Revolution or Reform: What can Open Banking really do for small businesses?
Mapa attended the Open Up Challenge and the Future of Small Business Banking panel discussion organised by Nesta last Wednesday.
Chris Gorst, Challenge Prize Lead at Nesta, opens the discussion saying that if we think of revolution as a ‘reversal of power relationships’, then Open Banking is a revolution. It could create new opportunities for new players in the market.
As Gorst claims, most small businesses bank as they did 20 years ago. However, with Open Banking, these small businesses should get tools to manage their cashflow better, to reduce the cost of financial services, to share their bank account and transaction data securely with third parties via APIs, and allow payments to be initiated directly from their accounts on their behalf.
Nesta’s ‘Open Up Challenge’ is a new £5m prize fund to inspire the creation of next-generation services, apps and tools designed for the UK’s small businesses. The Challenge is looking for 20 winning entries from anywhere in the world that will use the UK’s Open Banking APIs (the APIs that will exist following implementation of PSDII regulation) to transform the way small businesses discover, access and use core financial products. The winners will get access to groundbreaking data in the Data Sandbox, up to £1M in cash, and technical support from leading practitioners.
On the topic of whether Open Banking is a reform or a revolution, Imran Gulamhuseinwala, venture capitalist and Global Head of Fintech at EY, says that is hard to describe how banking will look in 2020. There is no way to find correlations in other industries due to the amount of change that is coming up. There is no specific vision but open banking will deliver an inclusive, effortless world. ‘It is inevitable,’ he says.
He considers it interesting that some banks have opened their APIs voluntarily in the US but that it is mandatory in the EU. Gulamhuseinwala hopes that this will bring a standard: ‘These are the foundation stones of the digital economy for consumers who have been underserved and overpriced.’
Tom Bloomfield, founder of Monzo, considers that ‘people tend to overestimate the impact of technology in the short term and underestimate it in the long run.’ Open Banking will have an effect in 10 to 20 years, he thinks, but this impact will be massive.
Jeni Tennison, CEO of the Open Data Institute, agrees with Bloomfield and states that by 2020, we might not see a service that has created value but, in the longer term, banking will operate more like a commodity – where one doesn’t choose a bank based on the interface, but chooses the interface that provides connections across multiple accounts in in a way that suits each person or business. Tennison thinks that we can anticipate products and services that help provide services to others, like the Citizens Advice Bureau. One should consider several circumstances; for example, as a parent what kind of services can help me help my children?
Izabella Kaminska from Financial Times’ Alphaville claims that the industry is really obsessed with Open Banking, as if this was a ‘goldmine’, but argues that consumers don’t really care about the interface with the bank. Kaminska worries that the business models that are coming up are not profitable, and she also argues that perfect information is impossible. ‘Without profitability, it won’t be sustainable.’ She says that, unless there are profitable business models, Open Banking would bring little value.
Blomfield refutes this statement, saying that this is not a zero-sum game. For a SME, he claims, there are a huge number of things that are very manual: creating invoices, chasing up for payment, managing the cashflow, etc. Admin becomes a real hassle and computers are much better at managing this drudgery than humans are. ‘The value of Open Banking is value creation through automation,’ he says. There is huge amount of inefficiency in banks; with Open Banking, banks could automate that.
The panel agrees that businesses have not yet understood the implications of sharing data or allowing third party APIs to access this data. As a society, we need to work on data skills, they say. Kaminska thinks that this will be like opening Pandora’s box: it is easy to police the market with a few players but it becomes very hard when it comes to hundreds of players. PSD2 and GDPR might not be enough to police the good use of data. She would like to know, ‘Who watches the watchers? How do you guarantee that these new players are not going to take consumers for a ride?’
Blomfield thinks that GDPR and PSD2 are not two conflicting pieces of regulation. ‘They are both pieces of law that are pushing control to the individual,’ he states.
Tennison argues that, while data shared with third parties could be used in a negative way, it would create value and have a positive impact when third parties can use this data to provide a service that is valuable to that person or business.
Small businesses are recognised to be crucial to a country’s economic health. Open Banking should enable services provided by different parties to work together to deliver augmented, and better, banking services for customers. Opening APIs might not create value or profitable business models in the short term but, inevitably, will provoke change in the long run.
For more information on SME banking, check out our SME Banking Dashboard or speak to us about bespoke consultancy on business banking, Open Banking, and PSD2 regulations and their impact on your business.