact of these

disruptive innovative ecosystems on established industries has received less attention. Walrave et

al. (2018) theorized how ecosystems around disruptive innovations can increase their socio-

technical viability. Sandström (2016) examined how the ecosystem around a possibly disruptive

innovation (3D printing) emerged, but concludes that this innovation was non-disruptive in the

context under investigation (the hearing aid industry). Several scholars have, therefore, called for

2
further research to overcome the limitations in our knowledge thus identified (Christensen et al.,

2018; Gomes et al., 2018; Hopp et al., 2018).

Our paper responds to these repeated calls and sets forth our knowledge on the emergence

and impact of ecosystems around disruptive innovations. To this end, we first develop the concept

of disruptive innovative ecosystems by integrating recent insights on disruptive innovation with

the literature on ecosystems. We, then, study the emergence of the ecosystem around financial

technology (‘FinTech’) and its impact on the financial services sector to explain how ecosystems

around a disruptive innovation emerge and affect established industries. Finally, we propose an

agenda for future research on disruptive innovation ecosystems.

By advancing knowledge on the emergence of disruptive innovative ecosystems and their

impact on established industries, our study makes an important contribution to the literature. Our

carefully selected single case study of the FinTech ecosystem has considerable merit in helping

researchers understand the concept of disruptive innovation ecosystems. It also follows in the

tradition of this type of research. Clayton Christensen’s (1997) analysis of the emergence of

disruptive technologies in the area of disk drives and their impact on the disk-drive industry shows

that such a study can provide a foundation for a highly influential and flourishing literature stream

(Christensen et al., 2018).

2. Theoretical background

2.1. Disruptive innovation

In the foundational work on disruptive innovation (e.g., Christensen, 1997; Christensen

and Raynor, 2003), the label ‘disruptive’ was used to designate an innovation that has no initial

appeal to mainstream customers of the established product because it performs worse on a key

3
performance dimension. Simultaneously, the innovation outperforms the existing offering on some

other dimension(s), which makes it attractive to the ‘low-end’ customers of the established product

and/or new markets. As ongoing technological progress continuously improves the innovation’s

performance on the former dimension, more and more customers of the original product switch to

the innovation so that the market share of the old solution progressively erodes (Chen et al, 2018;

Kumaraswamy et al., 2018; Schmidt and Druehl, 2008).

Most of the time, however, the term ‘disruptive innovation’ is used in a broader sense, viz.

to designate any innovation that shakes up an industry and substantially changes its competitive

patterns (Christensen et al., 2015; Kumaraswamy et al., 2018). Following this prevalent practice,

we decided to adopt a wider perspective for two reasons: First, a broader view not only dominates

academic and managerial discussions in general but also the emerging literature at the intersection

of disruptive innovation and ecosystems in particular (e.g., Ansari et al., 2016; Ozalp et al., 2018).

Second, relatively inclusive perspectives are commonly applied in the initial exploration of a new

field in the social sciences. Subsequent research can then endeavor to refine them.

Specifically, we build on Christensen et al. (2018) and call an innovation ‘disruptive’ when

it does not improve performance along the established ‘customer-preference trajectory’ – i.e.,

along the dimensions that customers historically valued – but introduces a new, hitherto ‘unique

constellation of attributes’ (e.g., small, lightweight, rugged; Christensen et al., 2018: 1047).

Prior research has illuminated several mechanisms that can explain why disruptive

innovations frequently pose difficulties for incumbents (see Christensen et al. (2018) for an

overview): First, an incumbent’s resource-allocation process may favor adherence to the

established customer-preference trajectory. Likewise, some of the popular financial valuation

metrics can easily produce a bias against certain types of innovation (e.g., ratio-based metrics may

4
encourage managers to shrink the denominator by reducing assets instead of increasing the

numerator by investing in innovation). Second, some critical resources on which the incumbent

depends for survival may reside with its existing customers. Hence, the incumbent may shy away

from innovations that do not prioritize these customers. Third, overlap between different market

segments can motivate incumbents to retreat to uncontested higher tiers of the existing market as

disruptors invade their market from the low end.

The literature has also examined a number of strategies by which incumbents can respond

to entrants with disruptive innovations (again, see Christensen et al. (2018) for an overview).

Additional investment in current customer-preference trajectories to combat disruption or moving

to other market segments are just two of the options. Prominent alternatives are implementing dual

structures or other forms of organizational ambidexterity to engage in the different types of

innovation simultaneously, and co-opting disruptive entrants (e.g., partnering with entrants,

licensing their technology, or acquiring them). Therefore, disruptive innovations do not necessarily

cause incumbents to fail.

These response strategies highlighted by previous research suggest that incumbents may

face somewhat different opportunities and challenges when disruptive innovations originate from

ecosystems rather than individual entrants. On the one hand, an ecosystem as a multi-company

system tends to be resource richer than an isolated firm. These higher resource endowments could

limit the effectiveness of incumbents’ investments in seeking to counter the disruption and

diminish their ability to acquire the disruptor or license its technology. On the other hand, its

inherently multi-organizational nature could present incumbents with more favorable conditions

for joining the ecosystem than does an isolated disruptor.

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 Such differences across ecosystems and individual disruptors pinpoint the value of

studying disruptive innovations in the context of ecosystems in addition to the traditional

disruptive innovation research. The editorial of a recent special issue on disruptive innovation

corroborates this assessment as it reflects on the state of the literature:

“However, the theory (as originally framed) does not adequately address the

dynamics of a number of innovations such as Apple’s iPhone or Uber’s ride

hailing platform (also see The Economist, 2015). Many of these innovations

are systemic, serve as platforms for others to build on, and disrupt existing

relationships among the members of entire industries and ecosystems instead

of affecting just specific incumbents (as in the case of standalone products or

services offered by individual firms).” (Kumaraswamy et al. 2018: 1027)

2.2. Ecosystems

While the biological term ‘ecosystem’ gained traction since its introduction to the

management field in the mid-1990s (Moore 1993, 1996), its use by business scholars and

practitioners has witnessed an outright ‘boom’ (Jacobides et al., 2018: 2256) in the last couple of

years (Adner, 2017; Fuller et al., 2019; Scaringella and Radziwon, in press). In his pioneering

work, Moore defined an ecosystem as:

“[a]n economic community supported by a foundation of interacting

organizations and individuals – the organisms of the business world. This

economic community produces goods and services of value to customers, who

are themselves members of the ecosystem. The member organisms also include

suppliers, lead producers, competitors, and other stakeholders. Over time, they

6
 coevolve their capabilities and roles, and tend to align themselves with the

direction set by one or more central companies.” (Moore, 1996: 26)

Moore (1993, 1996) “did not establish rigorous correspondence rules between natural and

business ecosystems […, but used the ecosystem terminology to present] an extended (though

persuasive) metaphor” (Oh et al., 2016: 4). It is, therefore, not surprising that the popularity of the

term has led to some variations in the way in which business scholars and managers have applied

it. Several recent efforts provide overviews of these variations (Jacobides et al., 2018; Scaringella

and Radziwon, in press; Tsujimoto et al., 2018). According to these reviews, two variations of the

definition are particularly common. The first variation highlights a specific innovation or value

proposition, i.e. the ecosystem produces a “coherent, customer-facing solution” (Adner, 2006: 98).

The second variation emphasizes technological platforms through which platform sponsors and

the providers of complements provide value to customers (e.g., Gawer and Cusumano, 2014).

These two variations advance a narrower conceptualization of an ecosystem than Moore’s original

definition in that an economic community of interacting organizations is likely to offer more than

one ‘coherent solution’ to customers – and may feature more than one platform. Applying one of

the alternative conceptualizations to these plausible scenarios would split the economic community

– i.e. the ecosystem in the sense of Moore (1993, 1996) – into several smaller ecosystems. As in

the case of disruptive innovation, we believe that adopting a broad perspective is appropriate in

initiating research on disruptive innovative ecosystems. Again, subsequent efforts can work to

refine it.

Across variants, scholars widely agree that ecosystems are characterized by

complementarities in production and/or consumption and that the members of the ecosystem can

coordinate these complementarities without hierarchical governance (Jacobides et al., 2018: 2263).

7
Given such complementarities, the ecosystem members continue to exhibit significant

interdependence, even though they might not be bound by contractual arrangements (Jacobides et

al., 2018: 2258). Consequently, the well-being of each individual member largely depends on the

fate of the ecosystem as a whole (Iansiti and Levin, 2004).

2.3. Disruptive innovation ecosystems

Adner (2017) argues that ecosystem thinking is not always equally important for strategy

making and strategy research:

“In mature industries, much of the ecosystem is latent most of the time. The

activities, actors, positions, and links are stable; to the extent that there is

change, it is at the level of individual actors or dyads (e.g., new products

launched through established channels; rivalry among actors in the same

positions) rather than affecting the structural alignment of multilateral

positions. In such settings, the ecosystem has the taken-for-granted character

of routine-as-truce (i.e., Nelson & Winter, 1982). It is when innovation requires

a change in the configuration of these elements that the ecosystem becomes

apparent and where consideration of ecosystem dynamics becomes critical for

crafting and understanding strategy.” (Adner, 2017: 44)

This reasoning corroborates the assessment that the intersection of disruptive innovation

and ecosystems is worthy of further investigation since disruptive innovations can normally be

expected to possess greater potential to disturb the configuration of an existing ecosystem than

non-disruptive (“sustaining”; Christensen et al., 2015) innovations. Combining the above

delineations on disruptive innovations and ecosystems, we define an ecosystem that develops a

8
disruptive innovation and subsequently emerges around this innovation – a ‘disruptive innovative

ecosystem’ – as follows:

“A disruptive innovative ecosystem is an economic community of

interdependent actors that – without hierarchical governance – coevolve

around an innovation which does not exclusively improve performance along

the dimensions that customers historically valued, but along at least one

hitherto neglected dimension. These actors (organizations and individuals)

display complementarities in the production and/or consumption of products

and/or services related to this innovation.”

Established disruptive innovation theory (e.g., Christensen et al., 2015, 2018) emphasizes

the potential of disruptive innovations to grow into a position of dominance in the market that they

had previously disrupted. When the disruptive innovation is not developed by a ‘standalone’

company but is embedded in an ecosystem, this effect is likely to be strengthened. Complementary

innovations developed by other members of the ecosystem can substantially increase the disruptive

innovation’s appeal to customers (Adner, 2006). Moreover, a disruptive innovation backed by a

multi-company system may be able to grow faster than a disruptive innovation backed by a single

firm because the greater number of supporting players can be a source of additional legitimacy.

This ‘legitimacy-by-numbers’ effect can increase the innovation’s acceptance among society,

policy-makers and regulatory bodies, as well as capital investors who tend to ‘trust’ an innovation

more when its fate does not depend on a single economic actor (Carayannis and Campbell, 2009;

De Clercq et al., 2006; Hillman and Hitt, 1999).

With these predictions in mind, we go to describe the evolution of the FinTech ecosystem.1

1
As we acknowledge in section 2.2, the analytical purpose and the definition of ecosystem used may make
it more appropriate to say that the FinTech ecosystem actually consists of various smaller ecosystems. Since we are

9
3. Research methods

3.1. Study context

Many established industries such as banking and finance, healthcare, insurance, tourism,

and transportation face the risk of being disrupted by emerging digital technologies (e.g., Blajer-

Gołębiewska et al, 2018; Guttentag, 2015; Lee and Trimi, 2019; Rajapathirana and Hui, 2018).

The research context for this study is the emergence of financial technology (FinTech). FinTech

has evolved rapidly to reshape banking, payment, commerce, financial investment, and even

money. This FinTech ecosystem of incumbent and entrepreneurial actors has benefited from

technological advancements in online payments, cryptocurrency and artificial intelligence, and it

has created innovation applications that have proved disruptive to incumbents. FinTech is a new

realm for banking and finance industries. Its underlying logic is to apply solutions provided by

information-technology-based services to increase efficiency in financial markets and banking

transactions for consumers, banks, businesses, and all ecosystem members. New trends in the

financial industry have led to new financial service products that can change the way financial

service firms operate as well as the way consumers transfer, borrow, and manage their wealth and

assets. The emergence of FinTech represents an industry system-level change that has led to the

interested in the aggregated effect of the ecosystem(s) on the established industry, we opted for the conceptually
more parsimonious solution to talk about one ecosystem. We are not the first authors to talk about the FinTech
ecosystem as if it was a single ecosystem (Lee and Shin, 2018). This more inclusive conceptualization is consistent
with an argument made by Christensen et al. (2006). Christensen et al. (2006: 101) point out that, in the case of
disruptive innovation, “the innovations, not the organizations, are being considered. In the case of MinuteClinic, for
example, the innovation is low-cost, walk-in clinics in high-traffic areas such as drug stores and shopping malls and
not the MinuteClinic brand itself. It is easy to confuse the two, but a [… consideration of disruptive innovations]
needs to focus on the solution first and then look at how it is, or could be, implemented.” Applying their argument
from the single-firm to the ecosystem context, a consideration of the emerging ecosystem(s) around a disruptive
innovation as a whole should be the first step and a consideration of how the ecosystem(s) can be differentiated into
smaller ecosystems should come later. However, we do not deny that using another conceptualization of an
ecosystem can equally lead to interesting insights. In fact, we propose the use of alternative conceptualizations as an
avenue for future research.

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emergence of new actors and the convergence of competencies. FinTech thus provides a relevant

research context for the study of disruptive innovation ecosystems.

The FinTech ecosystem with its stakeholders has grown appreciably in recent years

because of substantial investment (Lee and Shin, 2018). Total investment in FinTech as of March

2016 reached nearly USD 33 billion, whereas the figure for 2014 was only USD 3.4 billion

(Strategy&, 2015). A few years ago, most FinTech investments were located in the US. However,

the rise of China as the dominant force in FinTech transaction value since 2016 has signaled its

ongoing expansion in other parts of the world. European countries, especially the UK and

Germany, have, in similar vein, experienced significant innovation in recent years.

The technology offerings and market penetration of FinTech companies, which numbered

248 in 2014, have continued to grow. The number of FinTech companies reached 1,379 in 2016

(Venture Scanner, 2016). FinTech companies operate in various areas, causing disruption and

introducing innovation to traditional financial products and services. While Bitcoin and other

cryptocurrencies continue to attract considerable attention from investors and the media, other

areas of FinTech such as robo-advisors, InsurTech, and retail banking have garnered greater

recognition in recent years.

3.2. Data and analysis

This study uses explorative qualitative and secondary data since the current knowledge

about the topic of FinTech is limited. More specifically, we conducted 78 expert interviews with

senior-level executives from a range of organizations (e.g., banks and private investors) and

institutions (e.g., governments and international regulatory agencies) to gather insights into how

FinTech disrupts the banking system and, more importantly, how the emergence of new

11
technologies shape the ecosystem. These respondents were selected on the basis of their hands-on

knowledge and ability to provide varying perspectives on the evolution of the FinTech industry.

The interviews were conducted over a period of three to four years and averaged 50 minutes per

respondent.

The respondents held different company positions: investment analyst, fund manager,

compliance officer, financial expert, regulator, trader, and so on. The following questions were

asked during the interviews: How has the journey for your organization been in terms of adapting

to financial technology transformation? How would you categorize the FinTech applications in

your industry? What are the common challenges and opportunities related to FinTech? How are

other ecosystem actors adapting to FinTech? How has the emergence of FinTech transformed your

industry dynamics and the position of actors? The interviews were executed by the third author,

who has an industry background as a consultant.

We also analyzed white papers, reports, and blogs to understand this disruptive

ecosystem, which has had one of the largest impacts in the last decade. In order to develop an

empirically grounded framework for disruptive innovation ecosystems in the FinTech industry

and various insights thereof, we followed the steps recommended when using constant

comparison techniques (Strauss and Corbin, 1990; Nag et al., 2007). This technique enables

researchers to identify empirical patterns in a large and complex dataset. The method calls for a

series of iterations to discover different themes and uncover various dimensions in order to

develop theoretically and empirically grounded frameworks, such as a disruptive innovation

ecosystem roadmap. The focus in the initial step is placed on open coding the interview data and

documentation to retrieve common terms or labels the respondents provided. In the next step, we

began to identify patterns and links within the categories in order to develop empirically driven

12
but theoretically valid themes, such as different technology applications in financial services.

The final step involved generating an illustrative framework that connects data and codes at a

higher level of abstraction, such as the proposed framework. To ensure rigor and increase

confidence in the analysis, multiple members of the research group developed the coding scheme

independent of each other, in the first instance. Where a lack of agreement existed, the coding

scheme was discussed and modified until consensus was reached. This provided an independent

perspective on the trustworthiness of the coding schemes (Lincoln and Guba, 1985).

4. Findings

This section has three sub-sections. In the first, we discuss the technological disruptions

that have driven change in the ecosystem. In the second, we discuss the key financial technological

applications that have been introduced. In the final sub-section, we present a FinTech disruptive

innovation ecosystem roadmap based on a longitudinal perspective.

4.1. Emergence of financial technologies (three waves of technological changes)

4.1.1. Wave 1: Electronic payments

The development of the Internet and smartphones has increased the popularity of electronic

fund transfers through online banking and mobile payment. The transition from traditional cash to

digital money has blurred the line between money and data. Transactions such as paying for taxi

fares and restaurant bills can now be made using software applications (apps). Consumers are now

offered more payment methods than ever before.

Emerging technologies in money transfer on the Internet offer new opportunities for

businesses as well as governments. New low-cost, open-source technologies such as ‘Blockchain’

13
allow businesses to reach a larger number of customers, including those in neglected market

segments. Businesses can also focus on the deficiencies of financial services in providing services

that are not available under the existing infrastructure. These include digital payment, money

transfers, and loans. New technologies also offer more convenient methods for international digital

commerce and create a new and constantly expanding mobile workforce.

The formation of a FinTech ecosystem is an important factor prompting the type of

technological innovation that facilitates the creation of more efficient financial markets and

systems (Strategy&, 2015). A developed FinTech ecosystem can also attract greater talent and

generate more business ideas, leading to the growth of opportunities in a variety of sectors

including wealth management, electronic payments, trading platforms, insurance, and regulations.

4.1.2. Wave 2: Blockchain and cryptocurrency

The blockchain and cryptocurrency category comprises companies that provide products

and services relating to blockchain technology and cryptocurrencies. Blockchain is a shared

database, best known as the technology that supports Bitcoin and other cryptocurrencies.

Cryptocurrency is a kind of digital asset that uses cryptography to enable secure transactions and

verify the transfer of assets. Bitcoin is the first and the most well-known cryptocurrency (Telegraph

Reporters, 2018). Blockchain companies develop and implement blockchain technology, whereas

cryptocurrency companies provide products and services such as trading and storing of

cryptocurrencies.

Companies in this category provide a wide range of services. Cryptocurrency mining

companies focus on developing hardware, software, and other services for mining

cryptocurrencies. A large group of companies in this category focus on currency trading by

14
providing trading platforms for cryptocurrencies. These platforms normally allow their users to

exchange cryptocurrencies for fiat money. In addition, some companies operate in wallet services;

they provide software wallets for cryptocurrency storing and transfer services for cryptocurrencies

or money. Another group in this category comprises companies that provide peer-to-peer (P2P)

market platforms or lending platforms.

Example of companies in this area include LocalBitcoins, Prasos, and Coinia Wallet. Swiss

blockchain and cryptocurrency companies, which are the most significant in terms of innovation,

include Ethereum, Xapo, Monetas, iProtus, Metaco, Bitcoin Suisse AG, Bitfinitum, Bity,

SwissMine, and CryptoCash.

Blockchain is probably the first term that comes to mind with reference to FinTech

currency. The reason is that Blockchain is a shared database that has attracted considerable

attention from the public in recent years. It is best known as the technology that supports Bitcoin

and other cryptocurrencies. Thanks to the popularity of Bitcoin, Blockchain has gained a

competitive advantage and momentum.

Bitcoin transactions and blockchain business models still have a limited number of uses,

and FinTech transaction volumes are still quite modest compared to the entire financial services

market. Their impact has been notable, as reflected in increasing investment in Blockchain as well

as Bitcoin and other cryptocurrencies.

Blockchain technology and its potential applications have received the approval of many

technology employees in the financial industry and Bitcoin dissidents because of their benefits and

applicability to finance. Although some investment bank leaders have been skeptical about the

technology, which could introduce high risks through security breaches and fraud during financial

transactions, they have also praised the technology behind Bitcoin as a “good” and “useful”

15
technology that facilitates a range of outcomes (Glazer, 2016). For example, blockchain

technology allows stock traders, including buyers and sellers, to interact directly without a third

party. All transactions can be recorded almost immediately. Thus, the financial industry has taken

a keen interest in the development of blockchain because of its potential applications in

streamlining financial transactions and extending services to customers. Several major investment

banks in the US including JP Morgan Chase and Goldman Sachs, as well as their counterparts in

Europe, have conducted research into blockchain and have begun to develop projects for internal

use.

4.1.3. Wave 3: Artificial intelligence

During this stage, the ecosystem is transformed by Artificial Intelligence. Artificial intelligence

captures the intelligence that can be exhibited by machines. The concept of Artificial Intelligence

in the financial sector centers on devices that can interpret and understand tasks, and take action

to complete those financial tasks. For example, the devices can be robo-advice, digital brokers,

and assorted devices used in trading, tax management and trade decision-making. With artificial

intelligence, there is a high degree of automation and efficiency improvements, which are most

readily apparent in investment platforms and portfolio management. Many previously unique and

high-value-adding banking services and products disappear. With increasing customer maturity

and adaptation to artificial intelligence, new kinds of customer needs emerge. Several of the known

incumbents experience significant challenges in adapting, and new entrants take over and become

important players. While this occurs in many areas in the finance system, Artificial Intelligence

can be found at the core of many product and technology areas today. Among them are RegTech

(regulatory technology), which refers to FinTech companies that help customers with the

16
compliance process, and Wealth management, which captures an area of FinTech that includes

companies offering alternative wealth management services and technology-enabled solutions.

4.2. Development of financial technological applications

4.2.1. Banking

Banking FinTech companies provide alternative banking solutions for retail banking. Their

services include digital lending, personal finance, online and mobile banking, P2P lending and

investment management. P2P lending companies allow their clients to access funds on a P2P

lending basis, with clients borrowing directly from lenders. Some companies provide digital

lending services in which they directly lend funds to borrowers. This category includes companies

that offer personal finance and investment management services. These companies provide tools

and advice for clients to manage their accounts as well as providing various financial planning and

investment services. Finnish companies in this category include Holvi and Euroloan. Swiss

FinTech banking companies include Contovista, Flynt, MoneyPark, Numbrs, and Qontis.

Online banking has become popular as the smartphone market has grown (Hussain et al.,

2019). An estimated 46% of consumers use only digital channels such as mobile phones, PCs, and

tablets for banking services, which represents a huge increase from 27% in 2012. Young

consumers are reported to be the main users of mobile banking, with 82% of smartphone owners

between the ages of 18 to 24 years using mobile banking (PwC, 2017).

The development of new technologies and smartphones has created openings for new

digital-only banks that provide exclusively online services via several digital applications. The

new generation of FinTech banks can operate without offices or facilities, which significantly

reduces brick-and-mortar costs. Free from the cost of physical locations and benefiting from new

17
technologies, FinTech digital-only banks can introduce lower rates and fees to clients along with

innovative services. By using the benefits of FinTech and its technologies, banking platforms can

offer more user-centric services to meet the needs of individual clients. Digital-only banks offer

clients around-the-clock accessibility without the need to visit a branch during office hours to

access banking services. In the US, a survey found that four out of 10 Americans had not visited a

bank branch in the previous six months (LaPonsie, 2016).

While digital consumers have shifted their preferences to online and mobile banking, they

also have higher expectations regarding online services. They demand easy-to-use digital services

with seamless approval and flawless processes. Digital-only banks have the advantage of

allocating all their resources to the supporting technology in order to enhance clients’ digital

experience and meet this emerging need.

Digital-only banks possess great potential to flourish in the years ahead. However, they

still face the challenge of building a customer base from scratch. Most customers are still reluctant

to transfer their money from well-known established banks to new start-up banks. Surveys have

shown that 62% of respondents still believe in the importance of local bank branches, and 25% of

respondents refuse to open an account with a bank that has no local branches (PwC, 2017). This

challenge has placed digital-only banks at a clear disadvantage with respect to traditional banks.

However, if and when these digital-only banks gain the trust and favor of the public, their position

may change for the better, and their influence on the way financial services are provided may

become considerable.

4.2.2. Payments

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 FinTech payments are one of the largest components of FinTech. FinTech payment

companies provide electronic payment services; these services vary from consumer needs to

trading in markets and mobile or Internet commerce. Companies in this category offer point-of-

sale (POS) payment services such as digital storefronts. Digital storefronts, or cyber storefronts,

refer to websites that sell products and services. Other payment services offered by FinTech

companies in this category include personal payment services and mobile or online payments. To

meet the needs of the emerging trend of cryptocurrencies, some payment companies offer Bitcoin

payment services, allowing customers to use digital currency for fast and secure payment. Some

companies in this category also offer fast and affordable digital solutions for money transfers.

Notable Finnish FinTech payment companies include Mistral Mobile, Seitatech, Payment

Highway, Tapp, PayiQ, Enfuce, Giftom, MobiWallet, and Wone Payment. FinTech payment

companies based in Switzerland include Avance Pay, Cash Sentinel, e24, Monito, Paymit,

Kickshops, and Twint.

4.2.3. Crowdfunding

Companies in this category provide digital platforms to raise funding for projects and start-

ups, so-called ‘seed-stage/start-up funds’ in the roadmap of angel or venture capital investors.

Crowdfunding is a way for individuals, businesses, and organizations to raise funds in the form of

donations or investment over the Internet. There are four types of crowdfunding: reward-based,

donation-based, equity, and debt crowdfunding (World Bank, 2013). Companies in this category

differ in the types of investment projects for crowdfunding.

19
 Finnish crowdfunding platforms include Fundu, Invesdor, Vauraus, Joukon Voima, and

[Link]. In Switzerland, notable crowdfunding companies include Crowdhouse, Investiere,

Spendit, Cashare, RaiseNow, ProjektStarter, and Veolis.

4.2.4. InsurTech

InsurTech companies are FinTech companies that provide insurance services based on

technological innovation. These companies differ in the types of insurance and services they offer,

which include life/annuity, healthcare, and rent and housing insurance. InsurTech companies use

disruptive models such as peer-to-peer insurance, which connects a group of customers and pools

their premiums to insure them against risk. Some InsurTech companies allow clients to customize

their insurance policies with the assistance of artificial intelligence. These companies have made

insurance more user friendly and affordable for consumers. Some companies offer mobile

purchasing and monitoring of insurance policies.

Notable Finnish InsurTech companies include Vakuutuskettu, Pretus, and Wellmo.

InsurTech companies in Switzerland include FinanceFox, Knip, MyLibery, Bfox, Esurance,

Anivo, and Animalia.

The insurance industry is actively exploiting the technological advantages and benefits

derived from FinTech applications to enable new innovations called InsurTech (insurance

technology). InsurTech has flourished in response to the relatively slow development of traditional

insurance services compared to that of other financial services. According to InsurTech reports,

86% of insurers think that they must innovate to retain a competitive edge, whereas 96% of insurers

think that digital ecosystems influence the insurance industry (Accenture, 2017).

20
 The leaders of online investment advisor and digital wealth management companies in

Europe refer to the insurance sector as “ripe for the picking” because of its lag in adapting to

changing consumer habits and preferences and in addressing their sector’s need to embrace digital

technologies. Although insurance is a huge sector for FinTech firms to enter, it is difficult to access

because of increasingly complex regulations and massive capital requirements.

However, venture-capital-backed funding for InsurTech companies has increased in recent

years. InsurTech is becoming one of the most active segments of the FinTech ecosystem as it seizes

the opportunity to simplify and improve the efficiency of traditional insurance. Global InsurTech

investment was estimated to reach USD 1.7 billion in 2016, which nearly doubled the figure for

2014 (Accenture, 2017). Although the US leads the InsurTech trend with more than 50% of total

deals, countries such as the UK, Germany, France, China, and India are following the trend with

strong growth in investment (LaPonsie, 2016).

The question now is whether the rise of InsurTech can threaten the incumbents in the

insurance market. Although mainstream insurance companies face competition from these

disruptive InsurTech start-ups, many customers place greater trust in their traditional insurance

companies because of concerns over account security and fraud protection. However, there is

scope for InsurTech start-ups that cooperate with insurance companies to improve efficiency and

optimize the operation of mainstream businesses. Incumbents may be slow to embrace new

technologies, but they are partnering with InsurTech start-ups to enable digital transformation of

their services. In China, the numbers of investments in InsurTech start-ups rose by 40% in 2016

with nearly two-thirds of deals funded by insurers (Even, 2017). Such investments will enable

InsurTech companies to modernize the insurance industry and introduce new distribution channels

for ecosystem companies in the industry.

21
4.2.5. RegTech

RegTech (regulatory technology) refers to FinTech companies that help customers with the

compliance process. These companies provide tools for implementing and monitoring compliance

with regulations or reforms using innovative technology. These firms help customers address and

mitigate risks relating to laws, regulations and compliance. RegTech companies focus on

government and legislation. They offer tools to identify legislation or platforms for legislative and

regulatory analysis. Some RegTech companies focus on tools to help customers prevent the risk

of anti-money laundering (AML) or to assist them in the know-your-customer (KYC) process.

Cybersecurity RegTech companies provide tools for customers to detect policy violations

and to comply with information security protocols. Other notable areas of RegTech include tax

management and trade monitoring. Reports show that the US is the leading country in RegTech,

with 74% of the total global deal share since 2013, followed by the UK, which has 10% of the

global deal share (CB Insights, 2017). While the UK is the RegTech leader in Europe, Germany,

Ireland, the Netherlands, and Switzerland are also increasing their market shares.

A notable example of a Finnish RegTech company is MORS Software. Notable RegTech

companies in Switzerland include NetGuardian, Qumram, Apiax, Finform, SwissMetrics, KYC

Exchange Net AG, Dydon, and Squirro (Fintechnews Switzerland, 2017).

The technological disruption caused by FinTech, the rapid development of the digital

economy, and the virtualization of money have caught the attention of regulators and governments

in several countries. New regulations such as the Markets in Financial Instruments Directive

(MiFID II) and the International Financial Reporting Standard (IFRS 9) have been introduced,

forcing institutions and companies to adapt and implement compliance rules within a short time

22
frame. Some have proved unprepared for rapid technological change. Therefore, RegTech has

grown rapidly to meet this need to address regulatory challenges.

The Northern Trust’s annual regulation conference poll showed that, in 2014, 50% of

attendees expected to spend more time on regulatory compliance in the coming year. The figures

were even higher for 2015 (75%) and 2016 (68%; [Link], 2017). These data show that many

firms still need to invest time and resources to comply with new regulations such as MiFID II.

While the new regulatory environment can become a burden for firms because of the necessity to

dedicate time and resources to regulatory compliance, RegTech start-ups tend rather to sense a real

opportunity to innovate and create solutions for established companies.

4.2.6. Wealth management

Wealth management FinTech includes companies that offer alternative wealth

management services and technology-enabled solutions. These include robo-advisors, investment

platforms, and portfolio management. The most notable sub-category in wealth management is

robo-advisors. Robo-advisors refer to companies that offer automated investment platforms. This

service now targets both business and retail customers and competes with traditional wealth

management services in terms of cost, flexibility, and around-the-clock online accessibility. Robo-

advisor platforms help clients customize their investment portfolios based on analysis of their risk

profiles and investment goals. Robo-retirement focuses mostly on retirement savings accounts.

Wealth management FinTech refers to companies that focus on developing exchange

and/or trading platforms for financial assets such as stocks, bonds, foreign exchange, and other

asset classes. Digital brokerage refers to online brokerage platforms for investors to trade assets

such as stocks and bonds. Some companies in this category provide advisory platforms for advisors

23
to create investment portfolios to sell to clients. Others provide social investment networks for

investors to interact, track peers’ investment strategies, and follow each other. Hedge Fund Tech

refers to companies that offer software solutions or platforms for hedge funds.

Notable wealth management FinTech companies in Finland include Evervest, Helsinki

Capital Partners, Benemint, Selma, Haumi, FA Solutions, Shareville, and Taviq. Wealth

management FinTech companies in Switzerland include InvestGlass, MoneyPark, Advanon,

Lykke, Amnis, TrueWealth, and FundBase.

Robo-advisors are rapidly becoming the biggest disruptive technology in investment and

online stock trading. This new technology has been one of the most frequently mentioned FinTech

segments. The automation of advisory services can benefit firms and customers in various ways,

especially in meeting the needs of an increasing number of clients by customizing individual

clients’ services. The demand from a large number of customers makes it difficult for financial

advisory firms to process information from market research and analyze the data to provide advice.

Therefore, new robo-advisor start-ups have entered the advisory market with new strategies to

solve the complexity of data management with the help of robo-advisors.

While traditional wealth management firms are limited by online technology capabilities

and tools, robo-advisor start-ups have addressed these weaknesses and have identified

opportunities to access this market by exploiting the rise of mobile and cloud technologies. A

FinTech survey conducted in North America showed that 79% of respondents would use robo-

advisors for personal investment, and 69% would use robo-advisors for assistance in retirement

planning (Finextra, 2016). However, flaws in financial advice algorithms and data protection

issues associated with this new trend testifies to the need for cautious consideration.

24
4.3. FinTech disruptive innovation ecosystem evolution

The FinTech ecosystem consists of numerous technology companies and global

institutions. It is, therefore, difficult to list all parties using the primal segmentation often used in

the banking and financial industries. However, it is possible to constitute the global FinTech

ecosystem of banking and finance industries by adding the technological orientation of existing

parties and the new segmentations that have evolved from the new entrant technology suppliers.

The development of FinTech through the emergence of thousands of start-ups in this sector has

brought significant changes to various industries. In addition to mapping technological innovations

in financial technology and banking applications, we find evidence that a FinTech ecosystem, as

it emerges, has a systematic and hard-hitting impact on incumbents (see Figure 1).

We identify three stages of ecosystem evolution. The first stage is prominent industry

maturity, which opens up a path for the introduction of technology innovations (in our case, related

to electronic payments) in initial cooperation with incumbents. Here, incumbent firms dominate

and seek support from new ventures to enhance their ability to exploit emerging technological

innovations. One example is online payments, where established banks have cooperated with

technological companies to offer new incremental functions such as online payment or mobile

banking. These applications have proved helpful and have allowed incumbent firms to use existing

complementary capabilities such as their sales force and brand value. In these situations, there are

few new ventures, and financial support from venture capitalists tends to be limited.

The second stage is the symbiosis stage, which introduces a more radical technology such

as cryptocurrency and blockchain. These technologies are largely driven by adaptation and

exploitation of the new banking and transactional practices of new ventures. The increasing

volume of digital transactions has led to a new trend whereby money in the form of data slowly

25
replaces physical money or traditional cash. FinTech reports have noted that the concept of

physical money is fast becoming redundant in this new digital-only world (EY, 2017). The industry

landscape in this particular stage tends to be highly disrupted and uncertain. Existing incumbent

firms attempt to co-exist with new ventures that begin to gain market share because they have no

previous lock-in investments. Thus, they start to profit from technological innovations due to their

ability to quickly respond to the changing ecosystem. There is also a larger inflow of venture

capital to support these new ventures as the industry expands, with new actors and certain larger

actors unable to cope with disruptive innovation.

The third stage is industry resilience and the very prominent role of new entrants that take

over and re-shape the industry where incumbents face the risk of being replaced. During this stage,

the industry is transformed with incumbent firms confronted with diminishing influence and new

ventures exerting increasing influence. With artificial intelligence, there is a high degree of

atomization and efficiency improvements. Many previously unique and high-value-adding

banking services and products disappear, and new kinds of customer needs emerge. With

increasing customer maturity and adaptation to artificial intelligence, customers start to seek new

kinds of services such as highly customized wealth management plans. Few incumbents are able

to cope with the need to innovate and adapt their business models. Thus, most incumbents struggle

to survive. However, with a large injection of venture capital, many new ventures are able to grow

and dominate. They begin to offer financial technological applications such as InsurTech and

RegTech.

26
 Figure 1: FinTech disruptive innovation ecosystem roadmap

5. Discussion and agenda for future research

The academic literature on innovation and the revolution in product offerings and business

models devotes considerable attention to the market mechanisms and effects through which

disruptive innovations supplant existing technologies and product offerings (Bower & Christensen,

1995; Christensen, Raynor, & McDonald, 2015). Most research in this area has studied how

entrepreneurial companies influence existing incumbents through disruptive technologies,

products, and business models in the process of discovering and implementing a fundamentally

different solution in existing businesses (for a review, see Christensen, McDonald, Altman, &

Palmer, 2018). Although this research has advanced our knowledge of how individual disruptive

27
companies influence existing businesses and industries of entry, it has not addressed the underlying

motives and strengths of collective forces combining through joint formation or the way in which

various entrepreneurial companies group together (Christensen et al., 2018; McDowall, 2018).

This omission is the focus of this research paper. Such a view provides a larger picture of systemic

impact. Previous research has neglected disruptive innovation ecosystems and the broader context

of entrepreneurial companies that create disruptive innovation in industry or product domains. An

understanding of the underlying ecosystem where disruptive innovation occurs could help the

research community to interpret and analyze the larger framework that promotes a different value

proposition in a larger system of incumbent companies (Tsujimoto, Kajikawa, Tomita, &

Matsumoto, 2018). This would provide insights into the broader picture of underlying disruptive

technology innovation of entrepreneurial companies and how incumbents’ technology and

business models face new competition. In turn, this would impact the next generation of

innovation, where ecosystem actors influence each other through emerging technologies and

business models.

Against this background, we argue that, while research suggests that disruptive innovation

has far-reaching implications, studies have overstated the impact of individual disruptive

innovation companies compared to the impact of disruptive ecosystems. Our research addresses

this oversight by exploring the concept of disruptive innovation ecosystems. We argue that an

understanding of this concept is important for the study of disruptive innovation. We define the

concept and outline how it occurs though an empirical study of the global FinTech ecosystem that

has transformed and outcompeted an entire sector of incumbents. Ultimately, the goal of this paper

is to discuss how disruptive innovation ecosystems contribute to disruptive innovation theory and

the growing stream of ecosystem research.

28
 We believe our conclusions from studying the evolution of the Financial Technology

services sector provides a clear message. At a time when the fast-changing business environment

is driven by disruptive innovation from new entrants, the study of disruptive innovation should not

neglect the power emanating from the forces that build and transform ecosystems. The disruptive

power of FinTech is derived from the development of the ecosystem of actors. The importance of

ecosystems is evident when emerging technologies develop in the FinTech sector and

interdependent companies influence the direct development of technology, competencies, and

opportunities for new business models in financial services. Invariably, this will undermine the

power of incumbents. Initially, the power of the FinTech ecosystem was limited, but it will

ultimately prove to be increasingly groundbreaking.

Our research has explored the concept of disruptive innovation ecosystems and the

evolution of the disruptive FinTech ecosystem. Consistent with our definition of disruptive

innovation ecosystems, we have shown how communities of actors with complex yet related

relationships develop a broad trajectory along a technology path; here, members of the ecosystem

co-evolve and forge interdependencies that combine and integrate a spectrum of knowledge, with

the aspiration of increasing value through faster, smarter, and more creative value propositions.

We have supported our thesis that firms on the same broad technology and competence path benefit

the whole system by developing and entering new niches. We have shown the importance of

investors remaining interested in the ecosystem. We have also revealed how technological

advancement means more entrants in related technological categories, which is important for value

creation in disruptive innovation systems.

This paper’s analysis of the FinTech ecosystem supports the growing number of scholars

who argue that many disruptive innovations today are developed and commercialized in and by

29
ecosystems rather than ‘standalone’ firms (Fuller et al., 2019; Kumaraswamy et al., 2018; Walrave

et al., 2018). As the significance of ecosystems for disruptive innovation burgeons, the knowledge

gaps that persist become increasingly detrimental and inhibiting. Much academic endeavor is

needed to augment the very limited amount of research thus far conducted on the disruptive

innovation–ecosystem intersection. We, therefore, highlight some potential avenues for future

research.

 Ecosystems display cooperative and competitive elements simultaneously (Moore,

1993). How does the intra-ecosystem competition affect the market prospects of a disruptive

innovation, i.e. the extent to which the innovation actually disrupts its target industry? What other

features (e.g., the strength of the ties between ecosystem members; fluctuation among ecosystem

members) make an ecosystem more or less receptive to producing a disruptive innovation?

 Are there conditions under which a disruptive innovation is better developed and

commercialized by a standalone company than an entire ecosystem?

 A disruptive innovation first needs to be developed, before it can make inroads into a

market. Overall, disruption can be a relatively lengthy process (Snihur et al., 2018). At which

points along the process does an ecosystem offer greater advantages over a standalone approach?

 In developing our definition of disruptive innovative ecosystems, we drew attention to

variations in the way the literature describes ecosystems. While some studies conceive of an

ecosystem as a community of actors that affect each other, others refer to actors contributing to a

specific value proposition, and still others refer to actors grouping around a particular technological

platform (Jacobides et al., 2018). Similarly, the term ‘disruptive innovation’ may be used in a

narrower or broader sense (Christensen et al., 2015; Kumaraswamy et al., 2015). Under which

conditions do the different variants of ecosystems and disruptive innovations, respectively, make

30
a difference to our knowledge on the development and commercialization of disruptive

innovations in and by ecosystems? For instance: Are some ecosystems better able to generate

disruptive innovations that make inroads into a market from the low end than other kinds of

innovation that shake up the industry, and if so, why?

 The distinction between disruptive and non-disruptive (sustaining) innovations is not the

only powerful way to characterize an innovation. Other insightful classifications are ‘competence-

enhancing vs. competence-destroying innovations’, ‘architectural vs. generational innovations’,

and ‘radical vs. incremental innovations’ (Gatignon et al., 2002). How do these types of innovation

relate to ecosystems?

This list is, of course, not meant to be exhaustive. Scholars may identify many more

promising research opportunities at the intersection of disruptive innovation and ecosystems, and

we welcome such efforts. In their search for promising research opportunities in this area, scholars

may wish not only to refer to the above agenda but also to the research agendas on disruptive

innovation in general (e.g., Christensen et al., 2018; Hopp et al., 2018); they will want to consider

whether these research recommendations have interesting implications in the context of

ecosystems.

Overall, it is important to state and acknowledge that research on disruptive innovation at

the organizational level has largely examined the issue through the lens of the individual firm. This

approach only marginally considers the context and ecosystem of the focal firm. In this study, we

approach the issue from a different angle in order to offer a broader explanation than the traditional

explanation of the link between the individual entrepreneurial entry of disruptive innovation and

the incumbent exit. Adopting a closer look at the evolution of the FinTech ecosystem, we present

a compelling case that disruptive innovation system research is very much needed. The results of

31
the study offer preliminary but encouraging support for the standpoint that disruptive innovation

systems should command further attention. We focused on the concept of disruptive innovation

systems and the need for a broader perspective. However, we performed little analysis of the

mechanisms behind the progress of the ecosystem. Therefore, we encourage scholars to test and

develop the mechanisms behind the concept of disruptive innovation systems.

6. Concluding remarks

At a time that is simultaneously characterized by the emergence of influential ecosystems

and by a growing number of disruptions, the literature has so far paid scant regard to the role of

ecosystems in the development and commercialization of disruptive innovations. To overcome the

consequent limitation in our knowledge, this current study has developed a definition of disruptive

innovative ecosystems and has illustrated this concept using the example of the disruptive FinTech

ecosystem. We further indicate some avenues for future research on disruptive innovations and

ecosystems. Overall, our study offers preliminary but encouraging support for the idea that

disruptive innovative ecosystems demand and deserve further attention. We hope that our insights

motivate scholars to engage in more conceptual and empirical work at the intersection of disruptive

innovation and ecosystems.

32
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