How open banking will mean fewer headaches for small firms

By Leo KIng

Open banking is set to have a major impact on the SME financing sector, opening new ways for small firms to connect to innovative fintech services.

The options will be welcome: balancing cashflow and ensuring sufficient financial flexibility at all times is one of the biggest headaches for small and medium-sized enterprises.

For an increasing number of smaller companies, this headache is already being made less severe by working with alternative lenders and credit monitoring services. These services can assess the creditworthiness of a small business by accessing their transaction data.

This process will become much easier when the existing, inefficient ways of transferring transaction data are overhauled. Open banking regulations, coming into play in January, allow customers to easily authorize banks and other licensed firms to access their transaction history. For small companies, it becomes much easier to access best-in-market providers. The quality and range of personalised services will be transformed.

Open banking integration is in progress ahead of the deadline, and numerous finance companies are moving to test their adoption of the standard. Among the fintechs expected to draw on bank data is Growth Street whose principal product, Growth Line, functions much like a traditional bank overdraft and offers a revolving line of credit.

Greg Carter, chief executive of Growth Street

Greg Carter of Growth Street: businesses see the value in opening up their data to access services

“Our starting point is to pair data and finance to give ambitious firms access to flexible credit,” explains Greg Carter, chief executive at Growth Street, which also plans to use the same data access facilities to provide automated cashflow forecasting.

“We give businesses a very simple means to access the money that they want to borrow, when they want it, and they only pay for what they use,” he adds.

Growth Street is a finalist in the  Open Up competition, run by innovation foundation Nesta, which recognises fintech open banking innovation for SMEs. Other finalists included API marketplace Bud, business finance firm iWoca, lending marketplace Funding Options, invoice funding firm Investly, and self-employed accounts business Coconut.

“Gone are the days when an SME would have to walk into a bank branch with a sheaf of papers with all their financial information to apply for credit,” says Mr Carter. “Now it’s a simple digital transfer that they can do from the comfort of their office. And in exchange for that seamless transfer of data they get access to a useful service.”

Asked whether businesses will be comfortable sharing their data, Mr Carter adds: “We’ve found that when it comes to data access, businesses see the value exchange that’s taking place. They see that by giving access to data, they reduce the amount of work that they have to do to access credit.”

A link-up between emerging lending companies like Growth Street and the open banking marketplace from fintech firm Bud is expected to enhance competition within SME lending markets and broader financial service arenas. “I think what we’ll see is more firms specialising around a particular type of customer and banks realising that they can’t cater to all customer types, because other companies are picking off particular segments,” Mr Carter adds.

Meanwhile, companies such as Credit Data Research - also a finalist of Nesta’s Open Up challenge - are harnessing open banking and payment data to enable small businesses to demonstrate their creditworthiness to lenders.

“Our approach empowers SMEs with an ability to understand and improve their credit standings, which impacts positively on their ability to receive funding,” explains Alessio Balduini, chief executive of Credit Data Research, whose backers include the analytics arm of credit rating firm Moody’s.

The company’s Credit Passport analyses an SMEs’ finance data, with their consent, to present a digital credit profile that can be easily shared with lenders to provide a basis for loans.

Mr Balduini expects open banking changes to “bring incredible transparency” to the small business lending market and allow firms to make more effective use of their rating credentials. “Access to capital for the SMEs, and competition amongst lenders, will both benefit from the increased transparency,” he says.

For small businesses and their lenders, collaboration between companies focused on creating new services through open banking data could prove essential to competitive advantage. “The more collaboration, the better, in terms of adoption and translation of this technology into real value for SMEs,” Mr Balduini adds.

Leo King is a writer and editor. He works with the Financial Times, The Sunday Times, Bloomberg, Forbes, The Economist and The Daily Telegraph.

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