The concept of what defines disruptive technology, a term coined by Harvard business professor Clayton Christensen, is controversial. But the power of high-tech innovation, of course, is not.

Do traditional financial firms face the kind of threat today that taxi drivers face from Uber and others? That’s the topic that venture capitalist Jon Sakoda tackled late Thursday during the Hearsay Social Innovation Summit 2016 in San Francisco.

Speaking to several hundred financial services professionals, the general partner of New Enterprise Associates – which has invested in Hearsay Social, Financial Engines, Braintree and others – said today’s environment “feels like things are happening differently and faster than ever in financial services.”

In other words, Sakoda explained, “There are waves of disruption with peak amplitudes.” And that means disruption basically surrounds the industry.

The four pillars of disruption, he points out, are new platforms, big data, favorable (meaning less) regulation for disruptors, and millennial behavior. “Remember, millennials are OK with sharing data online,” the venture capitalist said.

The main force driving disruption in financial services is the “unbundling” of these services by firms largely concentrated in Silicon Valley, he adds. For instance, there are financial firms that focus on car insurance by charging by the mile (Metromile) and no-fee trading applications (like Robinhood).

“The new normal is to hyper-target customers with lower cost products and differentiated services,” Sakoda explained. And these clients are being pursued by “dozens and dozens of firms” – many referred to as fintech enterprises — rather than just a limited number of large organizations such as the big banks and insurance firms.

Future Shock?

Will these new armies of fintech firms overpower the traditional entities? “There should be healthy skepticism about any one of these companies putting a Merrill Lynch or State Farm out of business,” the tech specialist said.

This is because some 90% of new firms fail. “Of those that are funded by VCs, about 50% make it” long term, he stated.

Those figures don’t deter venture capitalists.

According to CB Insights’ research cited by Sakoda, the yearly funding of fintech firms was $13.8 billion (for 653 deals) in 15 vs. $2.1 billion (for 298 deals) in 2011.

Still, that level of investment is dwarfed by the market capitalization of the major financial firms, which tops $7 trillion. “We at NEA have put in $50 billion in five years into the industry, and we could do two or three times that” and not get close to this market-cap level, he explained.   But small firms can expand – or “scale up” – quickly. “Robinhood, the free mobile trading app, has had some 500,000 people on its wait list and now reports some $1 billion in transactions,” said Sakoda. “It has a social component, too,” which makes it attractive to millennials.

It doesn’t pay anything for advertising, he points out, while E-Trade is spending $1,000 to attract each new client.

Where is the industry in this cycle of disruption and unbundling of products and services? “We’re in the first phase,” Sakoda said.

“As for the second and third waves, we have to remember that it took decades for the banks to be as consolidated as they are now. … So, unbundling should take at least a decade or more, and then we’ll see some consolidation.”

When it comes to staying afloat, the venture capitalist has several recommendations of where and how financial services companies should focus.

First, critically define the core strategy based on the firm’s competitive edge in the context of changing technology, regulation and client experience.

Next, clearly define the firm’s market segment or segments.

Third, figure out when the firm will find itself in an unprofitable niche or face a disruptive innovation to its core business.

Sakoda says it takes all three of these considerations or factors to work “in concert” for a firm to be a successful disruptor. Likewise, traditional firms need integrate this thinking and strategic planning into their tech plans in order to survive.

In addition, firms need to look at existential threats to their core businesses. Also, they should modernize their distribution methods across channels and embrace new technology to compete.

“There’s a big push today, which is to get off of the old technology and onto the new ones – like the cloud – and to turn off legacy systems,” he said. “This is what it takes to compete and work with the best of breed in the business.”