TechnologySME banking and the data opportunity

SME banking and the data opportunity

Banks have traditionally acted to protect customer data but, in doing so, have missed an opportunity to leverage the value of said data, according to Peter Ryan, senior product manager at Infosys Finacle

Data is the ultimate green economic resource. It can be reused multiple times without a loss of value. Take a customer who makes an electronic payment to buy something from an SME. This creates a data record of the transaction of the purchase. This data point can be used to:

  • Record the transaction against the SME’s account
  • Update the balance of the SME’s account
  • Analyse when and how customers make payments
  • Update the cash flow of the SME
  • Provide data to support a loan application

By virtue of banks being trusted with a customer’s money they are also trusted with their data. Banks have traditionally acted to protect a customer data by preventing access and locking it away in siloed databases. However, by doing so they missed an opportunity to provide and leverage value from said data. This all changed with open banking.

Some in the finance industry have grown disappointed with open banking. It has not led to the much-anticipated mass adoption by customers. However, this is because banks have looked at open banking as an extension of traditional banking. Often the initial focus of open banking was on retail customers, personal financial management, gamification of savings or new and exciting ways to pay for lunch. However, it is difficult to make money this way, no-one wants to pay extra to find out they are drinking too much coffee.

At the other end of the scale, large corporate users already had their account data. Large corporate customers expect banks to provide their data to them (for example through receiving data rich xml camt.053 or camt.052 account statements). Once they have the data, they load it into their accounting software, use it for sales analysis, perform cash flow forecasting and a whole number of other uses. As large corporate customers have the financial and IT resources to invest in the software required, they can use the data banks share with them – they do not need open banking.

This leaves the small and medium sized enterprises in the middle. These have many of the same regulatory needs as corporate customers (such as the need to provide a set of accounts) without the finances to pay for an IT department or specific software to derive value from the data. This is where open banking can be a game changer.

Increasingly banks are seeing an opportunity to sell an integrated SME package to SME business customers. This package not only includes business banking support but also includes integration with the software required to run the business.

Open banking allows an SME to design their own banking experience. So, an SME can transact and save using bank accounts that are best suited to the needs of their business and then consolidate all their banking data in a single user experience. This allows the SME to receive a complete picture of their business while still enjoying the best returns and cheapest payment service open to them.

Similarly, the bank offering a data consolidation service also has a complete picture of the finances of the SME and the two can work in partnership. Indeed, the SME’s bank is uniquely positioned to offer this data consolidation service. This is because not only does the bank hold most of the financial data that the SME needs (in the accounts and transactions on their database) but the bank is also a trusted organisation. This trust (which underpins banking) is something that the bank can leverage when offering this service.

However, to finance this service, the bank needs to offer value added services to its SME customers. Once all the banking and other financial data has been consolidated the bank need to orchestrate this data into downstream systems offering extra value to the SME.

The simplest way of doing this is through sharing the SME financial data with an accounting package. By offering an integrated accounting package as part of a financial service ecosystem the bank can integrate financial data into the accounting package and provide this as a service to their SME customers.

However, the integration of financial and other data from the SME opens other opportunities such as:

  • Reconciliation between invoices issued and payments received, this can lead to analysis of expected payment times from customers.
  • Invoices payable can be combined with payment routing data to allow SMEs to pay their bills just in time to improve cashflow.
  • Scheduled payments can be combined with expected receipts and bills due to provide a future cashflow for the business, allowing the bank to offer credit facilities based on solid financial data.
  • The financial data of an SME without a credit history can be loaded into an alternative credit assessment fintech to finance the business through marketplace lending.

This allows the SME to derive the full value from its data without the overhead of maintaining a large IT resource or having to purchase multiple software products. To achieve this, banks need to go beyond banking in their SME banking offering. Banks need to act as data companies with a banking license.

Banks must understand the pain points of SMEs (particularly around finance and administration) and offer solutions to the SME, while still maintaining low banking fees. Banks cannot do this alone. They need to use new concepts like Open Finance to establish an eco-system that has the bank at the heart and a series of fintech third party service providers offering value added services to their SME customers. This means that banks can provide a service that goes beyond banking while still maintaining a strong relationship between the bank and their SME customers.

 

Finacle helps traditional and emerging financial institutions drive truly digital transformation to achieve frictionless customer experiences, larger ecosystem play, insights–driven interactions and ubiquitous automation. To find out more click here

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