Caution: Friction Starts Fires

If you want to know how new technological innovation will change our future society, it pays to keep an eye on the latest research. But the variety of research being undertaken is so vast that the best a generalist like me can do is track broad research trends and their potential: nanotech, new materials, synthetic biology etc.

If you want to know where business innovation will change our future society, the research base is equally broad. But as a consumer or businessperson, you don’t need to subscribe to any expensive journals or learn any jargon. Because one of the best indicators of coming innovation is friction.

Friction comes in many forms. It’s in those bureaucratic interactions that the supplier has failed to reform. It’s in those high costs that the supplier continues to charge, even though their own costs have fallen dramatically — or should have done if they had invested in new systems. It’s in the manual processes that frankly there is no good reason not to have automated.

A great example of all of these different ‘frictions’ is in banking. It’s a little cliché now to wail on the banks. But this isn’t about dishonesty, this is about inefficiency. Inefficiency that frustrates us today, but will kill them in the future.

Take what should be a simple process: opening a business account. Wow this is harder than it should be. Walk into a branch they ask you to call instead. Call and some banks will post(!) out physical forms to you. These forms don’t always arrive (we waited over a month for one bank recently — despite repeated chasing, the forms never arrived).

Other banks will ask you to come in for an appointment where someone with very little (if any) business experience will try to understand your 21st century business and describe it in a way that fits the 20th century forms they need to fill out. This is the best case scenario in which you don’t need any borrowing facilities and you have been a customer of the bank for nearly two decades.

Banks have certain responsibilities, under law and industry regulation, to maintain checks and balances. To ensure that the people they serve are legitimate (and not laundering money) and not getting themselves into difficulties. But none of this excuses the incredible burden of friction that they incorporate into this process.

And so what always happens in the face of friction like this will happen again: new, innovative competitors will find ways to challenge the established players. The barrier to entry for banking is higher than most, but it’s not insurmountable. Look at the players that have already emerged, taking slices of what might traditionally have been the banks’ business: PayPal, iZettle, Stripe. In the next few years we will see others chip away at other aspects of their business.

And then there is the big threat on the horizon: alternative currencies. There remains a lot of scepticism about the prospects of currencies like Bitcoin. But one look at the quality of people beginning to tackle the challenge of making alternative currencies into mainstream options to see that this is only going one way: there will be a very real, very low-friction alternative to the legacy banks for a lot of functions in the none-too-distant future.

Whatever market you’re in, look for the friction in your business, your suppliers and your competitors. Wherever there’s friction, there’s going to be a fire.