The Fintech Innovation Cycle

Joseph Schumpeter, an influential twentieth-century economist, posited that innovation creates economic vitality through a process of “creative destruction,” the replacement of old ideas with new entrepreneurial ones. But he also stated that this process did not happen in a straight line—more as a series of explosions. Later scholars built the theory of the innovation S-curve, where new innovations begin slowly as markets become accustomed to the new products and services before a later takeoff phase. The small business fintech innovation cycle was characterized by an energetic first phase with hundreds of new entrants. The second phase, takeoff, for these early fintechs did not occur as anticipated. The banks woke up and started investing in technology internally and through partnerships. Technology platforms discovered that they could embed financial services directly into existing business relationships and workflows, capturing the customer exactly at the point when they had a financing need. The groundwork had been laid for an expanded lending marketplace with a variety of competitors and new products and services with the potential to transform small business access to capital.