Open banking – supporting businesses during a critical phase

The last twelve months have placed unprecedented pressure on small and medium-sized businesses. Between 23 March and 5 April 2020, a quarter of all UK businesses (of which SMEs represent the majority) ceased trading, and over half of those that continued to trade saw a fall in turnover.

84% of UK SMEs are frustrated with their current banking experience

This matters because the ongoing success and growth of these businesses is central to the UK’s overall economic health. Small businesses (defined as those with 49 employees or fewer) make up 99% of the business population and employ nearly half of all workers.

Access to services, including the ability to manage cash flow and lower barriers to obtain funding, has for many been the difference between survival and closure. For the millions of small businesses that are gradually reopening their doors, the crisis means they’ll be looking at their business through a new lens when it comes to financial services.

The reality is that the existing inefficiencies in the small business B2B space and small businesses’ more sophisticated financial requirements have largely been ignored by incumbent providers. Recent research from Marqeta suggests that small businesses are losing confidence in the big banks, with 84% of UK SMEs frustrated with their current banking experience and 67% considering finding a new provider if their current bank is unable to provide better digital capabilities.

As we emerge into the next critical phase, with businesses opening back up, SMEs will need even more support than ever before.

Tools that can further small business success should be welcomed, and here open banking – which lets businesses give verified third-parties access to their bank data through a secure application programming interface (API) and initiate payments on their behalf – is already playing a crucial role and offers even more potential in the future.

This includes understanding and predicting cash flow, initiating and making faster payments at a lower cost, aggregation of multiple accounts and obtaining access to short- and long-term funding and credit. Open banking is crucial, for example, in helping lenders understand the financial situation of a business in the simplest and quickest way so that they can work out the best solution for it.

Fintech firms have succeeded by refocusing on simple, practical and consumer-centric services that resonated with real customer needs. In the UK, fintechs stepped up and offered refreshing alternatives and more efficient ways to, for example, distribute government-backed loans. In the UK, iwoca – the first UK lender to turn on open banking for its customers – lent £370 million to small businesses as part of the Coronavirus Business Interruption Loan Scheme (CBILS) and achieved 10% market share of all loans approved through the scheme.

With open banking capabilities powering these services, businesses have been able to access finance as and when they need it. But there’s still much more that can be done.

Open banking payments: the SMEs’ best friend

The last twelve months have exacerbated a huge problem that blighted small business owners long before the pandemic, but one that became even more critical during it – getting paid on time.

Businesses waste as much as 20% of their day chasing invoices. Moreover, long payment terms mean suppliers have to manage cash flow gaps as well as carry the credit risk of their customers. And most methods of taking payments are clunky; 80% of UK B2B businesses still rely on bank transfers to get paid, which – although low cost – are full of friction.

The alternative – accepting cards – is expensive and comes with chargeback risk and delays in payouts. Payments should be seamless, simple, and free of charge. You don’t pay to send or receive an email or text message anymore, why should you pay to simply move money between bank accounts?

This is where fintech firms using open banking come into their own. Small business owners should not be burdened with managing the payments, collections and credit risk of their customers. Instead, fintech lenders can take on that risk – something which they specialise in – and allow small business owners to focus on what they specialise in – running and growing their businesses.

Using their risk decisioning capabilities plus all the innovation of open banking, fintech firms can provide a solution for the millions of small businesses that want to do just this – eliminate the stress of getting paid so they can focus on growing their business.

Embedded solutions to support small businesses

We’re at the start of the next wave of innovation.

Mobile-integrated payment services, seamless integrations and customisable financial products are increasingly commonplace for retail consumers as more platforms and services embrace open banking capabilities and embedded technology. Lending – and small business lending in particular – will follow a similar trajectory. If lending can successfully become more embedded into the infrastructure of everyday services, finance will become more accessible and easier to use.

We’ll see more integrations that allow partners to build the ideal journey and bespoke lending product for their customers, ensuring products actually work and are evolving in the right direction – with the needs of small businesses. These could be integrations which make a fintech firm’s full lending stack available to an entire ecosystem of payment service providers, other fintechs, brokers, accountants and bookkeeping platforms – enabling the lender’s partners to make finance available exactly where their customers are planning their accounting and cash flow needs.

Or these might be services which bring finance to the point of invoice, allowing suppliers to get paid up front whilst their customers have the flexibility to spread the cost.

Successful providers, whether an incumbent or a fintech firm, will be those who can effectively embed products and services across multiple platforms, in turn helping businesses take control and manage their money more efficiently.

We’ve come a long way, but there’s still a lot of work left to be done to give small businesses the tools they need to thrive.

About the authors
Bobby Chadha is head of product – payments at TrueLayer.
Lara Gilman is co-lead of iwocaPay at iwoca.