Technological leapfrogging: Why rich countries lag behind in FinTech adoption

Here is a German version of this article.

The results of a study recently published by the consulting firm EY revealed that China and India have the highest adoption of FinTech services among its online population out of 20 countries. 69 percent of China’s and 52 percent of India’s digitally active citizens have used at least 2 FinTech services over the past 6 months. The statistic clearly shows a tendency towards a higher FinTech adoption in emerging countries compared to developed countries.

The notion of that the richest countries lag behind in regards to FinTech has been confirmed a few days ago by the Swiss watchmaker Swatch, when the company presented the second generation of its contactless payment solution. Unlike the predecessor, “Swatch Pay” will exclusively be launched in China, at least for now, and won’t be available in Swatch’s home country or elsewhere in Europe. According to a spokesperson cited by the Swiss business paper Handelszeitung, the reason for the decision are the “old-fashioned banks and credit card providers”.

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The example of the seemingly lower progress of FinTech in the richest nations represents a recurring phenomenon in which long-term innovation leaders are suddenly outperformed by countries which, on paper, seem to be less strong in regards to economical and infrastructure development, but that make a technological leap. This dynamic is reminiscent of Clayton Christensen’s “Innovator’s Dilemma” – however, the focus does not lie on specific companies that became complacent and thereby a victim to their own success, but on macroeconomic and societal trends.

The higher willingness of people in emerging countries to use FinTech services is closely related to the particular importance of the mobile web in these markets. While people in the developed world have, for a long time, accessed the Internet through their home PCs and fixed broadband internet, hundreds of millions or even billions of people in developing and emerging countries use the smartphone as the prime – and often first personal – device to go digital.

In these markets, companies have quickly adapted by offering their services primarily, if not even exclusively, for mobile devices. This created a self-enforcing loop of growing acceptance and increasing offerings focusing on the smartphone as the universal tool for any imaginable everyday problem one can think of, which naturally includes everything regarding finance. Additionally, many people in these markets don’t have a bank account or a credit card. That means that switching costs are nonexistent or at least much lower, creating a highly attractive environment for FinTech services.

In many developed countries on the other hand, where people have over many years learned to associate the Internet with the PC, smartphones still often are being considered a secondary device for many digital tasks; a device that people use only when they are not near a PC. This narrative has naturally been accepted even by the commercial players, which prevented a dynamic advancement of FinTech services similar to the the one which, for example, can be witnessed in China right now.

The phenomenon of technological leaps is not limited to the digital sphere of course. Just arrive at an airport in for example Seoul, Hong Kong or Singapore, or take the subway in these cities, and you’ll be experiencing a modern, highly efficient and smart infrastructure which easily beats those of cities in Europe or North America. Solutions that have been built much more recently and for much bigger numbers of people are simply superior when it comes to scalability, flexibility, convenience and maintenance.

Sometimes, an innovator known for its cutting-edge technology being overtaken by other countries also can happen when these other countries jointly adopt a different type of solution later, leaving the original pioneer and early adopter with an infrastructure incompatible with the rest of the world. This is called the Galápagos Syndrome and has happened to Japan multiple times.

Original innovators being beaten by “newcomers” with better and more state-of-the-art technology is an inevitable process and probably even a good way to have different markets, solutions and regions compete with each other. While the leaders tend to optimize an existing technology, elsewhere this technology is simply being skipped in favor of a more advanced/efficient/cheaper solution.

With the upcoming introduction of 5G mobile networks technology, we might soon see another variation of this phenomenon. Countries which have lagged behind when it comes to fixed broadband speeds and penetration could leapfrog the current leaders by simply channeling their investment budget into rapidly building 5G coverage.

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