U.K. financial institutions (FIs) have been advised to comply with the EU's Revised Payment Service Directive (PSD2) regulations despite Brexit, but the U.K. has its own Open Banking initiatives coming into force in 2018, too. They're a result of the Competition and Markets Authority (CMA) inquiry, which found a serious lack of innovation in the nation's banking sector — especially when it comes to small- and medium-sized business (SMB) services.
“Open Banking will make a transformational change to banking for personal customers and small businesses,” said Alasdair Smith, the CMA's chairman of the retail banking investigation, when the group announced its findings earlier this year. “For the first time, innovative and secure apps will provide personalized services and information to cover all financial needs in one place, and make it easy for people to find out what bank account is best for them.”
As the U.K. readies for both PSD2 and Open Banking reforms to take effect, Nesta, an organization aimed at promoting innovation across a range of industries, set up the Open Up Challenge, a way for FinTechs to present their solutions for the SMB banking industry. With Stage 1 of the Challenge closed, and a list of preliminary winners announced, Nesta has also released new research that highlights just how much the U.K.'s entrepreneurs are struggling in today's financial services climate.
The financial management hurdles are especially acute for millennial entrepreneurs, according to findings from Nesta's report, released earlier this month. Millennial business owners spend more time on financial matters than business owners aged 35-plus do, while nearly one-quarter of millennial SMB owners say they have had a business fail because of poor financial management — two findings that stuck out for Chris Gorst, Open Up Challenge prize lead at Nesta.
According to Gorst, it could be that older entrepreneurs are more seasoned business owners and therefore more efficient than millennial entrepreneurs at financial management. Or, he hypothesized in a recent interview with PYMNTS, it could be because millennial SMB owners are struggling in a financial services climate that doesn't meet their professional needs the same way it meets their needs as private consumers.
“Younger entrepreneurs will be so used to smooth, friction-free processes in many parts of their lives, that when it comes to finance, it's a bit of a shock to their system[s] how manual and full of friction these processes can be,” he said.
He pointed to access to business loans as one example.
“Dealing with a big bank and old systems to try to get a loan out of one of the large institutions involved a lot of paperwork,” he said. “There's a lot of lag. It might involve printing PDFs or your bank statements, sending them off and waiting for a reply — and that's a set of processes that young entrepreneurs are just not used to having to deal with in the rest of their lives.”
Older entrepreneurs could be used to the sluggish way of managing finances for their businesses, but that doesn't mean they enjoy it. Research suggests there is widespread dissatisfaction among SMBs with owners of all ages when it comes to the financial services they're offered by the big banks.
A separate survey conducted by U.K. FinTech Strands found most small businesses consider their banks a utility, not a business partner, with 43 percent of SMBs reporting they're considering switching from a traditional bank to a challenger bank because they are dissatisfied with the services being offered.
“There is recognition that services for small businesses are not as tailored and responsive as they could be, and I think that banks might look at the kinds of things that FinTechs are trying to do with small businesses and saying, 'We'd love to do that — why didn't we think of that?'” said Gorst. “There is recognition by the banks, looking at what's going on in the FinTech world, in some cases looking to partner with FinTechs to provide those services — but I think this has been going on more on the consumer side than the SMB side.”
Whether due to a lack of competition or internal infrastructures' inability to support innovation, banks have been slow to meet the needs of a younger generation of entrepreneurs across the U.K., he added.
With Open Banking fast approaching, FinTechs are “chomping at the bit” to get their ideas and services out on the market, added Gorst.
“Their bread and butter is removing inefficiency and friction from processes,” he noted. “They're ready to go whenever Open Banking is ready to accommodate what they want to do.”
Banks aren't necessarily as enthusiastic about Open Banking, PSD2 and other initiatives to promote data sharing and boost competition in the financial services space, Gorst said, but are increasingly concerned about competition from FinTechs. The FIs are therefore readying themselves to comply with incoming regulations and figure out how to work with these rules to their benefit.
“Banks are very much in implementation mode,” he said. “We're seeing some of the biggest banks partnering with FinTechs, and you hear bits and pieces about how they're developing their own new services for small businesses, which, to me, is a clear response to the emergence of Open Banking.”
But here's the kicker: As dissatisfied as small businesses are with traditional bank services, the big banks are more trusted. A survey released last year by Visa U.K. found 59 percent of SMBs trust their business banks as their payment providers, compared with 40 percent that said they trust an alternative online payment provider. Nearly two-thirds of SMBs operated by a sole trader said they fully trust their banks, despite only 30 percent of SMBs becoming “completely satisfied” with the range of services that provider gives them.
According to Gorst, while FinTechs are excited about the opportunities Open Banking may offer, and while industry players expect Open Banking to boost competition and improve services offered to SMBs, small business owners don't necessarily see it yet.
“There is a lack of awareness as to what Open Banking means — what it is, what kinds of things it might make possible,” he said. “A big concern for any FinTech is how you reach SMBs. There are a lot of them, and they're very diverse. A challenge for them right now is awareness among SMBs, and I think there should be more of an effort by the authorities to raise public awareness about the benefits Open Banking can bring.”
While awareness gradually ticks up, Nesta is moving forward with its Open Up Challenge. Stage 2 of the organization's Challenge will open in January as Open Banking reforms enter the market, and winners will receive a grant, early-stage access to Nesta's sandbox — including anonymized U.K. banking transaction data — and technical support.