The fintech Swiss Army knife approach to Open Banking? | Analysis of the deal

By David Beach | 1 February 2018

Colin Goldstein, Head of Strategic Partnerships at iwoca and Alan Walsh, Head of Network & Partnerships at Bud, sit down with bobsguide to talk PSD2, collaboration and why banks should be scared of the tech giants.

What is your role in the world of financial services?

iwoca: We’re on a mission to help small businesses access finance seamlessly and quickly. We’re focused on small businesses because, quite simply, they’re the backbone of the economy. Ever since the credit crunch, they’ve struggled to gain access to fair and fast finance and that’s due, in part, to traditional lending processes and risk appetites.

iwoca has used data and technology to solve the problem. We’ve built a proprietary platform that automates large parts of the process of gathering the data needed to make a credit decision and manage the customer journey. We use technology to make it as easy as possible for businesses to provide their data. More generally, our USPs are the speed with which we can give a small business access to funds, the speed and simplicity of our application process, and our ability to understand the performance of small businesses to make credit decisions fairly.

To realise our mission for fair access to finance for small businesses we’ve collaborated with banks, accountancy software and ecommerce platforms and now the Bud platform.

Bud: Bud is a financial marketplace and the first regulated open banking platform. We’ve built a core technology stack that delivers aggregation, intelligence and a marketplace of third party products. The marketplace aspect is where we connect users with relevant solutions such as iwoca.

We licence this technology to banks both in retail & business banking.

Do you think that PSD2 offers fintechs an opportunity to gang up as a Swiss Army knife against incumbent banks?

Bud: We don’t see it as an opportunity to compete with banks, we see it as an opportunity to collaborate.  Our biggest partnerships are with the banks as they license our technology to distribute these partnerships we have via their banking app. 

Partnership building is one of Bud’s fortes; we have over 70 marketplace partners, built over less than 18 months. Banks struggle to move at that rate for a number of reasons mostly stemming from their relatively high regulatory and legacy tech overheads. That’s part of the reason why Bud and banks work so well together; we have the tech (having started from scratch) and we take on all the due diligence when signing partners.

Banks are huge beasts and they won’t just roll over now open banking is live, and rightly so. It will take a few years post-PSD2 for Mr and Mrs Public to understand the full potential and value open banking creates. Collaboration is the catalyst that grows the potential of these companies (banks & fintechs).

iwoca: From the iwoca perspective, you may be surprised to hear that we’re not in the camp of "us versus the big banks". I envision such a deep collaboration between iwoca and the banks that they begin to use the iwoca platform to do their own small business lending.

That’s not wishful thinking either. There are banks with hundreds of years of risk modelling and lending who are restrained by legacy systems and limited risk appetite, which means they can’t provide small businesses with fast, digital access to credit. Some will say, we’ll crack it eventually, but others will admit they’ll never crack it and want to collaborate. Those are the banks we are in discussions with.

We already provide a white labelled version of iwoca to Tide, the mobile-led digital SME banking service. We also have relationships with major retail banks, including RBS, who refer customers us whenever they are not able to serve a small business customer; ultimately, they want to help their customer get access to credit, even if they cannot provide the service themselves.

Will banks look to replicate iwoca?

A bank may very well try and ask a software developer to build a copycat system, but that development process will be fundamentally driven by the bank specifying what they want the software developer to build. The issue is that they do not have the experience to specify what’s needed in this new digital world; you need a balance of tech know-how and lending experience to build a great credit product and iwoca has been specialised in this for years; that’s why it is preferable for a bank to collaborate, rather than try to build a brand-new copycat.

I’d also add that, on the surface, some small business lenders appear to be competing with iwoca, but they don’t have that scalable backend automation and often still operate with manual underwriting behind their website; someone will print off the customer accounts and go through with a highlighter and that takes days or weeks. It’s too slow for small businesses.

What sort of advantage do fintechs clubbing together have over the incumbent banks under PSD2?

Bud: Again, I don’t think it’s a one vs the other scenario. I think collaboration is exactly what Open Banking is encouraging - whether that’s fintechs with fintechs, fintechs with banks or banks with banks and open data is that catalyst.

PSD2 (although I doubt anyone on the street will ever refer to it as that) will help users get a more relevant and personalised deal, based on smart understanding of their data (by banks, fintechs and more), the competition then becomes about understanding who your customers are and creating the most relevant products.

Collaboration ensures a wider offering of services to customers, and with fintechs collaborating they have the opportunity to grow quicker and serve more customers, as long as the strategies are aligned.

So far, there’s no one Jack of all Trades fintech, but they’re all specialists in their own right.

I would say that the closest companies who would meet the Jack of all Trades description would be the tech giants. Would it be wholly inconceivable for Amazon to take the full leap into finance?

Bud: Amazon started off first and foremost as a specialist book vendor and they did it very well, similar to iwoca’s specialist lending or Bud’s product distribution platform. We focus on what we do well but plan to layer more on top, in a similar guise as Amazon, using the data to help form that strategy.

You’d be mad not to think the tech giants weren’t a serious contender and it’s definitely a challenge for financial institutes (large and small). They have the resources, the technology and the trust of the consumer. The trust aspect comes from the consumer being comfortable with the amount of data they’re already giving to the tech giants in return for a slick and customised service.

iwoca: Absolutely. As individuals, we’re very used to logging in to different digital services using our Facebook or Google credentials, and the same level of comfort and convenience will see people logging in with their Open Banking credentials.

For iwoca, Open Banking levels the playing field in lending by giving us access to the same data banks have for making credit decisions. This data is incredibly valuable in helping us make better credit decisions. Until now, banks have had a monopoly on this data, but with Open Banking control is put firmly with the customer. Although iwoca has already done much to relieve the burden on small businesses of lengthy forms, long waiting times and bad terms when applying for finance, Open Banking can make the journey even faster and simpler for the customer.

Our partnership with Bud is really all about Open Banking. Bud will have access to this data, which means - with consent and interest - Bud can use the iwoca Lending API to display an iwoca credit decision tailored to that one customer, all within the Bud interface, without the customer having to do anything other than click to request the decision.

Let’s address the Yin to PSD2’s Yang. How prepared are fintechs, such as yourselves, for GDPR? Do you remember those initial GDPR meetings?

Bud: I remember the early conversations we had with consultancies about compliance and regulation. They hadn’t seen something like us before so struggled to help. As such and in order to get a better understanding of what was required from our unique platform, our COO took responsibility, read the entire FCA handbook and became an expert in regulation, including GDPR for our particular case. We don't hesitate in embracing regulation. This is our second time in the FCA sandbox.

Also, as a relatively young company (less than three years old), we built the technology from the ground up with GDPR in mind. That’s a lot easier than a huge bank having to adjust theirs to be compliant

iwoca: When it comes to GDPR, we’re in a slightly different position as we’re a bigger company with a Head of Compliance and discussion around GDPR have been thorough for many years. Furthermore, our CTO and Co-Founder has been on the Open Banking Advisory Board, so these terms and changes have been in our consciousness for 2 and a half years.

It’s also worth mentioning that both Bud and iwoca are finalists in the Nesta Open Up Challenge, which is a £5m prize fund for companies innovating with Open Banking to provide improve financial services to SMEs. We’re in a good situation where Open Banking is very positive for our business platform so we’re thoroughly on board with the regulation.

Let’s play out Open Banking. Where does it leave the incumbent banks in the long run?

Bud: The way I see it from the banks’ perspective is that there is a new distribution channel now. Marketplace banking; where a bank distributes their services via other banks and platforms and vice versa. We are starting to see that happen now and I think the winners will be the ones who manage to control it in the best way for their customers. Offering real value which may not be the banks own proprietary services but that of another. If you serve the customer right for the long term, they will keep coming back.

iwoca: Whenever I hear this question there tends to be an assumption that Open Banking is negative for banks and positive for fintechs; it’s a great business opportunity for banks too and makes it easier for banks to win customers from competing banks; the data access can be leveraged by both fintech and bank. PSD2 and Open Banking isn’t necessarily about fintech versus bank.

It’s also worth considering that it’s still early days and Open Banking is not fully rolled out. It’s not wholly inconceivable that a CEO at a big bank won’t see the proof in the PSD2 pudding and make sweeping changes with substantial resources and completely transform their bank; never underestimate capability of someone with their back to the wall.

Bud: I think the physical ‘friendly personal bank manager’ model of 30+ years ago, who knew you and your family well, has gone. Young people don’t want to go into a branch, but they still expect something that suits their needs. With open banking and open data, they should be able to get that again, albeit in a digital world, from their mobile phone.

iwoca: It’s interesting you use that example of an old banking model. I wouldn’t discount it entirely. For example, you have a relatively new bank like Civilised Bank whose business model is based in locally based relationship managers visiting small businesses with an iPad to deliver banking services. They believe in physically getting out into the local community, to understand small businesses on a personal level, but at the same time offering fast, digital services.

Testing new concepts and technologies is incredibly difficult for an established bank, and I think we will see more and more banks create spin-offs in collaboration with successful fintechs to develop new offerings without the constraint of their legacy systems and business. 

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