One of the major financial innovations of the past decade has been the rise of open banking. This term describes the use of open APIs (application programming interfaces) to allow users more control over their banking. While uptake has been limited among consumers, it’s proved popular with SMEs. Recent research has shown more than 750,000 SMEs using it in the UK.
What Is Open Banking?
Open banking is the general term for a range of solutions where third-party developers create applications and services around financial institutions. Among other things, these allow users to see all their banking on a single platform, making it far easier to track cashflow.
This should make banking more accessible, giving customers more control over their accounts, but some critics have suggested possible downsides. It’s been claimed, for instance, that open banking could lead to greater financial exclusion for people on low incomes, while there have also been suggestions that it could make exploitation of financially naïve people easier.
Open Banking and SMEs
This may account for open banking being more popular among small business (16%) than consumers (11%), even though the market as a whole is targeted predominantly at consumers. By far the most popular open banking products among SMEs (79%) are those allowing data-driven account information services, allowing real-time insights for forecasting and cashflow — which has a clear advantage for business, but less so for individuals.
Open banking is an incredibly fast-growing sector. In the course of one year, the number of open banking payments, across both businesses and consumers, has risen from 25.2m (2021) to 68.2m (2022), with 7.7m in December 2022 alone.
Should Your SME Use Open Banking?
It’s clear that the objections to open banking mentioned above shouldn’t apply to an SME — and, if they do, the business has far bigger problems than their banking model. On the other hand, the greater clarity it can give you in planning for your business should make it a no-brainer.
However, it’s important to remember that any business service needs to be used correctly to be effective. In the first place, there are currently 159 fully regulated firms offering open banking products, as well as 173 businesses acting as agents for them — many of the latter small start-ups. While we’d hope that all of these provide ethical and effective services, it’s up to business owners to do thorough due diligence.
In addition, while clarity about cashflow is invaluable, it won’t solve your problems by itself. You’ll need efficient financial systems in your business — including a good credit control system. Give me a call if you need help to make sure your customers pay you — so that your cashflow will look good when you analyse it on an open banking platform.