The EU’s PSD2 and Open Banking in the U.K. have shone a massive spotlight on the role of API technology in banking to open up competition in the market. They are instrumental to financial institutions’ adherence to new rules that require them to open up data streams to third-party players, and traditional FIs are (finally) participating in the data-sharing game.
But that doesn’t necessarily mean they’re going to suddenly land on the same competitive plane as new market entrants, nor does it mean they necessarily want to.
“Banks will always have a role as the custodians of money – as the literal vault to keep money secure,” said Ray Brash, CEO of banking infrastructure provider and card issuer PrePay Solutions, in a recent chat with PYMNTS. “Even payments, that’s a cost for banks. All they want to do, probably, is invest the money they have on their balance sheets and lend. Doing payments is a bit of a pain.”
It’s no wonder, then, that traditional FIs are far from focused on building out high-tech solutions for small businesses, freelancers and sole contractors, which have become an attractive target to challenger banks and FinTechs in the U.K. Instead, these players see the value in providing these services, said Brash.
“My clients love the fact they’re engaged with payments,” he said. “When customers are making payments, they’re engaging with them, and you know where they are, and how they’re spending money.”
One of the most recent newcomers to enter the market is Coconut. Only a few weeks ago, the challenger bank announced its official debut on the market, and last week, Coconut revealed a collaboration with PrePay Solutions in which PrePay provides a stored value account solution and issues commercial cards to Coconut clients.
Brash explained that PrePay provides this type of “backbone” service to an array of players, and has been for years. All that time, the CEO noted, APIs have been instrumental in offering third parties an infrastructure on which to build out their solutions.
“We’ve always had an open platform,” he said. “We’ve always worked with partners, we’ve always had APIs.”
The market has a long history of recognizing the value of collaboration in areas like small business banking, he noted.
“It’s the recognition that you can’t be a jack-of-all-trades,” the CEO said. A company like Coconut, or fellow challenger bank Tide, will choose to work with a partner to provide add-on services to the bare bones banking platform instead of building out a proprietary solution. Doing so, said Brash, means the best-in-the-business for processes like invoicing, accounting and payments can all be found on a single portal for freelancers and entrepreneurs.
But now that PSD2 and Open Banking are the new realities, traditional financial institutions are stepping into this world of collaboration, too. While banks may have initially been reluctant to open up data stored in their systems to would-be competitors, they may be beginning to recognize that they, too, can benefit from data sharing by integrating best-of-breed solutions into their own offering, instead of investing in building out their own.
Brash said he’s not convinced banks will suddenly step in to fill gaps that have been left for years in financial services for small businesses and freelancers. It all comes down to recognition of the value of data, the CEO said.
“Banks are not the best at monetizing data,” he noted. “A lot of my clients to which we give access to transactional data say this is gold dust – what they can do with this is amazing. But my clients don’t come from bank backgrounds – they come from the Yahoos or Spotifys or Skypes. They see data as the key thing, and banks have never seen it that way.”
Access to transactional data is instrumental to ensuring these third parties can actually provide the services they’ve developed. Enhancing those products via machine learning, AI and other tools means they can automate many of those services, too. There is another element to ensuring that freelancers, sole contractors and other small businesses gain the most robust financial services solution possible, however, and that’s a seamless, streamlined user experience, said Brash.
“The thing at the moment is that traditional banks are pulling back from offering banking facilities to freelancers and contractors,” he said, “and there’s a huge requirement to set up a business facility. It’s a tiresome, expensive process. That’s the main driver in this space, the ability to set yourself up with a bank account, and a card, with minimal fuss in a really slick, fast, agile way.”
For third parties, that means stepping up to the plate.
“Service providers have to be agile and super responsive,” said Brash. “Companies like Coconut are not going to work with some of the traditional payment processors of 20 years ago – I won’t name names. They want to spin out a product in a week. They want to control this limit and that limit. That gives us huge insight into how we need to have our game at the top to meet demand, and meet the very high expectations of guys like Coconut and Tide and Revolut – and their own customer as well. You need to be transparent, and sharp, and really responsive.”