I recently had the pleasure of “attending” the LendIt Fintech – Europe 2020 virtual event. Now, much of the content covered banking services for Small and Medium Enterprises (SMEs), an area that personally I’m not particularly familiar with, but one that is gaining more focus in the news of late. One thing that struck me was the potential disruption of traditional business banking brought about by open banking.
You see, unlike the way that individuals manage their finances, often by logging in to their bank accounts, business financial management tends to be carried out through financial accounting packages. Where traditional banks used to get in on the action was when an SME needed financial advice to help them plan or where they needed to avail themselves of a banking service such a business loan. At this point they would talk to their business manager at their bank. However, over time this has gone from a named business manager, to a team, to a call centre, so that relationship has been weakened.
Meanwhile fintechs have been offering better and better services to SMEs, thanks to the introduction of open banking. On the one hand, cloud accounting platforms such as Xero integrate directly with banks to provide a view of the state of a company’s finances without the need to ever log into the bank. On the other, services such as Codat enable financial service providers, such as lenders, to integrate with these accounting platforms to get visibility into a company’s financial position to simplify making credit risk decisions when offering loans.
It seems that in the SME finance space, there is a whole eco-system of new innovative service providers developing, using businesses’ financial data to offer services to support SMEs and importantly to offer financial products, just as we imagined would happen for individuals with the advent of open banking. Crucially, these services are targeting highly profitable business banking products. Consequently, it seems that if the incumbent banks do not adapt, then there is a risk that, in the SME market, they may become simple utilities as was predicted by some when open banking was in development.
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So SMEs become the gateway for service providers to introduce services into the market which are based on open banking. Would this lead to more (some?) services being offered to individuals? Some SMEs are owned and operated by individuals…?
I think the answers is…eventually. It looks like this eco-system is built around charging for services in the case of the accounting solutions, and what can be made from lending. The commercials on the consumer side always strike me as more difficult. Consumer facing services are often offered as a loss leader in the hope of getting loan business. However, those targeting SMEs may act as a model of what could be offered to consumers, and there may be some technological overlap (e.g. evaluating financial health for lending vs. as a consumer service). It seems like we are still in the early stages of figuring out how to make a profitable consumer business out of open banking, but those operating in the SME space seem to be having some success. It seems likely that the learnings in one market will influence the other, but I think whilst we’ll see services being implemented, building profitable businesses out of them may be challenging.