The Open Banking initiative means banks have now started to offer certain tools and data packages to third parties powered by APIs and fintechs.
The recent announcement of the next awards to recipients in the Open Banking Challenge got me thinking about the number and nature of collaborations between fintechs and traditional banks that we’ve seen in the last year.
The Open Banking initiative, now many months since its launch, was proposed because the traditional banks, which dominate the retail and SME banking market, were not allowing for enough meaningful competition to either new entrants or to the clients they served in products and services, and the Challenger Banks were finding it challenging to access the market and embark on meaningful growth.
The UK’s Competition and Markets Authority believed that by creating software standards and industry guidelines it could drive both competition and innovation in the UK banking industry. By opening up data it would create another means to enable fintech challengers and improve retail products and services. What I think is true is that it will take some time before individuals and SMEs fully understand and feel the impact of the features and benefits of Open Banking, but how much, if any, impact has the open banking initiative had in driving forward fintech?
The period from 2012 to 2013 saw alternative finance platforms start to emerge and define the industry sector and characteristics we know as fintech. These platforms became a beacon for the underserved SME market. A market that for the most part was sidelined by the high street banks in the wake of the Financial Crisis because they were high-risk and costly customers.
Technology started to transform the costly manual processing of low ticket credit applications and this sector was proving to be profitable. Yet despite providing vital credit to a sector starved of capital, fintech players still struggled to get significant traction.
In my opinion partly due to a lack of education (vs awareness) being provided to the intended users, and partly due to a pervasive inertia when it comes to exploring non-bank products and services.
Awareness of all forms of finance amongst SMEs is certainly higher and growing year on year, but it is not yet being fully explored and exploited by those who need it the most. Despite the obstacles, these new delivery channels, low-cost platforms and digital solution continued to develop their services, providing SMEs with fast, flexible tailored financial products.
Customers also started to demand the same of their banks, yet the Goliaths of the high street stood firm, clinging to the past with their aged processes, systems and strategies.
For a few years, as fintech matured from infant disruptors to adolescent competitors, they failed to see or accept the changing financial landscape and, as we entered the dawn of young adulthood for the fintechs – who now saw a need for genuine collaboration with their erstwhile enemies – incumbents had to be nudged along by government policies.
There was, of course, the somewhat lukewarm Bank Referral Scheme, but it proved not to be the silver bullet when it came to SME funding. The SME market is a major driver for the UK economy, employing over 60 percent of private- sector workers and producing 51 percent of combined private sector turnover. It’s little wonder then that the authorities stepped in to compel the incumbent banks to act if the financial crisis, now a few years down the line, was to stay firmly in the rearview mirror.
Slowly, instead of dismissing the fintech players as a fad or just a few upstarts taking crumbs from their table, the traditional banks now started to realise that if they were to stay relevant and competitive they should be partnering and embracing new technologies.
The fastest and cheapest way for them to do it was by collaborating with fintechs. But how can the traditionalists blend with the innovators and the innovative technologists? There was always going to be a clash of cultures. It is tricky to bring genuine innovation to a big corporate organisation, but it is where future success lies – at least for the foreseeable future.
So many banks focused on turning enemies into close allies through strategic investment and acquisition. Those forward-looking banks are now developing partnerships with alternative finance companies to grow their markets, share fundamental capabilities, and expand their expertise and this year we are seeing a record number of banks partnering with fintechs.
Some successful examples include the likes of Spotcap who offer lending as a software service, or companies such as AMP Credit, who help incumbents move money off their balance sheet. HSBC UK has partnered with Castlight in the delivery of the bank’s first open banking loan, with Castlight’s CaaS technology allowing the bank’s lending teams to deliver fast, accurate and insightful decision-making as well as a better customer experience.
Open banking is a significant reason for the gear shift in the banking sector; banks have now started to offer certain tools and data packages to third parties.
For those banks that do not want to become involved with the significant costs and complications associated with a direct investment or acquisition, APIs will provide them with a straightforward method for working directly with fintech companies.
By leveraging the experience and resources of traditional banks, nimble startups and scaleups can use the experience and resources of the incumbents; and the banks, meanwhile, will be able to maintain a foothold in the market by licensing the infrastructure that underpins new technologies, ensuring both parties benefit from the relationship. Similar business models have been utilised by tech giants like Amazon and Google for many years, but banks are only now realising the benefits of being more open.
There is, of course, always the possibility that too much choice can be too much of a good thing, which could be an opportunity for those incumbents who open their APIs and avoid becoming just dumb pipes, but it does also mean they are now no longer masters of the data Mountain.
In this period of change, it will be the banks that take advantage of fintech and plan for the future that will still be around in the long term. The technology decisions the banks make now will come to define the next decade.
This is not really a space for the startup upstart, but really more for the scaleup which has the resources, financial, human, tech and time, to execute a meaningful commercial proposition when partnering with an incumbent. It also means that the incumbent needs to be ready to move away from any kind of innovation tourism and commit to the execution. Challenging yes; impossible, no.
The biggest challenge for agile fintechs who have the tech and the ability to bring it to a large market, is the time it takes to sell to big corporates from conception to delivery. A sales cycle into a bank and implementation is lengthy, typically taking 12-18 months.
Challenger banks helped along with fintech and light-touch regulation are multiplying, and the incumbent banks know they need to up their game.
Ultimately, it’s all about identifying and embedding themselves in their chosen markets and capturing a significant share of the market; finally, the UK financial services landscape is changing and customers who are not happy with their bank now have options and if these newcomers walk the talk that is proliferated in the market, customers will take their business elsewhere.