How SMB FinTech Firms Boost Data Sharing Without Open Banking

For proponents of open banking, the regulatory initiative seen in the U.K. and Europe is a natural progression from the surge in FinTech solutions offered to consumers, small businesses and enterprises. While policymakers target protection and customer ownership of data, one of the most prominent selling points for open banking is the ability for data to move seamlessly between once-siloed platforms.

That capability can be a critical part of holistic financial services for the many small business owners who are now struggling to integrate their growing list of back-office systems. But in jurisdictions like the U.S. and Canada, where open banking regulations are not in place, how do financial service providers act on the demand to move data and connect platforms?

As banks and other players develop custom APIs to facilitate connectivity, even when not legally mandated to do so, other companies are deploying another strategy. Mergers and acquisitions have become a popular way for traditional financial institutions to acquire the technologies developed by smaller FinTechs, not only allowing FIs to build out their offerings, but eliminating the reliance on an API strategy to connect their platforms to third parties.

Les Whiting, chief financial services officer at small business FinServ firm Wave, explained in a recent interview with PYMNTS that the M&A strategy enables service providers to facilitate the data connectivity that small business owners need to manage finances. Indeed, he said, a lack of regulatory momentum in certain markets means acquisitions are often the most effective choice.

“If you look at the current state of affairs of open banking [in the U.S. and Canada], there is a lot of talk, but nothing in terms of what you can practically build on,” said Whiting. “For us it was, do we build this ourselves, or do we acquire?”

It was the latter for Wave, which recently acquired small business account and debit card solutions provider Every. The deal marries Every’s services with Wave’s accounting, invoicing, payments and expense management offering, part of the firm’s broader strategy of building a holistic suite of SMB financial services.

Acquisitions are an increasingly popular strategy for other financial services players, too. According to Reed Smith and Mergermarket data published last November, 94 percent of banks and financial institutions in the U.S. have plans to acquire a FinTech in the next 12 months as they pursue heightened digital transformation.

It’s a strategy that also enables deeper integration of each individual service without relying on cooperation from third parties to open up data stored within their own siloes. Whiting said Wave is an advocate of open banking, however, and of customer ownership of financial data. Yet in Canada, where Wave is based, open mandates are not a reality – not yet, at least.

Earlier this year, the government published its review of open banking, concluding that such an initiative could strengthen customers’ ownership of financial data, promote diversity and competition in the FinServ market and boost innovation. Its report referenced the U.S.’ own path to open banking, which similarly has not adopted regulatory mandates, yet has nonetheless seen proprietary bank APIs emerging to promote connectivity with third-party players.

Yet open banking also raises questions and concerns about the security and privacy of that customer data as it moves between platforms.

“To allow customer choice to flourish,” the report stated, “there will need to be confidence that any potential open banking system has in place the safeguards required to ensure Canadians’ rights as consumers are respected, their privacy is protected, their information is secure and the financial sector continues to be stable and resilient.”

While Whiting noted that Wave supports opening up its customers’ data to third parties, including competitors, the M&A strategy can be an effective way to support data ownership and integration across SMB platforms without the need for small businesses to use any third parties.

“The way you ensure that you maintain those customers is by offering great products and services, and to not give them a reason to ever feel the need to take their data to another platform,” he said.

Whereas the company previously processed payments and facilitated settlement into an SMB’s bank account, the platform can now offer the very bank account into which payments are deposited, offering a more complete circle of FinServ processes and products. That ability to streamline movement of money (and data) means deeper visibility into cash flow for entrepreneurs, positioning the platform to be predictive. Holistic services offer the ability to gain visibility into cash flows and identify upcoming gaps, or to forecast which customers are likely to pay their invoices late, or notify when payroll taxes are due.

That is a valuable proposition for entrepreneurs, especially those that may have underestimated the administrative burden of operating a business, said Whiting. While open banking may not be a regulatory reality in certain markets, he noted that loosened financial policy in jurisdictions like the U.S. and Canada may nevertheless promote many of the same goals as intended by regulators in markets that have adopted open banking.

“Advances in technology and, frankly, deregulation, are starting to make modern small business banking and financial services a real possibility in 2019, when even in 2011, it wasn’t,” he said. “It’s an exciting time, and a lot of things are happening around open banking.”