In this post, we look at the use cases for open banking. One of the things I love about banq’s weekly newsletter is that it spotlights one API use case each week that has been made possible from open banking. For open banking to expand, understanding the potential use cases and being able to build viable products that leverage new use cases will be at the core of any momentum.
In recent months, for example, most API aggregators - that is, services that aim to help third party providers to connect with multiple bank APIs by offering a single, uniform API that will work with all banks - have all released e-books and reference guides documenting the possible use cases that can be built with open banking APIs.
The true level of innovation that will be possible from open banking, however, is still some ways off. To date, the majority of banks are focused on opening payments and account information capabilities as APIs. As shown in Figure 1, 56% of all bank API products focus on exposing these two functionalities.
Of course, a ton of innovation can occur with just these two components. Fintech can offer new types of credit scoring tools, for example, based solely off account transaction history data. New savings schemes that round up payments made and stores them in a separate account are possible.
But to my mind, there is still a ‘boiling the ocean’ approach to open banking use cases. There is a ton of potential for innovation with open banking, but the products that are being built to date are fairly limited in their range.
Small and medium enterprise (SME) customers are the current market for many of the fintech that is built from open banking APIs. Our analysis shows just over half of all fintech products built to date using open banking APIs are targeted at SMEs, as shown in Figure 2.
Of the SMEs that are being targeted, the product range being generated is fairly limited, as shown in Figure 3.
What is curious about these products, is that they are, by and large, targeting “all SMEs”. The main differential between products at the moment is that they are only available in specific geographic markets, based on where the fintech is accredited and which banking regulatory system it works within (even in Europe, with the exception of merchant payments providers, most fintech focus on one or two country markets at present).
The same issue is occurring in fintech targeting individuals and households, but for blog post length, let’s keep our focus on SMEs as an example. This year has seen most small businesses need to either digitize their operations significantly, retrofit their physical spaces, reorganise labour costs, seek government support and optimise their cashflows. I believe creative fintech can use open banking APIs to build new solutions that address these pain points. These innovators could gain traction quickly by focusing on a specific consumer segment market within all potential SMEs.
Snag Tights is a prime example of the sort of problems many rising SMEs have ended up facing this year. The woman-owned, tights retailer had a turnover of £14 million in 2019, with a current monthly sales volume of around £2 million, in a global market that is valued at £38 billion.
And yet with COVID-19, their online sales slumped as consumers held off on purchases during initial months of lockdown. Government support never came, and despite their proven sales record, it appears as if no fintech tools were really available to help them optimise their cashflow or acquire suitable short-term credit. Instead, the business reached out to their loyal customer base with an “SOS” deal: pay for two pairs of tights now, and receive them in November. They raised £1.25 million in one week by selling these SOS vouchers.
But where was the open banking fintech for this?
For me, one of the benefits of open banking should be that it enables more nuanced products, personalised or customised to specific markets. Snag Tights is one of any number of fast-growing, women-run businesses that have built a solid customer base in a niche, but globally scalable, market. (To be clear, tights is a niche market: businesses that target women are businesses that target half the population, so they aren’t niche!) Globally, women-owned businesses are 6 percent more likely to close during COVID-19 than male-run businesses, according to the World Bank, despite women-owned businesses consistently achieving higher return on investment than male-run businesses.
We are just not seeing a segment-driven approach being taken at present with use cases, with most of the fintech that are building with open APIs seeking to target “all SME customers”, rather than any in a particular vertical or based on specific characteristics. For example, women’s businesses are likely more prone to risk during COVID as women need to manage childcare, care for their whole family unit, or take on other community roles more than men. This gives rise to new financial services needs that could be built into new products and services, including those using open banking APIs.
What I hope to see in 2021: Targeting segments shouldn’t just be a marketing approach, where a generic product then has a series of posts. More than just creating content for customer segments, open banking APIs allow more nuanced product development, where you can build specific offerings for key market segments. I would love to see this level of innovation in use cases emerge next, this would truly get to the promise of open banking’s wider consumer choice objective.