Open banking disruption and SMEs — where to next… for traditional banks?
Small and medium business owners are desperate for the disruptive changes which open banking will deliver — even if most don’t know they are coming yet. Banks should think about how to turn open banking from a challenge into an opportunity. One way to address key business customer needs is by opening a “data dialogue” with them now, before others own this conversation.
Established banks are facing a perfect storm
Technological innovation and regulatory changes are lowering the entry barrier for financial services companies. Nimble newcomers are no longer held back by stringent compliance and banking license requirements. They are also not encumbered with huge infrastructure costs. They can deliver the modern, easy, personalised, and integrated service that retail — and particularly business — customers have not been getting. SME owners are increasingly frustrated with the contrast between their financial experiences as individuals and as businesspeople.
Customers worldwide are increasingly open to receiving financial services from non-banks. Look at PayPal, Apple Pay, TransferWise. Even the mobile payments revolution in Africa, which bypasses the traditional banking relationship. Now the upcoming EU PSD2 open banking regulations will compel banks to let in third parties via APIs (Application Programming Interfaces). They will have access to customers’ account information, and will be able to make payments on their behalf. Suddenly a traditional bank looks like a bland money safe. And customers cherry-pick providers who offer them delightful experiences around their finances, that are just the right fit.
The UK Government is happy to speed up these changes. The Competition and Markets Authority is introducing reforms to force more competition into small business banking. It wants to address low rates of bank switching and product comparison. Nesta — a UK innovation foundation — is running the Open Up Challenge. It’s a contest for fintechs to take advantage of the transparency and healthy competition PSD2 will enable. Their mission is to transform how small businesses “discover, access and use business-critical financial services”. Crucially, five large UK banks are contributing to a customer data sandbox which entrants can use to test their technology. Such participation is very encouraging, but it also looks like a slight case of “being made to play nicely”…
Banks were slow to understand and respond to business customers’ needs
The rapid pace of technological and regulatory change left banks alarmed about being lapped by competition that didn’t even exist ten years ago, and struggling to decide on the best way forward.
Another reason to worry is that fintech newcomers have really listened to customers, and are addressing their main banking issues. Traditional banks have either not been listening, or listened but for various reasons haven’t done enough about it in time.
I recently heard a great webinar on business banking disruption. The panel participants included Sigridur Sigurdardottir (Chief Customer and Innovation Officer at Santander UK), Pete Steger (Head of Business Development at Kabbage), Luka Ivicevic (Co-founder and Head of Growth at SME-focused bank Penta), and George Bevis (Founder and CEO at SME-focused bank Tide).
Several interesting UK challenger banks were discussed. They all had one thing in common. They’re solving key small business banking frustrations that I’ve heard from Dublin to Hong Kong:
- “My bank doesn’t know me and my business. They waste hours of my time, and can’t offer relevant financial support”. CivilisedBank has an elegant solution — a fluid network of “local bankers”. This replaces branches and relationship managers (who are only available to larger businesses anyway). It says: “business banking happens where you do business. Our Local Bankers come to you. You’ll always speak to someone you know — your personal banker or their support team”. This kind of thing is what can get SMEs to consider switching banks.
- “Computer says No” decisions. SMEs feel hamstrung by banks’ inability to accurately judge their creditworthiness. They find that banks are unwilling to take a chance on their potential, and make rigid decisions based on sometimes limited history. Oaknorth describes itself as “the bank for entrepreneurs, by entrepreneurs”. One of its key promises is a dialogue between entrepreneur and lending decision maker. This avoids categorical yes/no decisions read off computer screens.
- “I can’t plan because I can’t get quick decisions from my bank”. Oaknorth is focussed on continuity of lending. It’s one of the main reasons SMEs are afraid to switch banks. It’s also why they are drawn to venture capital investors who are seen as more committed. CivilisedBank promises to “run in real-time [so] you and the bank access up-to-date information for faster, better decisions”.
- “I wear many hats in my business, and need to feel in control of everything — but there isn’t enough time for all my responsibilities”. Coconut is a bank account for freelancers and the self-employed. It “works out your taxes, tracks your expenses and helps you get paid on time”. This is a good call in light of the huge increase in UK sole-trader businesses. It’s fuelling demand for integrated services, allowing one person or a small team to run a small business more efficiently.
- “I get nothing back for my loyalty to my bank”. I’ve heard from many SMEs that while they consider themselves loyal to their bank, they don’t feel it’s reciprocated. Lintel is a digital bank which differentiates itself on ethics and rewarding loyalty. Its customers will receive a bonus based on average account balances.
- “Personal banking is dead”. Here I see a generational divide. Established SMEs do mourn the almost-extinct local bank manager who knew them by name. Younger ones have rarely known one. They are realistic, even cynical, about their mostly transactional “relationship” with their bank. The webinar panel discussed whether entrepreneurs will stop caring about “personal banking” completely, and value speed and efficiency above all. I personally doubt this. It’s true that saving time on admin gives entrepreneurs more for doing what they are good at, and enjoy most. But there is a risk with fully automating banking. Especially those aspects involving some discretion, faith, and relationship building — like lending. It could make banking convenient most of the time, thanks to apps and snazzy UIs, but even more frustratingly impersonal when it’s the last thing an SME owner needs. CivilisedBank’s Local Bankers are a response to this. And Sigridur Sigurdardottir stresses that SME customers should always be able to pick up the phone and talk to Santander!
Will banks out-fintech fintechs?
Currently banks — established and new — are pursuing several (related) ways to keep up with the competition:
- Opening themselves up to “plug-in” services via APIs. Penta has embraced this. It’s aiming for an open platform to “enable creative app writers, for customers to benefit from great services”. Mobile-only bank N26 is creating a bolt-on ecosystem which is already looking beyond core financial services, to insurance and lifestyle.
- Full partnerships. Santander has partnered with Kabbage to provide its SME lending in the UK. Santander chose to partner with a fintech delivering excellent customer experience in a particular area. Kabbage partnered with an established bank to benefit from its brand recognition and trust. Barclays is opening Rise, a huge co-working space to “match fintechs with business challenges we we face as an incumbent bank”. Market Gravity is currently helping another global bank implement similar partnerships as part of our work on its business banking proposition.
- New digital banking platforms, allowing banks to do creative things with customer data, including through APIs. Monzo built its own platform. Atom Bank partnered with FIS. Market Gravity is helping 10X create a universal platform, built on open banking principles. It will allow banks to deliver very personalised financial experiences to their customers.
A potentially disruptive threat is from non-FS service providers already engaged with SMEs and doing something really well. “Could Xero apply for a banking license, or partner with Kabbage?”, asks Luka Ivicevic from Penta. This could create a one-stop-shop for banking, lending and business / financial admin — making banks less relevant. Watch this space… In my own research I see accountants pushing their SME clients towards cloud packages like Xero. These allow them to keep a closer eye on clients’ finances and to act as an adviser. Accountants have SMEs’ ears, and I can easily see them recommending “Xero Bank”.
It’s not yet clear whether banks will be strengthened by the rush to collaborate with fintechs, or fade into the background. They could become difficult to tell apart, and lose their grasp on the customer relationship. What is the right thing for a bank to do? Become an app store and allow a universe of fintechs to plug in and serve any customer need imaginable? Pursue tactical partnerships to become best-in-class for certain customer types? Rebuild themselves on top of a new banking platform? Or just serve as the “plumbing” infrastructure in some completely new banking environment?
Banks should open a “data dialogue” with business customers
Customer data underpins all these new conversations about the future of banking. George Bevis from Tide sees the very definition of banking changing to acknowledge that it constitutes a huge “data hub” of any business. I believe that there will be a rise in data processing platforms which will enable SMEs to glean insights from all the data they generate, helping their growth. All sorts of interesting data sources will also be coming into play. This is happening already — Kabbage makes lending decisions by using customer data which Santander can’t. However, there are still important legal questions to resolve. Who owns the data — customer or bank — and who can access it? Pete Steger from Kabbage points out that this is a hot issue in the US — so we may be leading the way with PSD2 in Europe.
I think more banks will take steps in the right direction by opening a “data dialogue” with their SME customers. This will give both parties real-time awareness of a company’s cash flow and banking behaviours — and of how these affect its credit score and borrowing options. Businesses could be guided towards optimal financial health. They should be better able to quickly secure credit that suits their needs. Market Gravity and a major Irish bank recently developed an SME working capital proposition based on this thinking.
Open banking is a challenge and an opportunity for traditional banks
Now is a crucial time for banks to formulate a clear strategy to survive and thrive in the new world of open banking. How to take advantage of the best of what’s already out there, and upcoming changes? How to reflect their own unique strengths and identity?
And above all — how to understand customers’ changing needs and expectations, and translate it all into products and services that result in delightful, long-term engagement?
Open banking is an opportunity for a long overdue reset of established banks’ relationship with their customers. A client with their eyes firmly set on this opportunity recently told me: “We want to be the most-loved bank in the UK.” Are you aiming this high?
Igor Zakhleniuk, Insight Lead, Market Gravity
Market Gravity partners with the most ambitious companies across Europe, Americas and Asia to create and launch breakthrough propositions that make their customers’ lives better.
Get in touch with me at email@example.com to talk about where your company wants to go next.