When challenger bank iwoca granted the UK’s first small business loan using Open Banking, it was one of the biggest banking innovations of the century.
Up until recently, SMEs were too often served by legacy infrastructure, exacerbating problems like tight cash flow positions, customer payment issues and lack of access to flexible business accounts and debt financing.
Recent changes to banking rules have only served to make the problem worse. European regulations such as Basel III and the soon to be Basel IV in 2022, are expected to increase funding costs and further reduce banks’ appetite to lend to SMEs – particularly those with below-par creditworthiness.
However, the past few years have seen governments and regulators apply more pressure on the banking sector to drive forward innovation and competition. This could bring huge benefits for smaller businesses.
Welcome to the Open Banking era
For the UK’S millions of SMEs, the introduction of Open Banking technology offers the prospect of a new funding and banking service model. Launched in early 2018, Open Banking allows consumers and businesses to share their banking and financial data with third-party financial providers through the use of application programming interfaces (APIs).
So how can this make life easier for SMEs? The answer lies in how successfully the technology can not only provide small businesses with an effective service, but also address their financial needs. It’s believed SMEs are set to gain £6 billion in added value from the regulatory change by achieving better cash flow, lower borrowing costs, higher productivity and reduced chance of business failure.
According to Forrester Research, starting a small business banking relationship is historically a lengthy and arduous ordeal. But new entrants are making the process more efficient. These include digital banks Azlo in the US and UK-based Tide, which are said to provide faster digital account opening and onboarding than was seen in the past.
Improving access to funding and loans
Where the real challenges lie for SMEs is in accessing the financing that is critical to achieving growth ambitions. Indeed, Banking Circle said a quarter of SMEs state that without adequate access to finance, they would be forced to make staff redundant, while four out of 10 would be unable to afford the equipment needed to stay competitive.
Enter the FinTechs, who have spotted an opportunity to use Open Banking to speed up the lending process. By making their financial data available to third parties, SMEs can gain access to a much broader choice of products and services through Open Banking, particularly lenders that are willing to provide them with loans – and in a much more painless process.
Case in point: Funding Options recently revealed it provided a £10,000 loan to a beauty salon in Kent in less than an hour and a half. This is a pretty ground-breaking step forward for SMEs as they fight to survive in a tough business environment that often overlooks their need for better funding options.
It’s also about improving cash flow
Going hand in hand with lending is the need to maintain a solid cash flow. Unfortunately, late payments are near the top of the list of the biggest headaches for small companies. The problem is so acute the Federation of Small Businesses has declared it a UK crisis that destroys 50,000 businesses a year at a cost of at least £2.5bn to the economy.
Critics say Open Banking alone will not solve this issue, but the ability to automate payment reminders and create sophisticated cashflow management platforms using APIs may lessen the devasting impact of late payments for SMEs.
In all, Open Banking seems a considerably attractive proposition for SMEs. So much so, one of the world’s biggest auditors and financial services firms, PricewaterhouseCoopers, predicts over seven in 10 SMEs will be using Open Banking by 2022.
What does the future of Open Banking look like?
In the Open Banking era, we are seeing a market where major banks and FinTech start-ups are working side by side to deliver a broader service to smaller businesses, increasingly as part of a collaboration.
For instance, we are beginning to see examples of high street banks teaming up with upstart competitors to strengthen their SME propositions. Westpac, one of Australia’s largest banks, teamed up with FinTech Assembly Payments to launch a payments platform for its business clients, while other lenders such as HSBC and RBS are busy building their own platforms to better serve customers. This can only be a positive for SMEs, as Open Banking and other technological advancements helping to bring better services to the market from both the incumbents and the challengers.