Open banking: a boon for small businesses?

calculatorConrad Ford explains why open banking is a positive thing for business – and what it means in practice.

Open banking has been much discussed in recent months, and there’s still a lot more to say where its effect on businesses in the UK is concerned.

In 2016, the Competition and Markets Authority (CMA) set up new regulations that require major banks to open up their data to trusted third parties.

Put simply, this enables bank customers to securely share their financial data with challenger banks, financial technology companies (fintechs), and other regulated third-party providers.

By introducing this initiative, the CMA is hoping to help newer financial providers to enter the market and compete with well-established banks. Combining rich bank data with innovative financial providers essentially means that customers can get the best of both worlds.

This sounds particularly useful for new providers, who will benefit from being granted access to the financial data banks hold on their customers, which has been unavailable until now. But what will it actually mean for businesses, in practice?

Open banking has the potential to deliver numerous benefits for small firms, but many business owners still don’t know about it.

Reduce administrative burdens

Open banking is a big opportunity for the five million small businesses that are across the UK. It’ll make things a lot easier by erasing administrative burdens when it comes to understanding and managing your finances, for example.

In Nesta’s recent Open Up Challenge, 20 fintech firms created new tools and apps that could change banking for the better. My company, Funding Options, was one of the 10 winners. We believe that open banking will shape the future of business banking, and could have a great impact on the business lending market.

Imagine this: you’re running a business and would like to apply for a business loan with an alternative lender. The initial application can be made online within only a few minutes. However, assessing your creditworthiness is still done the old-fashioned way, which means you have to email your bank statements as a photo or scan. This undermines an otherwise user-friendly process, and makes the underwriting process unnecessarily long and inconvenient.

Open banking is hoping to change that. Secure application programming interfaces (APIs) allow business owners to choose to share their financial data securely and instantly. This part of the underwriting process could be automated, and therefore paves the way for lenders and software companies to access revenue and other cash flow data directly from your bank account — all they’ll need is your permission.

This might not sound like a big deal, but in practice, it will facilitate much faster lending decisions, so getting a business loan will be comparable to the five minutes it takes to shop for your travel insurance.

Take advantage of your data

Fundamentally, the idea behind open banking is that the financial data in your bank account is your data, so you should be in control of it, decide how to use it, and choose who should get access to it.

Access can only be given with your explicit permission, which can be revoked at any time, while APIs are a proven and secure way of moving information from one piece of software to another. (You might not know it, but you use them all the time.)

As for open banking, there will be a standard API, which enables third-party providers to develop products using this data. Having one standard means that whatever they build will be compatible with all the major banks, so we can expect more useful tools and apps to emerge through this initiative.

Additionally, small businesses can use their bank data to their benefit in many other business areas, such as accounting or cashflow management. Business owners won’t need as many diverse systems to run their business any more – it’ll be possible to combine many different services into one system.

New opportunities

In a nutshell, open banking is a positive change for small businesses, and will most likely strengthen the UK economy as a whole. We’re moving to a world where the data held by your bank now belongs to you, and it’s yours to use as you wish.

Bill Gates said that we often overestimate short-term change and underestimate long-term change. Of course, it will take time to develop, but open banking could help to solve real problems faced by businesses – whether it’s cashflow, accounting, tax or funding.

In the future, business owners will not only get far more control over their own data, they’ll begin to use it to their benefit, too.

It remains to be seen exactly what the future of open banking holds, but we can be excited about these new opportunities which, after all, are only just beginning.

About the author

Conrad Ford is chief executive of Funding Options, 'the matchmaking website for small businesses and lenders' that is designated by HM Treasury to help businesses find finance when they’re unsuccessful with the major banks, as part of the bank referral scheme. Find them @FundingOptions.