As we come to the end of 2018, numerous roundups will be making its way around the internet, including ours.
This one will soon join the many that are bound to exist. However, ours will focus on one topic - small business banking.Open Banking Trustee, Imran Gulamhuseinwala OBE tells us: “We know that we have five million SMEs (small to medium-sized enterprises) that struggle with credit. We have far too many entrepreneurs that are taking a big step to set up their businesses and employ people, yet they’re spending all their time stressing about cash flow and admin when they should be running their businesses. So how can we help them?”.
If there’s one thing that the entire fintech community can agree on, it’s this - 2018 has been quite the year for new regulatory changes that will affect small businesses and the way they bank, but it hasn’t even started yet.
So, let’s take ourselves back to the first of many significant events this year that will impact fintechs and the small businesses that they serve.
It’s January 13th, 2018. PSD2 (Open Banking) launches - it’s exciting, different, a breath of much-needed fresh air in the banking sector. You were in one of two teams: people who were thrilled to get and give access to the bank’s APIs, or those who were slowly coming around to the idea, but were most definitely not thrilled about it.
In the middle of the year, GDPR emails flooded our inboxes, and Facebook was making so many enemies it was hard to keep up. Quick note - don’t sell people’s personal data to corrupt political campaigns, and then maybe they won’t get so angry.
Towards the end of the year, it felt as though the drama had died down. Banks started to understand the importance of their small business clients, and investors started to give out serious funding to SME focused fintechs.
So, with that being said and without further ado, here’s our (and others in the sector's) predictions for the state of small business banking in 2019.
2018: Small businesses find it difficult to access finance.
2019: Banks are starting to wake up and want to give small businesses a better banking experience.
If the countless dedicated panels, events and webinars in 2018 didn’t tip you off, then it's worth repeating, in 2019 small businesses will start to get the love and attention they deserve.
Small businesses are underserved on a national and international level, and the statistics show it. The small business sector continues to contribute a lot to the UK economy, (the combined annual turnover of UK small businesses are £1.9 trillion) and yet they continue to receive little funding. SME Magazine estimates that there is a £59bn funding gap for UK small businesses.
Banks are waking up to this reality. We can see that small businesses will get a better banking experience, just don’t expect it to happen overnight.
Banks have the capital and the in-house experience to help fund small businesses. What holds them back is their legacy infrastructure, a model that is not fit for small business banking in 2019. They know that there are many inefficiencies with their current models and that they can address this in two ways: build a better in-house system or partner with fintech platforms that are already addressing this issue.
Which takes us to our second point.
2018: The small business marketplace and platform era has only just begun.
2019: Banks will still be relevant for the foreseeable future if they change their strategy.
According to McKinsey, only 85% of a bank’s revenue comes from 25% of their customers. The remaining 75% is left untapped due to a lack of data and intelligence applied to it.
So, where are the other 75% turning to for banking products?
Over the past year, fintechs have increased their small business banking offering. Small businesses now have more choice - marketplaces to compare financing (e.g. Funding Options), alternative banking solutions (e.g. Revolut or Monzo), and platforms that can aggregate all of their data and give them insights on their cash flow. We should not forget the tech giants, Amazon and Paypal, who have decades of data on their customers both have released plans for their version of a small business banking solution.
So, how have banks been responding to this?
Banks can see that the thriving fintech industry is onto something.
As a result, many partnerships between fintechs and banks have formed to help update and modernise legacy banking models, and provide a better banking experience for their small business clients.
Conrad Ford, CEO and Founder of Funding Options, believes that although partnerships will increase, there is a high potential for the number of digital spin-offs to increase, too.
Conrad tells us: “The number of partnerships between banks and other platforms is likely to increase over the next year. But I believe that in 2019 traditional lenders will also move away from fintech accelerators and incubators, and start their own standalone digital challengers. Especially within the SME segment, we’ll start to see even more digital spin-offs like RBS’s ESME lending vehicle. This is a great example of competition working in practice. It's showing how new, innovative entrants to the market can spur traditional incumbents to up their game. After all, imitation is the sincerest form of flattery.”
Expect both the number of partnerships between fintechs and banks and the number of digital spin-offs to rise exponentially over the next 12 months.
2018: Important regulatory changes were enforced.
2019: These regulatory frameworks will continue to evolve and change the way small businesses bank.
Landmark regulations passed this year that will forever change the way small businesses bank, in particular, PSD2 and GDPR.
Countries all over the world are now taking cues from the UK on Open Banking since PSD2 was enforced across Europe earlier this year. Banks were required to open up their APIs to technology companies who wanted permission-based access to banking data, which they couldn’t have acquired otherwise.
Imran Gulamhuseinwala OBE, tells us: “I’ve travelled across many countries to talk about our Standards – Canada, Australia, Hong Kong, Singapore to name but a few – and one thing we are all crystal clear on is the importance of ownership of data. We are way past data belonging to a financial institution – it belongs to the customer. Data is valuable – and it’s time for customers to reap the benefits from this, with confidence. It’s early stages for data portability – but we expect to see the debate, and indeed the delivery, of data portability to increase exponentially”.
This has opened up the playing field for fintechs who are creating innovative banking solutions for small businesses. As we approach the one year anniversary of PSD2, we can already see the positive impact that this will have on small business banking choices in 2019.
Furthermore, GDPR forced every business, especially data-driven tech companies, to rethink the way they collect and store customer data. This became the catalyst for thousands of discussions around the ethics and standards that data companies should be held accountable for, should something happen to the customer data that they hold.
In 2019, we will see securitisation regulation come into place which could contribute to a better supply of credit to the small business sector. According to Deloitte, it is estimated that up to €150 billion in additional funding could be mobilised for the European economy.
Although it seems natural to be scared of regulation, the past year has proven that regulation should be seen as a force for good and that it can be a driver for innovation and a better product offering for small businesses.
2018: The discussion around open data has begun.
2019: The way we all handle data has drastically changed, and will continue to do so.
The Economist said in 2017: “The world’s most valuable resource is no longer oil, but data” - a statement that could not be more fitting for the past year.
Many tech platforms use data that are provided to them to fund their business through advertising, allowing users the option of benefiting from the platform for free. However, with the many data breaches, and the unethical use of user data in 2018, small businesses have become wary of who is allowed access to their data.
With the new regulations in place, and the standards fintechs will be held up against, it looks like a promising year for ethical data handling. However, it should not come as a surprise if news breaks that there are more companies mishandling customer data in an unethical way.
2018: The debate on the ethical use of AI continued.
2019: AI will become more mainstream and transform the way small businesses bank.
This year, there was a lot of hype around AI. Events such as Cog X in London, ICML in Sweden and NeurIps over in Canada, continued to gain considerable traction from the fintech community eager to learn more about the technology that can help them improve their product offering.
The ethics of AI has dominated the majority of these discussions. Name any scenario, and you can find many articles and events dedicated to improving the output with AI. Similarly, there are many who believe that we are actively creating our own destroyer.
Karina Vold, AI Research Associate at the University of Cambridge tells us: "Most of the ethical conversations about AI in 2018 were focused on autonomous systems - systems that solve tasks on their own, with little or no human interaction or involvement. In 2019 we will need to pay more attention to how non-autonomous systems could impact humanity and be built to improve human cognitive capacities. These include things like language translators, recommender systems, grammar and communication systems, navigational systems, and other 'assistive devices' which aim to influence our desires, decisions, and actions. All of these depend on interaction and feedback from humans. However, while some support the user's interests and goals, some will be manipulative instead of supporting the interests and goals of the system's designer, which in many cases are larger corporations. Hence, the issues of targeting, personalisation, and manipulation by algorithms will be a focus of ethical discussion for 2019”.
In 2019, AI will become much more mainstream, thanks to the accessibility of smartphones and virtual home assistants. Both encourage consumers to use the AI functionality (Siri, Alexa) on a regular basis, and already we can see that AI will have a long-lasting impact on our everyday life, and will continue to do so.
Fintechs and banks are thinking about how AI can be integrated with their offering, and small businesses are in for an influx of products that can help them better understand their business finances and predict the need for funding in a timely and fast way.
With all of that being said, there’s something, almost ritual, about this time of year that forces every human and business to reflect on the successes and failures of the past twelve months and to make a calculated guess as to what’s to come ahead. It’s safe to say that all of the aforementioned events affect a significant amount of people, how they run their businesses and in turn, the economy.