In 2009 Paul Volcker, titan of finance and former US Federal Reserve chairman, issued a stinging rebuke to the financial services industry, arguing that its most useful innovation over the previous 20 years had been the ATM.
That was just before global fintech investment exploded, from $1.8b in 2010 to $22.3b in 2015. Fintech is a broad church, but it has certainly brought doses of Silicon Valley’s disruptive energy to finance, promising to shake things up and provide cheaper, more user-focused and all round better financial services for customers.
But what might Volcker say seven years on, in particular about how useful all this innovation has been for small business customers?
Fintech has undoubtedly changed the possibilities open to small businesses in all kinds of ways. A small business in Huddersfield or Cardiff can take online payments with Stripe, borrow peer-to-peer via Funding Circle, manage outstanding payments via MarketInvoice, manage expenses with Xero, raise equity via Crowdcube, take card payments with iZettle, send money abroad via TransferWise, and do much more.
"The coming year is a unique moment in which technology and regulatory change combine to drive innovation in small business banking."
But despite the fintech boom (with the UK a global leader), some remarkable innovations and the rise of challenger banks and alternative finance, banking hasn’t changed all that much for most UK small businesses. A visitor from 1970 might be baffled by Snapchat, but they would cope pretty well at the bank (ATMs notwithstanding). They could probably find their old bank too. Most core business banking services in the UK — current accounts, loans, and other financial services — are still provided by just a handful of large banking groups. 80% of UK small businesses hold a current account with one of five major banks. The industry structure hasn’t changed much since 1970.
The coming year is a unique moment in which technology and regulatory change combine to drive innovation in small business banking. Will these core banking services change with “open banking”, which is coming to the UK over the next 12 months? Or will small business banking still be recognisably the same in 2060?
Open banking is in essence a technology infrastructure that enables services provided by different parties to work together to deliver augmented, and hopefully better, banking services for customers. These kind of mashups are ubiquitous on the web and fundamental to the value we get from our smartphones, but still fairly exotic in financial services. In the UK flavour of open banking, it will mean rules agreed across the major banks that define how a third party can access and use a customer’s banking data, or access that customer’s account to initiate payments.
Why could this be a big deal? Suddenly for third parties it removes huge barriers to engaging with and providing services to a bank’s existing customers. Of course customers will not provide access to their data and accounts without good reason — so it creates incentives for new players to create value for them and for incumbents to up their game.
What kinds of value could they provide? An obvious use case is enabling small businesses to compare banking services from different providers based on their own characteristics. Remarkably, this is still difficult or impossible to do with any degree of sophistication.
But ask almost any small business and they will confirm that there are plenty of challenges with which they would welcome help. Small businesses are recognised to be crucial to a country’s economic health, but UK business owners consistently say they spend frustrating amounts of time on routine admin, time they would surely rather be spending on their customers. The average late payment debt now stands at £32,000 (or £26.3b across the 47% of SMEs that say customers and clients stray beyond agreed payment terms). An estimated 1,300 hours a year is spent by the average small business owner chasing late payment. Only 3% of the £4bn of small business loans refused every year seek alternative finance options. Many small businesses may not know their own financial positions, perhaps through lack of resources or skills — only 38% of small businesses produce regular management accounts and many lack timely and useful insight into their finances. The list goes on.
Our mission with the £5m Open Up Challenge is to ensure the opportunity presented by open banking delivers game-changing benefits for UK small businesses.
We will support and reward at least 20 teams developing next-generation services, apps and tools. We’re looking for entrants who can bring a combination of insight into the problems small businesses face, technology, and commercial know-how.
You’ll be part of a community of leading fintechs, VCs, developers, data analysts and thinkers who are as excited by the challenge as we are. If you’re interested, take a look at the information on openup.challenges.org and get in touch. We want to hear from you.