The rise of open banking has seen a proliferation of FinTech companies offering all kinds of financial services.
The digital banks, for example, raised the bar in terms of offering a slick digital experience. Monzo was a beautiful prototype for what the traditional banks needed to put in place, such as sending a notification when something comes out of your account. Every bank in the country has now replicated that.
The FinTech industry is littered with people who are dismissive of the role a financial institution plays as well as how hard it is to run a regulated business. Banks may not have innovated as quickly as some startups, but that is because they spend so much money and time on being regulated.
On the other side of the fence, in recent years open banking may have been viewed as either an opportunity or a threat, depending on whether you’re a forward-thinking banker or a slightly more conservative one. You can understand the hesitancy in some quarters: while deregulation has been great for new services, the fact is that 93% of us stay with the bank that we first opened our account with.
However banks should not be taking their customers for granted. SMEs, for example, are typically time-poor and stand to gain a great deal from innovation in financial services, if their needs are put first.
Alongside a reduction in time spent on admin – thanks to automation in areas such as matching and reconciliation – the opportunity is there to go beyond banking and help people to run their business in other ways: for example, by offering invoicing, accounting, cash forecasting as well as balance and payments in one mobile app.
Then there is the problem which kills 50,000 SMEs a year – late payments – which can be reduced through technology such as request to pay and automated collections.
So who is best-placed to provide this modern experience: the FinTechs or the banks?
There may be examples where a bank can provide everything a customer needs; likewise I’m sure FinTechs can adequately service some SMEs in some areas. However, I believe both are beginning to recognise that partnership collaboration is the best way forward: the agility and flexibility brought by the partner coupled with the client base, marketing power, brand and regulatory environment offered by the banks.
It’s a symbiotic relationship: building a client base from scratch as a FinTech requires massively deep pockets, while the banks have got millions of customers, a captive audience. Banks are also now realising that they can no longer simply offer products to businesses, as SMEs increasingly expect the services outlined above to be embedded within their daily workflows.
We also need a sense of purpose and ethics to come into our industry. We talk a lot about financial inclusion, and rightly so; but we don’t talk enough about financial ethics. It should not all be about making money, it should be about making things better.
Everything a FinTech does is seen as good, while everything the banks do is viewed as bad. If this were Star Wars, banks would be the evil Empire and FinTechs the honourable rebels; but there are plenty of examples of FinTechs pushing more debts on to consumers and small businesses.
Look at the backlash against ‘buy now pay later’: you can’t tell me this is any different to a payday loan with another banner. Klarna and Stripe have now got into bed together to offer BNPL to small businesses. When are the regulators, our protectors, going to realise that there is a risk people are taking out loans that they don’t need and can’t service?
Incoming open finance regulation will also soon see financial services offered by companies with no history in the space. Indeed, many people believe that the main threat to banks will come from Big Tech firms such as Google, Amazon and Facebook.
I genuinely hope that people are waking up and realising that these platforms are actually doing far more harm than good. If you think they have their users’ interests at heart, consider how they have evaded media regulation by hiding behind the fact that they are platforms rather than content publishers.
I’m sure Big Tech would like to claim that it holds your credit card information to enable more efficient payments at checkout, but how can you be sure that information isn’t being sold on or distributed in some other way? Banks have made some mistakes – look at PPI – but they are so heavily regulated that they will only hold data on you when it is absolutely necessary.
My prediction is that in the next two to five years, there will be a correction in the finance industry. The companies with meaningful business models which solve real-world problems and look after their clients will survive, while there will be a lot of casualties in the FinTech space.
I believe a mix of innovative services provided between forward-thinking FinTechs and trusted financial institutions could prevail. Ultimately, the market will decide.