By Geoff Colvin and Ryan Derousseau
March 30, 2016

Fintech is far from finished, but it’s reminding us of something about digital disruption that all business leaders and investors need to remember.

Betterment, founder Jon Stein’s prominent “roboadviser” financial services startup, yesterday raised $100 million in a round that values the company at $700 million, which is 40% more than its valuation in a fundraising round early last year. That was welcome news for investors worried that the booming industry might be falling out of favor; fintech funding surged to a new high last year overall but declined slightly in the third quarter and fell sharply in the fourth quarter. Betterment’s new investment may indicate that investors were only resting, or maybe that they’re separating the wheat from the chaff.

Here’s the larger point: Leaders and investors must remember that, in any industry, digital disrupters often “destroy more value for incumbents than they create for themselves,” as the McKinsey Global Institute has succinctly put it. So if you think roboadvisers will eventually take, say, 20% of incumbent advisers’ business, you can’t just assign 20% of the incumbents’ profits to the new disrupters and calculate values accordingly. The disrupters will probably earn far less than the incumbents lose.

The music business is a great example. Americans are listening to more music than ever, yet the music industry’s U.S. revenues are down 40% over the past decade. We all know why. Annual CD sales have plunged from $9.4 billion to $1.5 billion in ten years and now account for just 22% of total industry revenue. Streaming has become the way Americans prefer listening to music (34% of industry revenue), and streaming services deliver far more music per buck than CDs ever did. Streaming services like Spotify and Apple Music thus drain revenue from the industry incumbents and keep little of it for themselves, delivering the difference to consumers in the form of better value.

Early evidence suggests that something similar may be happening in financial services. That’s sobering news even for incumbents that are on top of the trend. A survey last year by the A.T. Kearney consulting firm found that half of respondents who were using roboadvisers were doing so through two giant incumbents, Charles Schwab and Vanguard. Bravo to CEOs Walt Bettinger and Bill McNabb, respectively; they’re way ahead of competitors. But in the digital economy, even success may mean a smaller business – not necessarily, but it might. Leaders and investors need to internalize that deeply disorienting new reality.

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