Following the global financial crisis and a pullback among banks from small business (SMB) lending, some jurisdictions have recently begun introducing new initiatives to entice competition in the space. That may come in the form of regulations that ease access to banking licenses or legislation like PSD2, promoting open banking and data sharing between financial institutions (FIs) and third parties.
This is the scenario of Europe, where, according to Lav Odorović, “business banking can be really awful.”
Odorović is the CEO and co-founder of Germany-based Penta, one of several challenger banks that have emerged in the EU market. The company announced last week that it emerged from private beta to provide small business and startup banking services.
“It takes, on average, four to eight weeks to open a business bank account in Europe,” Odorović recently told PYMNTS on the challenges of traditional business banking. “Banks can charge up to 7 percent in fees to send or receive money in different currencies. Admin tasks like accounting and invoicing make it really hard to scale efficiently.”
Small businesses’ dissatisfaction with large financial institutions is a much-discussed challenge in the industry today. Research from FIS found that 14 percent of small businesses using a global bank have switched providers in the last year, and even more said they plan to switch banks in the coming year. Nearly half of the small businesses considering switching banks are doing so because they feel their current providers lack the products and services they need, a factor that analysts said shows SMBs are concerned about more than bank loans.
Prior to launching Penta, the CEO said he interviewed 100 small business owners to understand exactly what their biggest pain points were.
“We initially thought it was loans or sending and receiving money instantly,” he said, but the actual needs of SMBs were much larger.
“Opening up a bank account quickly and online,” Odorović said of the responses small businesses gave. “Sending and receiving money from abroad at low rates. Automating accounting and invoicing. Getting notified when employees spend money on their business debit cards. And [an] easy-to-use user interface.”
Odorović said all of these responses pointed to a collective need for digitization.
Developers Get Involved
What regulations like PSD2 and other open banking efforts have done to address those needs, the CEO continued, has brought non-bankers into the mix.
“Just a few years ago, if you wanted to build an innovative financial product you [had] to be a banker,” said Odorović. “Today, anyone can change banking. And that’s the biggest advantage, because non-bankers look at the world differently. They fundamentally think differently than bankers.”
“It enables a new generation of businesses to decide what the future of financial services will look like,” he added. “It gives power to non-bankers to decide the future of banking instead of Wall Street or Canary Wharf.”
The small business banking market is, in a way, following the evolution of Apple, he said.
“When the Apple Store came out in 2008, Apple had no idea where the App Store was going,” he explained. “But it gave developers the ability to be creative. The result? Snapchat, Twitter, Uber and the beginning of mobile banking.”
Developers creating third-party mobile apps now have the ability to be creative with the solutions they build for the business banking world. Odorović said that this democratization, in which anyone can build a solution for small business banking, leads to lower costs and more innovative solutions that address small businesses’ needs.
“The developer community will be able to leverage the existing infrastructure and data in order to help spread ideas and the message that ‘there’s a better way to bank’ to more Europeans at an [increasing] rate — including those that are under-banked and unbankable,” said Odorović.
PSD2 is instrumental to this development, the CEO argued.
“It’s such a great time and environment to be in this business because of PSD2,” said Odorović. “The directive has largely contributed to the evolution of FinTech, which has, in turn, helped thousands of people and businesses all across Europe.”
The regulation has also led to the emergence of the concept of “a tech company with a banking license,” he said. “And even challenger banks like Penta are opening up their APIs as well, so that we can empower developers to further innovate for businesses and consumers with the wealth of data that we can provide.”
Despite the industry’s confidence in PSD2, implementation of the rules could hit a few snags. Recent analysis from Deutsche Bank found that PSD2 is coming at a time when Europe is readying other data-related regulations, and the financial services sector could easily become overwhelmed and confused with the influx of rules.
Still, Deutsche Bank’s report emphasized that, ready or not, PSD2 is coming, and the FI similarly expressed confidence in the regulations’ ability to disrupt the financial services market.
“We rest on the cusp of a payments revolution,” said Shahrokh Moinian, Deutsche Bank’s global head of Cash Products and Cash Management, in a statement announcing the report. “The financial institutions that will thrive will be those that exploit the power of APIs, initially to provide third-party providers with access to their customers’ accounts as part of PSD2, but more broadly thereafter to create innovative and convenient products and services tailored to users’ changing requirements.”
Collaboration between traditional FIs and developers are instrumental in today’s environment, Odorović said, adding that the evolution of this industry is “ultimately enabling us and our developer community to offer our customers great products that can help [small businesses] scale quicker, acquire more customers and save a lot more money than was previously possible before the idea of PSD2.”