Most new challengers are attacking retail, but a few ingenious startups are moving into the more fragmented and poorly served small business market. It is here that concepts of open banking and banking as a platform may first become real.
In February, the UK’s financial services regulator, the Financial Conduct Authority, finally delivered to the Treasury committee of the House of Commons the full report written by Promontory Financial Group.
The report dealt with RBS’s mistreatment of the many small and medium-size enterprises that had had the misfortune to fall into the hands of its Global Restructuring Group (GRG) in the recession that followed the 2008 financial crisis.
Nicky Morgan, chair of the UK parliament’s Treasury committee, had announced at the start of the month a new inquiry looking at the lessons to be learned from RBS’s GRG and more broadly at the state of the market for SME finance.
According to Morgan: “The case of GRG has undermined the trust of small firms in banks and highlighted the imbalanced and potentially exploitative relationship between banks and SMEs.”
The Treasury committee’s inquiry will consider the extent of competition in the market, as well as access to other sources of funding aside from bank credit available to small businesses, including crowdfunding and peer-to-peer lending.
Around the country a million entrepreneurs roll their eyes: ‘Another report? Yes, that’s bound to make all the difference.’
Any student of the banking industry could probably write its key findings now. Small businesses, which account for more than 99% of private businesses in the UK and in aggregate contribute more than half of turnover and employment, are particularly poorly served by big banks.
The big five high street lenders are built for serving either retail customers or medium-size and larger companies with collateral to back three-year and longer term loans that the banks like to hawk to companies that do not really need them as a way to sell associated risk management.
Small businesses want short-term, flexible working capital with no punishing fees for low usage or early repayment. This is expensive for banks to underwrite – especially for new startups and sole traders lacking several years’ worth of financial history – and to administer. Few small businesses want the interest-rate hedging and FX facilities that banks like to bundle up with term loans for medium-size and larger corporate customers.
Many small businesses are discouraged even from applying for bank credit. Sole traders and small company founders often combine personal and business finance, raising start-up capital by re-mortgaging their homes and sometimes paying business expenses – even payroll – off a personal credit card. It is, in banking jargon, all quite sub-optimal.
The report’s authors may find a little good news, however. The market is at last now producing non-bank competitors looking to provide the right kinds of services and products for small businesses – ones that give these challengers a shot at the £2 billion of annual revenue the British Bankers Association suggests SMEs now pay for financial services.
George Bevis is a former banker who started at Capital One and dealt with small businesses in roles such as product director at Zopa, business strategy director at Barclaycard and head of innovation at RBS, before founding Tide. Tide is a digital business bank that launched last year and focuses for now on smaller companies with 10 employees or fewer, providing easy account opening for simple payments services.
Tide describes its core product as a super-charged current account. A lot of business founders do not want term loans. They do want to send and receive payments, however, and to manage expenses, invoices and bookkeeping. George Bevis, founder of Tide
“Tide is about the people who run SMEs and who often lose huge amounts of valuable time doing crappy repetitive admin,” Bevis tells Euromoney. “Tide is essentially a software business that aims deeply to understand SMEs and then to automate a lot of that admin, especially as it relates to current accounts.”
Bevis claims that by focusing on a particularly poorly served and numerous segment – very small businesses – Tide has been able to gather market share quickly, gaining one in 12 of all new business current accounts opened in the UK just 10 months after launch.
“We think we are the fastest growing new B2B fintech in the UK ever,” Bevis claims, leaving Euromoney to figure out just how many B2B fintechs there are at a time when most new challenger banks and fintechs are targeting consumers doing basic retail banking, remittances, foreign exchange transfers, crowd investing or wealth management.
Early momentum has come from entrepreneurs sharing their experiences.
“Half of our customer acquisition is through word of mouth,” says Bevis. Key offerings, aside from speedy account opening – take a picture of your photo ID, confirm a few details, send a selfie that Tide matches against the photo ID and you are done with an account in minutes, with a MasterCard to follow – include the ability to send and pay invoices on the go.
“That was a bit of a lightning bolt moment that came during a debate with one of our early backers about whether a business customer really can do everything on a mobile,” says Bevis. “We conceived a process for customers to upload an invoice into Tide, which reads the invoice and prepares a payment, as well as more obvious services such as paying invoices and recognizing and categorizing different expenses for accounting purposes.”
Tide is not actually a bank. Customer deposits are kept in a segregated account at Barclays under an FCA-regulated e-money licence by PrePay Solutions (PPS), a leading European prepaid services company that services more than 50 blue-chip organizations including PayPal, EE and Virgin Money.
Holding member funds under an e-money licence means that PPS is not allowed to take investment risks with customer deposits.
“The e-money licence is a fantastic innovation which allows you to offer many of the services of a bank without being a fully fledged bank,” says Bevis.
If I was at a property company, I would never let a £50 million building yield zero. Why should I with an asset that happened to be cash?
Felicia Meyerowitz Singh, Akoni Hub
Tide applied for and recently received its own e-money licence. It is also already licensed as a credit broker. The company earns revenue by charging 20 pence per bank transfer and £1 for using a card at an ATM. There are no other monthly or annual account fees or transaction charges.
While the business is still in the very early stages of its roll out, Tide is hugely ambitious. It declares an aim of having 50 million small business customers globally by 2026. That is an enormous number for a startup in an economy of 5.4 million SMEs. To even come close, Tide, which counts business customers today in the tens of thousands, will need to expand geographically, enlarge its product offering and deal with bigger companies.
It has plans to do each of those.
“We will be in several European countries before the end of this year, and in 2019 we may go into another continent, either Asia or North America,” says Bevis. “The core product we have built meets needs that are quite similar in many countries – needs that banks are not focused on to the same extent they are on those of retail customers or large businesses.
“We will take a pragmatic view over which products and services we can create and provide ourselves and which it makes more sense to provide through partners.”
Credit is one example. Tide does not allow overdrafts. Instead it tied up last year with iwoca, a specialist online provider of working capital facilities to small companies, to allow its customers to apply through the Tide app for up to £15,000 in working capital, potentially available within minutes, or by submitting to a longer credit appraisal for up to £150,000. It has been rolling this out to its customers as Tide Credit.
Other destinations on the product roadmap include allowing multiple users to have cards on the same business bank account.
“When we first started, our customers were roughly 30% sole traders, 70% registered businesses. Today it is more like 80% registered businesses,” says Bevis.
Still to come are an FX offering – due to be delivered soon through another partner – international accounts, Sepa (Single Euro Payment Area) payments, bulk payments and Swift payments, even, eventually, a fully fledged banking platform.
This is the BBVA model of banking-as-a-platform service being rolled out by a new challenger rather than an incumbent.
“I used to be one of those employees at a big bank looking to innovate for business customers. I know how hard it is for a bank to build the services of a software provider,” Bevis says.
“We’re moving beyond core current account services,” he continues. “In fact, we’re already close to doing most of the things a regular bank does. We’re looking at payroll, for example, as one of those administrative burdens we could automate for small companies. We see ourselves eventually as a provider of most universal banking services.
“I’d certainly expect us to be servicing FTSE500-size companies before long. But we’ll also do things your bank has never even thought of. We’re looking at AI to automate any number of processes. I feel that our technology is like a Ferrari launched in the era of the horse and cart for small business banking. We have to tell customers it’s a better horse, just to get them to try it. Once they do, they’ll soon see what we can really provide.”
Felicia Meyerowitz Singh, Akoni Hub Felicia Meyerowitz Singh, founder and chief executive of Akoni Hub, a fintech company that helps SMEs improve returns on their spare cash, has been doing a lot of thinking about the impact of open banking to improve the delivery of financial services to the neglected small business market.
Her thesis is that for years banks have sat on the hugely valuable asset of customers’ transactional and financial data, unwilling to share it with other service providers or to use it to enrich their customers’ experience.
With open banking, this power will eventually be wrestled from the big incumbents. Data will be available to third parties, SMEs and new digital players through open APIs (application programmable interfaces) – as long as customers consent to it being shared – and these challengers may start to deliver financial products that remove the hassle for enterprises of managing their finances, as well as saving them time and money.
Singh felt the sore end of this as the financial director of a Lloyds Insurance broker and underwriting agency that periodically held large volumes of cash, up to £50 million at times.
Singh lacked the resources to track the money markets and programmatically split the cash into instant access and deposit amounts at different banks to optimize returns over various short-dated maturities and bank rating grades. She ended up just depositing the cash with two high street banks that had little incentive to offer advice on how to improve returns on it, presumably (although Singh herself does not say this) because they were treating it as a free good.
“The relationship managers would simply say: ‘These are our rates,’” she recalls.
And how did those rates look?
“They were terrible. But we weren’t big enough to qualify for a global treasury solution,” Singh tells Euromoney. “I recall one RM suggesting I should walk into the local branch and enquire there about rates for our own and our clients’ money.”
In the end, Singh had her team split cash holdings into one third at one high street bank, one third at another and the last third split between various other banks, on which her team first had to build ratings profiles. She still lacked the resources to constantly monitor changing money market rates at different maturities matched against business cash-flow, while also keeping track of ratings fundamentals at large numbers of banks.
“I spoke to my peers, the CFOs and treasurers at other firms in the Lloyds market and they were all in the same boat. I wanted a treasury management system-lite: one I could go into and simply execute deposits as our cash levels and market rates changed. But the systems were too complex. I had a £50 million asset that essentially yielded zero. It was nonsensical.
“If I was at a property company, I would never let a £50 million building yield zero. Why should I with an asset that happened to be cash? My thought was: ‘There has to be a simple way to do this better.’”
Akoni Hub, like Tide, sees the difficulty SMEs face in accessing the fairly simple financial services they actually need aside from lending, which for now can often take weeks and endless form filling – much of it repeatedly inputting the same data to different providers – to obtain.
It has built a so-called deposit dashboard, which allows businesses to compare the instant access accounts and deposit rates on offer from the more than 80 banks in the UK seeking business’s short-term cash. It overlays Fitch’s implied ratings on these banks.
Open banking comes into play when SME companies give permission for Akoni Hub to see their cashflow data, which in many cases is delivered manually. This allows Akoni to send prompts to shift money that the company may not need to access for a set time into a higher-yielding term deposit of a bank that fits its ratings criteria.
“Our current permissions relate entirely to cash products, which are non-advised,” says Singh. Akoni is FCA regulated and licensed, but it is not a bank. Rather it has partnerships with a panel of banks, including Barclays, Aldermore and Metro, that handle the cash.
If banks don’t want to charge customers for holding their cash, then they might want to help them move it into longer than 30-day maturities Yann Gindre, Akoni Hub
Becoming a customer of Akoni allows businesses to transfer funds to an Akoni Hub account with Barclays, which works like a trust account. Small businesses can then use their own dashboard to ask Akoni to instruct panel banks to execute selected deposits. This takes just a few clicks and requires no paperwork. Companies can see their entire cash balances and what they are earning on them, including money not managed through Akoni Hub if they permission this.
The dashboard shows when a company’s instructions to shift cash into a deposit have been received by a panel bank, when they are being processed and when the deposit has been made.
“This is the benefit for small businesses,” says Singh. “It takes out the endless hassle of repeat data provision, gets customers access to the products they need and allows them to manage and decrease their risk while at the same time boosting the bottom line on their cash.”
Like most fintech companies, Akoni Hub has sought to make its mark with one eye-catching product, while developing plans to crunch vast amounts of data derived from multiple sources in an open banking world and use machine learning and AI to expand into additional financial services.
“We are looking at adding money market funds for larger customers, as well as other financial products,” says Singh. “As those funds are an advised asset class, we would need to vary our permissions or partner with a third party that already has those permissions.”
Akoni Hub looks to Euromoney like a product that incumbent banks may want to white label – several are already considering this – as the competition to provide easy access to basic services for small companies now awakens.
It may look like banks would be encouraging a competitive marketplace, which might hurt their own net interest margins, but most bankers Euromoney speaks to claim to be champions of free-market competition.
There is another angle for banks to consider. Akoni Hub’s co-founder and deputy chairman is Yann Gindre, a former debt capital markets banker and veteran of stints at JPMorgan, UBS and Barclays, who for a time headed global markets at Commerzbank and more recently chaired Natixis Alternative Investments.
He knows the banking industry inside out.
Yann Gindre, Akoni Hub “I would suggest that the liquidity coverage ratio under Basel III raises questions about the continuation of certain banking business models,” he says. “Regulators now require banks to hold high-quality liquid assets [HQLA] as a proportion of any deposits shorter than 30 days’ maturity to protect against a run on the banks. For that reason, if banks don’t want to charge customers for holding their cash, then they might want to help them move it into longer than 30-day maturities.
“We see considerable upside for banks with Akoni Hub, first as a useful tool they might offer their own clients – one that costs relationship managers little time to run – and second as one which may benefit the banks by encouraging customers into longer-dated deposits.”
Gindre adds: “It could soon offer a daily automated money market sweep so that short-term cash doesn’t sit on the banks’ balance sheets incurring HQLA charges. At scale, this could free up capital for banks to support lending.”
One of the important lessons for banks from the emergence of companies like Akoni is that they must find better ways to use the vast abundance of client data they hold to help their customers or others will do it for them.
One side benefit of its business model is that Akoni can benchmark a company’s management of its cash against peers of similar size in the same geographic region and industry sector.
“If you’re a widget maker in the northeast and we can see that your average debtor days are 65 while your peer average is 25 days, then that’s an important insight that with better invoice management you might free up some cash now tied up in unpaid accounts receivable and earn a return on it instead,” says Singh.
It is easy to see in principle how Akoni might use the same approach to open banking and client data to offer market monitoring and execution services similar to the one it now offers for cash and deposits. These could be in working capital, foreign exchange for small businesses that start exporting, trade finance and insurance.
Akoni does not need to compete with banks to provide those underlying commodity products and services. In fact, it will likely only have much impact if it is delivered through the banks.
As Euromoney surveys the new offerings in banking services to small companies for clues to the future of business banking, it is striking how fragmented the market is becoming.
There are more providers, more products and services. Big banks are unbundling services they once packaged together, exiting certain lines of business and specializing more.
New challengers are emerging that may have a long-term vision to offer a one-stop shop for an array of products but that for now are striving to make their mark with only one. The right product or service might be out there for a business, but how do you even find the potential providers and compare them? Shachar Bialick, Curve
“The world of money is becoming even more disconnected,” agrees Shachar Bialick, founder and chief executive of Curve, a new platform that seeks to provide a way for individuals and businesses to manage multiple cards and accounts.
It provides customers with an app into which they can load their various credit cards and then allocate payments between them at a touch of their smartphone screen. It also provides a single plastic MasterCard that customers can use at home and abroad, and which undercuts banks that like to gouge customers on the FX rate by exchanging money at the wholesale market rate plus 1%, instead of the more normal plus 5% margin or more.
Bialick tells Euromoney: “Because there are multiple use cases for money, people and businesses tend to have numerous financial services, accounts and cards. As new regulations force banks to unbundle, this fragmentation only accelerates, with new challengers emerging. The problem is that customers are not aware of all the new entrants that can help them save or have better services, let alone compare or on-board them on their headspace.
“People now have so many bank cards, credit cards, loyalty cards, accounts, savings products that it’s all getting harder to stay on top of, or to sign to new services. Thus, a fragmented marketplace leads customers to leave a lot of value on the table.”
That is why Curve came up with the idea of one card to rule them all. Its best wrinkle, however, is one that messes with time itself. “Curve allows you to change the card/account that you spent money from, after you made the transaction. We call it ‘Go back in time’,” says Bialick.
“With this functionality, Curve is now developing a service, whereby we identify that you made a big-ticket item on a credit card using an overdraft, the interest you would otherwise pay using this product / overdraft, and recommend the user to move this transaction to a cheaper instrument, using the Go Back In Time functionality: for example, the ability to split the charge to 10 instalments with a significantly lower APR rate, provided by one of our partners.”
The firm jokes that its card comes with a flux capacitor. Older Euromoney readers may recall that is what powered Doc Brown’s time-travelling DeLorean in the film ‘Back to the future’.
“All fintech firms are obsessed with crunching data to generate customer insights,” says Bialick. “What we care about are first principles. Providing data, or insights are not enough. An action should follow. With Curve, we provide actionable insights where we can tell clients: ‘If you do this, it will save you money’, and all the client is left to do is tap yes or no.”
Curve’s initial product tries to help people get on top of the four basic things they do with their money and which can feel like a full-time job. They want to see where it is, send it to other people, spend it and even save it.
Like all emerging fintech companies, Curve will have its roadmap of products and services to roll out in future. Intriguingly, Bialick offers a very clear point of view on where the banking market is likely to go in the next 10 years.
Right now it is fragmenting. At some point disintermediation will peak and then consolidation and aggregation will resume before, possibly, we see category kings.
“If we want to become the operating system for money, like Spotify is for music, Netflix is for TV, or booking.com is for travel, we need to take a view on the whole industry,” says Bialick.
“The starting place is that banks are the focal point for money right now, and they do a good job parking our money securely. I put my salary into the bank every month, and that’s the basis of trusted relationships that led banks to offer proprietary products such as credit cards, loans, foreign exchange, savings, pensions, etc. But actually, in today’s world, the only thing that only a bank can do is take deposits. Almost everything else, thanks to new regulations, non-banks can also do.”
He continues: “Whether they know about it or not, customers are now connected through multiple banks and multiple networks, such as Visa and MasterCard, and interbank networks like ACH [automated clearing houses] or Faster Payments, and, for many users, new additional layers such as mobile wallets and cloud solutions like PayPal and Skrill.”
So what does Bialick see as the end game?
“We believe that there will be one more new layer, an aggregation layer that will connect the entire stack offering into one place – an operating system for money at the top of all this, which will solve the fragmented world of money by providing one personalised point of access to ‘everything money’, allowing customers to access and discover financial services, just as they do with music on Spotify, accessing and discovering their favourite music.”
In this vision the underlying services, such as payments, are mere commodities. Fintech challengers, which have great technology but no customers and a high cost of customer acquisition and thus weak stores of risk data, bypass this problem by becoming a point of access to other people’s services.
“The banks used to say: ‘Give us your checking account and we’ll upsell you other proprietary products that make us money’. In the future, the successful challengers will be the marketplace in which customers access the best-available products for them,”says Bialick.
Tide, with its grandiose sounding aim to have 50 million business customers 10 years from now, also shares the same ambition to be a new kind of banking category king: one that is not really a bank at all.
“To be an operating system for money, we ought to be agnostic of where customers’ money is or who conducts their payments, as well as which operating system they use,” says Bialick.
“The competition won’t be BBVA or Bank of America, not unless they fundamentally change their DNA and stop being banks. It won’t even be the new challengers, as they are still following the models of traditional banks. It may well be Apple Pay, PayPal, or WeChat, which have the required DNA to build an aggregation layer. However, with these players, they are restricted by the infrastructure and the significant behavioural change required to use their products.”
Banking’s next category kings may take the view that the higher up the financial stack they go, above products like deposits, credit and savings, above payments networks, and the more front-of-mind they are for customers as their operating system for money, the less regulated they are likely to be.
Written by Peter Lee for EuroMoney, 6th March 2018.
Full article: https://www.euromoney.com/article/b1769mlczvrdcr/why-sme-banking-may-spawn-the-industrys-next-big-winners?copyrightInfo=true