The first year of Open Banking was characterised by a steep learning curve for the nine largest UK banks. The new technology standard created challenges in all organisational aspects. Banks will have to operate differently, increase their focus on collaboration and up-skill their employees to navigate this change. Another key characteristic of this first year was the strong focus on the retail business, which helped the industry to appreciate the complexities of Open Banking from a retail customer perspective. I believe 2019 will the year we will learn more about how Open Banking can benefit, and effectively include, an equally important customer segment: Small and medium sized enterprises (SMEs).
Ironically, this customer segment usually does have access to a business bank account, but in reality are often unable to obtain the financial services they need. In the accounts that they do have access to, the terms are often not favourable given non-competitive interest rates, late access to funds, bureaucracy and lack of support, resulting in an illusion of financial inclusion.
The finances of SMEs are often complex but of relatively low value when compared to large corporates. For traditional banks, extending credit to small businesses is often unprofitable once risk profiles are taken into consideration. To make things worse, the global financial crisis of 2008, coupled with additional regulation and capital costs, has made it even more difficult for SMEs to secure financing. Well, apparently, SMEs are too small to serve.
Small and medium enterprises, according to the World Economic Forum, represent 99% of world’s 125 million companies and contribute to more than 50% of the global GDP. In the UK private sector, SMEs account for 99.3% of businesses, 60% of employment and 52% of turnover. In other words, they are too big to ignore.
The financial needs of small businesses are often time critical. The competition in the SME space is intense, so they don’t have the luxury to wait weeks, sometimes in the dark, for a loan approval or access to funds. Depending on the growth stage of the business, from a start-up to a well established brand, timely access to financial products and services can be a matter of survival.
Historically traditional banks did not invest enough in digital innovation and business capabilities to serve this market, leaving SME banking revenues unprotected from challenger banks, alternative lenders and integrated business tools, which aim to provide a superior proposition. The underlying data and interface standards of Open Banking will not only amplify the reach of these new propositions, but will also remove the “stickiness” from existing SME banking relationships. Open Banking now allows SMEs to easily and automatically transfer their transaction and credit history to another financial services provider, by the way something that used to be a very clunky, paper based and painful process, and one of the main reasons for the inertia in this market.
Having a well established brand, global footprint and shiny mobile apps are not enough, SMEs expect much more from their banks now. They want more intimacy and to be comfortable that their relationship manager (real and virtual) understands the particularities of his/her business. They also want more transparency, to know exactly the transaction costs before (not after!) the payment is confirmed. When applying for a business loan, they want speed and predictability, and not to waste precious time in applications that may end up declined.
Remember, all large corporations started as a small business, and their growth trajectory depended on multiple, often intangible, factors. Making binary or automated decisions based exclusively on limited transaction or credit history is a dangerous strategy that will certainly justify your budget, but will not create a meaningful relationship with your customer, leaving some of your precious revenue streams unprotected.
Not everything that can be counted counts, and not everything that counts can be counted - William Bruce Cameron
The new Open Banking ecosystem creates a unique opportunity to better serve SMEs and also creates the ideal conditions for profitable partnerships between banks and FinTechs. Providing the business capabilities your organisation doesn’t have, or may want to improve, can now be acquired from third parties and even from your competitors.
What is your organisation’s strategy to serve the market that represents 99% of the UK private sector? Are your products and services aligned with your clients’ growth trajectory? Are you prepared to not just ride, but also contribute to, the next wave of economic growth? Open Banking creates an opportunity to truly include SMEs in the financial services sector and trigger a new cycle of value creation much needed in the UK economy.
I’d love to hear your thoughts or questions on the open banking journey, so do get in touch or leave a comment.