How open banking will boost SME FinTech adoption
One reason to expect rapid growth in FinTech adoption by SMEs is their readiness to share data. Seventy percent of SME adopters are willing to selectively and securely share their banking data with other financial services companies, if doing so would help them get access to a better deal. By comparison, just 46% of consumer adopters are prepared to share data under such circumstances.
This readiness among SMEs to share data creates significant opportunities for FinTechs to develop products built around open APIs. Open APIs are at the heart of the open banking phenomenon taking hold in markets around the world.
In the UK, which ushered in an open banking regime in 2018, 94% of SME FinTech adopters are prepared to share data with other financial services companies, and 63% are ready to share with non-financial companies, if it means getting access to a better deal. This indicates that the efficiencies generated by open banking in the SME sector are significant, and that the products and services powered by open APIs bring real value to SMEs in the UK.
Many FinTechs in the UK use open banking and open data to serve their SME customers in a personalized and timely manner, helping them understand, run and grow their businesses. FinTechs that provide financial management services can use open-banking data to deliver rich insights into an SME’s cash flow and financial health.
Many SMEs are already accustomed to digitally sharing data by, for example, uploading their financial information to a cloud-based accounting provider. With the spread of open APIs, providers can more efficiently offer a range of services to SMEs, such as overdraft protection, bookkeeping, expense management, factoring and supply chain management.
Open APIs are spurring the development of new financial management tools. For example, a FinTech might provide a SME with the ability to dynamically and automatically hedge foreign-exchange risk on a transaction right at the point-of-sale.
Open APIs may make it significantly easier for SMEs to obtain credit, the fuel they need for growth. Securing a loan is often a slow and cumbersome process for small businesses. With access to open data, lenders — whether they are established banks or FinTech challengers — can quickly make informed underwriting decisions, in some cases, reducing the “time-to-yes” and the “time-to-cash” on an SME loan to just a matter of minutes. In the UK, we’re seeing various product marketplaces as well as standalone propositions that use open banking to “turbocharge” their onboarding and underwriting processes. This is to enable faster and better access to credit for SMEs.
Functionality matters more than price
Unlike consumers, who often pick a FinTech based on attractive rates or fees, SMEs are more concerned with features and functionality. Asked to name the top three reasons why they would pick a FinTech challenger over an incumbent financial institution, globally 66% said range of functionality and features, 55% said round-the-clock availability of service, and 54% said ease in setting up, configuring and using the service. By contrast, 39% identified rates and fees as among the most important factors. The top three global drivers for SMEs adopting FinTech solutions are the same in the UK market as well.
This emphasis on quality of propositions by SME adopters has helped fuel a surge in monoline FinTechs, i.e., providers that are focused on doing one thing very well, such as payments or loans. These firms can help SMEs address areas that are often pain points — including financing, billing, payroll and accounting — freeing up business owners to focus more of their time on being innovative and entrepreneurial.
Even as this unbundling of financial services is occurring, other providers are trying to re-bundle services, by creating super apps, platforms and ecosystems that offer a selection of products all in one place — although so far this phenomenon is more prevalent in the consumer market than it is in the SME space.
SME adopters of FinTech tend to be “technology-first” organizations. They favor technological solutions to business issues, such as dealing with new regulations or establishing a new sales channel. They also rely on a community of advisors when making a major business decision, including adopting a new technology. In the UK, for example, when SME adopters are deciding whether to use a new service, 53% consult their professional network and industry contracts, 49% seek advice from business advisors and 31% get recommendations from current suppliers.
This reliance on a network of advisors points to potential marketing channels that incumbents and FinTech challengers alike can tap into to reach a wider base of SME clients — opening up new ways to provide innovative financial solutions to a large, diverse and still largely underserved market.