When open banking launched in the UK in 2018, the sector’s startups made some big promises. They pledged to break the monopoly held by banks over customer data, give those same customers the chance to share their data with trusted third parties in exchange for new deals and services, and to usher in a new era of competition in the UK’s fintech sector.
Four years on and some things are going well; according to the Open Banking Implementation Entity (OBIE), a nonprofit aimed at encouraging the adoption of open banking, more than 5m customers have now used some form of open banking services in the UK, with the jump from 4m to over 5m happening in just four months. Investors are also still betting big, with monster funding rounds and notable acquisitions.
But obstacles remain before all European banks, fintechs and customers open up their hearts — and wallets — to open banking. As open banking is in its infancy, a big challenge is actualising use cases, such as startups' and SME access to loans.
Here we ask four experts to share the deets on how open banking is changing access to loans for startups and SMEs — and what that might mean for fintech’s darling, open banking.
A need for speed
As many SMEs and startups will say, loans can be vital when expanding your business. But getting a bank or loan provider to approve one can be tricky, not helped by timely bureaucratic processes and a lack of financial data. Open banking could help this.
For Nicolas Weng Kan, chief executive of open banking fintech Yolt, it’s all about the speed in which open banking can help facilitate a loan from the side of the lender.
“For SME and startup lenders, open banking brings three advantages: speed, more objective data, and the ability to deliver better customer experiences,” he says. “Lenders that use open banking data can save tens of thousands of work hours a year and approve a greater volume of loans with higher confidence.”
Weng Kan says this is because open banking allows lenders to cut out manual verifications and offer instant credit decisions with fewer human errors.
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The traditional method seems bleak by comparison. According to Yolt, the average lender processes around 6,258 loans a year with each loan taking around 3.5 hours to process. The administration and other related costs amount to around £530k per year.
Open banking reduced this burden substantially, says Weng Kan, allowing lenders to save approximately 18k work hours per year.
Lenders that use open banking data can save tens of thousands of work hours a year and approve a greater volume of loans with higher confidence
More time for growth
The speed of APIs — the software that allows banks to speak to fintechs and vice versa — is the other big benefit of open banking. According to the OBIE, the average response time for open banking APIs (as of March 2022) is a mere 466 milliseconds.
Stacy Clementson, head of credit and underwriting at Fleximize, a business loan provider, says this is important for startups that are short on time and high on growth.
“Fleximize is very aware of the value of a business’s time,” she says. “Early on you’ve got many plates to spin as a business owner, and securing finance is just one concern. Open banking has helped applicants in early growth phases by removing the need to search bank statements, collate documents, and manually share information. The funding landscape is fairer as even those short on time have access to loans.”
But automation is not without its risks. Clementson says her big concern is neglecting customer relationships. Business owners, particularly those who are relatively new or have not applied for a loan, often need human interaction to give them confidence.
Open banking has helped applicants in early growth phases by removing the need to search bank statements, collate documents, and manually share information
“Startups and SMEs must find providers that can look beyond data to understand your journey,” she says. “Figures don’t always reflect a startup's potential, and it’s down to the lender to make a well-informed judgement based on more than the books.”
A major tipping point for young, and small, businesses looking for loans is being able to produce historic data. But Simon Farmilo, strategic partnerships director at business loan provider Capify, says lenders that can leverage open banking data to make decisions based on the real-time cash flow of a business.
Farmilo also says that having a constant connection with an open banking lender could soon lead to more proactive funding services, such as no longer needing to reapply for top-up loans. He says a lender could hypothetically notify a founder when eligible, as well as provide customised loans.
“As lenders interpret and build better insights from open banking data, risk profiling for SMEs and startups is improving in turn,” Farmillo says. “This will enable funders to provide a better-customised loan offering that reflects the needs and requirements of SMEs and startups more accurately.”
Connectivity is king in open banking
There’s also value in the real-time analysis of cash flow to make better lending decisions.
Yolt recently launched Cashflow Analyser, an online tool that helps lenders and leasing companies leverage open banking data to provide immediate insights into the cash flow of applicants.
“You have lots of different open banking providers providing similar kinds of solutions,” says Weng Kan, “But our key differentiator is the fact that we're pan-European. We're able to connect to all these different bank accounts to mix all this data to give lenders efficient tools to assess candidates.”
However, more cooperation is needed between regulatory bodies, banks and fintechs, says Swati Lay, chief technology officer at business loan provider Funding Circle.
“While the UK has made great strides towards embedding data sharing schemes into the financial system, more can be done,” she says. “The CMA [Competition and Markets Authority] recently announced open banking’s next steps, including a new governing body and Joint Regulatory Oversight Committee. There’s a great opportunity here to keep raising the standards and quality of data sharing through these
Our key differentiator is the fact that we're pan-European. We're able to connect to all these different bank accounts to mix all this data to give lenders efficient tools to assess candidates
Where do we go from here?
Weng Kan predicts it will definitely be easier for startups and SMEs to access loans in the future.
“The ability to grant more loans based on the reality of startup and SME cash flow situations is powerful because it is so much more accurate,” he says. “Lenders are typically very risk-averse, whether it’s a traditional bank or a fintech, it’s our belief that open banking powered by cash flow analysis will change the way loans are granted and will likely open a new market.”
Weng Kan expects to see an increasing number of lenders requesting open banking solutions to help them with their analysis, which is good news for startups and SMEs looking for better deals and services.
“Open banking allows lenders to approve more loans because they can see clearly what's going on,” Weng Kan says. “It's about assessing risk and making much smarter decisions, so lenders can grow their business and offer more to startups and SMEs. You need to have access to the relevant data, and that's where connections are important.”
Learn more about how Yolt’s Cashflow Analyser can help lenders and leasing companies use open banking to provide insight on the cash flow of applicants.