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What Open Banking means to small business?

Small businesses are about to get some real power over the way they do business. In recent years SMEs have already experienced one paradigm shift with fintechs giving them more control over the way they manage their money.

Open Banking, which came into effect in 2018, follows an August 2016 ruling by the UK’s Competition and Markets Authority requiring the biggest UK banks and building societies – including Barclays, HSBC, Lloyds, Nationwide, Santander and RBS – to allow licensed start-ups direct access to the data held by those institutions. This means banks, building societies, credit card issuers, e-money institutions and others must provide APIs that allow third parties to perform actions for individuals and organisations that hold accounts with those institutions.

This means companies can provide services that already existed, such as making payments, or entirely new services, such as accepting alternative forms of payment. New entrants don’t need to provide the full gamut of banking offerings. Instead, they are free to provide whatever works best in the market. This provides businesses the option to mix-and-match services to meet their situation.

For SMEs, this can mean the levelling of a playing field currently tilted against them. A dramatic example of this lack of equality comes from research done by Previse, a fintech that uses AI to get suppliers paid instantly. Their data shows small suppliers are most impacted by slow payments. They analysed more than 10 million invoices, representing more than £24 billion of spending by some of the UK’s largest businesses, and found that the smallest suppliers are paid 30 days late, while firms charging the biggest fees are paid, on average, less than a day late.

Suppliers invoicing for a value of less than £10,000 per annum are not even processed by buyers until 35 days after being received, on average, while large supplier invoices were prioritised. Clearly, SMEs need all the help they can get to get their money quickly and make it work for them.

SMEs represent about £14 billion in banking revenue, but big banks offer limited products and services that address their specific needs. That’s why SMEs have been quick to adopt new fintech players that better suit their needs.

Until Open Banking, however, small businesses have had to cobble together a selection of services from various providers. The resulting hodgepodge presented challenges to those businesses when they tried to analyse their overall financial situation. Manual collation and processing of data from disparate sources consumed resources and took time, hindering the ability to respond to changing business conditions. Open Banking means those pieces now work together, providing not only faster but more accurate financial reporting. It also means those outcomes require fewer resources.

In addition to analysis, Open Banking promises to improve day-to-day operations by improving accounts payable and accounts receivable, international fund transfer and the storing of funds to maximise interest generated.

Open Banking should also give SMEs more power when it comes to accessing the credit they need to grow. Research shows 36 per cent of SMEs were seeking loans from personal sources (18 per cent from directors in the business and 18 per cent from family and friends). Half of those seeking these loans said they felt it was necessary because of the difficulty in getting credit from traditional lenders.

The free exchange of information available under Open Banking can help SMEs in their credit and loan applications to both traditional lenders and alternative players.
These lenders will be able to quickly access the applicant’s full financial picture, improving the approvals process. With banks and alternative lenders competing for their business, small businesses are likely to see more competitive products become available for which they qualify more easily.

Remaining competitive in the global economy is a challenge for every SME. While Open Banking is not a panacea, it can remove some of the inefficiencies that have impeded companies when it comes managing their finances, and grow access to credit. That’s help any SME should welcome.

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What Open Banking means to small business?
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