As Real Business explored in our recent look at challenger banks, the way in which business owners conducted their financial activities has been held back from a lacking banking innovation. And despite innovative payments, fundraising and accounting platforms emerging, Nesta is leading the charge to encourage the creation of services that deliver augmented, and hopefully better, banking services for customers.
To find out more we caught up with Chris Gorst, challenge prize lead at Nesta. He explained the origins of the £5m prize, but began by summing up the market context and new regulations that are driving change.
(1) Please summarise the upcoming UK and EU legislation changes as simply as possible
“Open banking” in the UK is being driven by two distinct but related regulatory agendas. The first is the CMA’s package of reforms to UK retail banking, of which open banking is a key part. The second element is the EU-wide 2nd Payment Services Directive (PSD2). Both explicitly aim to stimulate greater competition and innovation. The CMA’s reforms are designed to be consistent with PSD2, but its scope is different.
At the heart of both agendas is enabling banking customers to share their data securely with third parties, and allowing third parties to access customers’ accounts directly to initiate payments.
The focus of the CMA reforms is current accounts (both personal and small business) and the nine largest providers of these fall within the CMA’s scope, while PSD2’s scope extends to all payment accounts (including, for example, credit cards).
The CMA reforms go beyond PSD2 in specifying how the biggest UK retail banks are required to “open up”. Specifically, banks representing the overwhelming majority of customer accounts are required to develop a shared open API standard for data sharing and third party payment initiation. The creation of a common “industry standard” for open banking, rather than allowing multiple standards to emerge over time, is intended to be beneficial for competition and innovation.
Both the key CMA reforms and much of PSD2 come into force in January 2018. But, to complicate matters, a key part of PSD2 – the regulatory technical standards on strong customer authentication and secure communication – which will affect how PSD2 is implemented will not come into force until spring 2019 at the earliest. In practice, because the CMA reforms kick in in January 2018, the UK is likely to be the first EU country to see the impact of open banking.
(2) What does this mean for business owners?
SMEs currently face a dearth of banking innovation when compared to the personal banking market. While personal banking has benefited from many of the innovations being driven by global consumer brands, SMEs have not seen the same investment in innovative services. The Open Up Challenge will develop new banking services for SMEs that will save time, money and allow teams to focus on running the business.
Right now, for the five million small businesses in the UK, most core business banking services – the provision of current accounts, almost all loans, and other financial services – are still provided by a just a handful of large banks. This leaves small businesses little choice. Some 80 per cent of UK small businesses hold a current account with four major banks.
(3) Why has it created an opportunity for innovation in the finance space?
Barriers will be removed for startups and entrepreneurs in this space, enabling them to understand the SME customer better and provide solutions that are accessible to the audience.
(4) What is the Open Up Challenge all about?
The Open Up Challenge is a £5m prize fund to reward next-generation services, apps and tools that create game-changing value for UK small businesses. We’re looking for 20 winning entries from teams anywhere in the world to transform how UK’s five million small businesses discover, access and use business critical financial products, including bank accounts, loans and overdrafts.
(5) How could this foster increased trust in our financial services industry?
It will encourage transparency of products and services in the SME market so these companies will be able to access the right solution for them.
(6) What kind of banking innovation are you expecting to occur?
Ideas might include an easy-to-use service that recommends a better value loan or overdraft facility by scanning the market in real-time, based on an SME’s unique transaction history.
It could populate a loan application on the SMEs behalf and switch for them, seamlessly. Based on the SME’s financial behaviour, it may recommend using an invoice financing provider rather than using a credit card each month.
It may integrate with the SME’s accounting software to do the accounts or complete the tax return or even stay abreast of tax liability.
It may even use machine learning and Artificial Intelligence to warn about a big shock like rising energy prices that might affect the costs of the SME’s supply chain and help get the protections need.
If you’re interested in getting involved with Nesta’s Open Up Challenge, and possibly secure a share of the £5m prize fund equity free with your banking innovation, sign up now.