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Why Traditional Banks struggle with new credit models, fintech’s, embedded finance, and MSME innovation?
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Clayton Christensen’s The Innovator’s Dilemma explains a paradox that plays outacross industries:- The very practices that make market leaders successful are often the reasons they fail when disruption arrives.
Organizations that listen closely to their best customers, optimize for their most profitable segments, and refine existing products can still lose—not because they are poorly run, but because they are too good at the old game.
This dilemma is deeply relevant to lending. Traditional banks and established NBFCs have built robust systems to serve large, well-understood borrowers.
Their policies,risk models, and operating structures are optimized for scale, predictability,and compliance. But when new credit models emerge—embedded lending, MSME cash-flow finance, BNPL, Co-Lending platforms, or API-driven credit—these same institutions often struggle to respond.
Christensen’s insight is not that incumbents are resistant to change. It is that they are rationally optimized for a world that no longer exists.
In lending,disruptive credit models rarely look attractive at the start. They serves maller borrowers, thinner margins, higher uncertainty, and unfamiliar datasources. MSME loans based on transaction data may appear riskier than collateral-backed loans.
Embedded credit inside marketplaces may seem less controllable than branch-led origination. Early fintech models often lackscale, predictability, or regulatory clarity.
From the perspective of a traditional lender, these innovations don’t fit the existing balance sheet logic.
Credit committees ask rational questions:
-Is the ticket size large enough?
-Is the margin sustainable?
-Does it align with our riskappetite?
-Does it scale within our current systems?
Christensen shows that asking these questions is exactly what traps incumbents. By rejecting early-stage credit innovations because they don’t meet today’s profitability benchmarks, lenders miss the compounding opportunity to build tomorrow’s dominant platforms.
The result is familiar across markets. FinTech’s start by serving borrowers banks overlook. Over time, they improve underwriting, lower cost of acquisition, strengthen collections, and climb up the value chain. By the time the model looks“bankable,” the ecosystem advantage is already established.
A core ideain The Innovator’s Dilemma is that disruptive innovations need different operating models. They cannot survive inside structures designed for legacy businesses. In lending, this is especially true. Embedded finance requires API-first architecture.
MSME cash-flow lending requires real-time data ingestion and adaptive risk models. Platform lending requires orchestration across partners, not ownership of the entire journey.
Traditional lending stacks—often built as monolithic systems—struggle to support this flexibility. They expect standardized workflows, linear processes, and fixed risk logic. Disruptive credit, by contrast, thrives on experimentation, modular design, and rapid iteration. It needs systems that allow lenders to test new products without destabilizing the core book.
Christensen’s answer to the dilemma was not to abandon the core, but to separate innovation from it.
Successful incumbents create parallel structures—new teams, new processes, new metrics—to explore emerging opportunities. In lending, this means treating new credit models not as “exceptions” to the coresystem, but as first-class products with their own journeys, risk logic,and economics.
The MSME segment illustrates this dilemma most clearly. India’s MSMEs contribute significantly to GDP and employment yet remain underserved by formal credit.Traditional lenders often see MSME lending as operationally complex and risk intensive. FinTech’s, however, view the same complexity as an opportunity—using alternate data, digital workflows, and embedded journeys to reframe risk.
What Christensen helps us understand is that MSME lending does not fail because it is unviable. It fails because it does not align with legacy success metrics.When lenders measure new segments using old benchmarks, innovation stalls.
This is why modern lending success is less about choosing between “traditional” and “digital” andmore about building adaptive platforms. Platforms that allow lenders to serve multiple borrower types, launch new products quickly, and evolve risk logic without rewriting their entire stack.
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