What Does Open Banking Mean for SMEs?

In practice, Open Banking refers to the secure sharing of financial data between UK banks and third-party providers, such as alternative lenders, price comparison websites, and online payment systems. Introduced in 2018 by the Competition and Markets Authority (CMA), Open Banking was designed to bring greater competition and innovation to the finance industry. In doing so, consumers should receive a better and fairer deal when choosing a financial product or service.

There are now over 2.5 million consumers and businesses using Open Banking-based products in the UK, a figure which has more than doubled since the start of 2020. Currently, the nine biggest banks and building societies are enrolled on the Open Banking Directory, with many more expected to join soon.               

How has Open Banking developed over the years?

Since 2016, when the proposal for Open Banking was initially put forward by the CMA, around 300 fintechs and other third-party providers have adopted the new technology. While there have been glimpses of the financial revolution that was promised, reports show that progress across the industry has been sluggish. The UK’s biggest banks have been among the slowest to implement change. This is partly because of compliancy issues they must address before rolling out the new system to customers, but they’ve also been accused of deliberately stalling to keep control over the valuable customer data they hold.  

Understandably, there has also been some reluctance among the general public due to concerns about data protection. Since September 2019, however, new regulatory rules mean that Open Banking must be secured by something called Strong Customer Authentication (SCA), which requires users to provide more information before they can allow transactions, purchases, or access. This provides an extra level of security to those using Open Banking technology.

How does Open Banking help customers?

Open Banking has several advantages for consumers, both in terms of personal and business finances. The technology allows users to have a clear and complete view of all their finances on one screen, giving visibility over all their accounts even if they’re with multiple banks or building societies. To make life easier for consumers, it’s possible to make payments directly from a bank or building society without the need for card details or further credentials. Moreover, Open Banking is a great way to improve your awareness and control over your spending, by showing how and where your money is being spent, which can help you to budget effectively and achieve your savings goals.

It’s also an exciting innovation for SME business owners, not least by removing the hassle of day-to-day financial tasks with new time-saving software like budgeting apps and accounting platforms. By allowing banks to share data with alternative lenders, who then get instant access to a company’s transaction and credit history, businesses can get faster and fairer decisions on their funding applications.

The heightened transparency in the market also provides SMEs with a much better idea of the range of products and services that are available so they can make a more informed choice. In the case of price comparison websites, Open Banking allows these third parties to analyse a company’s unique spending patterns and make tailored recommendations on a better business credit card, current account, or overdraft. This means businesses can get the best deal based on their own specific needs.

How does Open Banking help finance providers?

The ability for customers to instantly share financial data has a huge impact on alternative lenders and their internal processes. Customers are required to share information about their financial health so that lenders may perform affordability checks, verify incomes, assess credit history, and decide on the eligibility of a borrower for a loan. As applicants will no longer need to trawl back through past bank statements and provide copies, lenders can significantly speed up the time between an application and a lending decision.

Not only is decision-making faster, it’s also much fairer and safer. Lenders can get an accurate, up-to-date picture of a customer’s financial position, and whether they’d be able to manage their repayments, which prevents misguided lending and helps the lender reach a valid proposal. With more access to financial information, lenders can also provide better advice and products which suit the needs of their customers.

It’s also worth noting that it’s not just alternative lenders who are reaping the rewards of Open Banking; accountancy firms also benefit from wider data sharing with customers and their banks. The improved visibility over their customers' accounts means that accountants have a more in-depth understanding of payment histories. Accountants can then advise their clients on their financial decisions based on detailed, accurate information. As much of the administrative work can be automated, accountants can be much more efficient and dedicate greater time to advisory activities that benefit the customer.  

You can learn more about how Fleximize uses Open Banking here.