Small business banking in the United Kingdom is about to undergo a radical shake-up, driven in part by pressure from the competition regulator.
In August last year, the Competitions and Markets Authority (CMA)-announced a package of measures aimed at forcing banks to work harder for their customers. High on the list of reforms was a requirement for banks to adopt “open banking standards.”
In practice this will mean that customer bank account information can be shared under a set of common standards, allowing third parties to offer data-driven services. Effectively, this make it much easier for financial technology companies to provide bank customers with innovative tools to help them manage their accounts, spending and investment. And as the markets regulator made clear in its report, small businesses in particular, stand to benefit from a move to open banking.
A Focus On SMEs
That’s assuming, of course, that the move to open banking is matched by innovation on the part of the fin tech industry. In theory at least, that shouldn’t be a problem. When faced with a big fat opportunity, the likelihood is that financial technology companies will jump at the chances to make use the rich well of data generated by bank account activity. But there is perhaps a question over the benefits to small business. Fin tech players might choose to focus their efforts on consumer services rather than SMES.
Throwing Down A Challenge
In a bid to encourage solutions that will benefit small firms, the UK’s innovation agency NESTA has stepped in to offer £5m in prize money to encourage technology teamsto develop “open banking” products that will be of direct benefit to SMEs.
Dubbed the “Open Up” Challenge, the initiative will unfold over two stages. In March this year, NESTA will invite entries (through to May) and in July a shortlisted group of twenty teams will be given £50,000 each to develop products based on their proposals. At the end of the year, 10 winners will share a £1m pot of money. Stage two begins in 2018, with a further prize of £2m open to five teams.
The “challenge” model – setting a task and providing money to help innovators come up with solutions – certainly isn’t new, but what it does do is provide technology teams with a mix of cash and focus to encourage them to work towards a goal defined by the sponsor.
But is it necessary to do this in the fin tech arena? After all, the UK and London in particular is an acknowledged center of financial innovation. Established by an Act of Parliament, NESTA is a charitable body charged with encouraging innovation through investment, and policy research. Why should the organisation deploy money to fund research that could equally well be supported by angels or VCs?
As Open Up Challenge Prize Lead, Chris Gorst explains, the initiative was set up to focus fin tech teams on the particular requirements of SMEs. “Small and medium sized businesses face problems in three areas,” he says. “Namely: time, money and capital.”
Thus, NESTA is looking for proposals that will help managers and business owners address these issues. For instance, apps or services that analyse account activity and apply predictive algorithms to help business owners see possible cash flow pain points well in advance and take action accordingly. Equally, the product might help SMEs to identify and access sources of finance more easily, using bank account data to match the business with appropriate lenders or investors.
Equally important, Gorst believes the prize will put SME requirements on the radar screens of fin tech companies. “Open Up may help to push them towards an area that they might not previously have been interested in,” he says.
Gorst stresses that the challenge is open to fin tech companies from around the world and not just in the UK. Startups are welcome to apply but unlike some challenges Open Up is not exclusively focused on companies at the start of their journey. Indeed, fin tech teams with a track record may well provide the best fit with the criteria set out by NESTA.
In particular, NESTA/Open Up will be looking for proposals that offer genuine user benefits to SMEs when open banking arrives in 2018. Applicants and entrants will be assessed by a panel of judges, which will include fin tech experts and also a business owner with no direct connection with financial services.
Let’s fast forward a couple of years. Both phases have run their course and the prizewinners of the second stage are banking their money. From the point of view of an innovation agency, what does success look like?
“We would hope that when the second phase is over, the winners will have products that are ready for the market,” says Gorst. “Indeed, we envisage that the prize money might be used to market the product. We would like to see products having a real foothold in the market and delivering real benefits.”
First appeared at Forbes