Open Banking will make the customer the judge

Exciting transformations are taking place in the banking industry, following the Competition Market Authority’s announcement that it’s going to shake-up retail financial services for small business clients. To say that there is a banking revolution on the horizon is an understatement and it is being driven in no small part by a rapidly expanding, innovative FinTech market. For FinTech startups globally, ‘Open Banking’ and APIs are providing a wealth of golden opportunities for tech visionaries to develop pioneering solutions for SME banking customers.

Currently, should a FinTech startup wish to work with a bank to develop solutions, they have a number of challenging hoops to jump through, such as gaining agreements from procurement teams. This process can take months, whereas with open APIs the FinTech startup has the advantage in that it will no longer need to convince the banks or their procurement teams. They simply need to develop a solution and offer it to the customer. This shift in control from the banks to the FinTech sector will ultimately empower the small business customer as they become the judge of which products and services are the most successful in meeting their needs.

So what will the changes mean for SMEs? Traditionally banks have special permission to perform certain activities for customers, for example, lending, opening current accounts and managing overdrafts with the aim of locking customers in to an end-to-end vertical structure. In a word, a ‘one-stop-shop’ for all banking needs. In contrast, open APIs will allow FinTech companies to target one specific banking service and focus fully on customer experience within that service, thus enabling SME customers to easily access the best financial solutions across various providers.

To facilitate the success of Open Banking, traditional banks will need to collaborate with FinTech startups. Any bank that wants to truly succeed will need a digital strategy based upon open APIs and platform thinking. This is where FinTech companies can play a major role by providing open APIs to banks. It is not a matter of whether FinTech startups or banks will win a fight against each other. Instead, we will see a cultural change whereby banks and FinTech companies will trade data in exchange for ideas and innovation to create something that consumers and SMEs really want. Ideally, traditional banks will become platforms that connect, curate and manage original, pioneering banking solutions offered by FinTech companies.

SMEs and consumers are already reaping the benefits of simplified online payments processes through the use of APIs, as employed by PayPal. However, FinTech initiatives are not merely focusing on payments. In fact, new entrants are challenging various aspects of the traditional banking business model with some successful initiatives relating to lending and saving, funding and investment (crowdfunding), and international money transfer (such as TransferWise). To tackle day-to-day financial management, FinTech visionaries are also designing financial tools to help SMEs keep on top of invoices, organise their cash flow, manage their working capital and chase suppliers. All of these tools are going to prove vital in helping entrepreneurs to spend more time on growing their businesses and less time on managing their finances. I believe that there are no limits to the innovation that this new era in banking and technology offers, with FinTech companies able to take advantage of the latest technologies including AI, visualisation tech, biometrics and machine learning. Combined with effective data sharing, I believe we will see the emergence of personalised solutions that work specifically for individual businesses.

There’s no doubt that this is an exciting time. The FinTech sector has a wealth of talented tech visionaries who are busy developing game-changing innovations and solutions. The opportunity to turn these ideas into a reality can be realised with the onward march of Open Banking. For those innovators who want to progress their ideas, Nesta’s Open Up Challenge prize fund will encourage the development of ideas, with entrants not only having the chance of winning a share of £5 million but they will also get to test their product ideas and services with real data before launching to market; a great way of kick-starting any FinTech innovator’s probability of future success.

Over the next 12 months, the banking landscape is going to change significantly, becoming increasingly diverse with traditional financial institutions sharing the market with newcomers that are willing and able to offer very specific components of banking products and services. For the banks and the FinTech sector alike, the opportunities are limitless. However, what will set the thrivers apart from the survivors will be their ability to collaborate and work together. It’s not a case of shielding data but sharing it; cooperation not competition will be the name of the game. And who will be the winners? The customers will decide.

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