The evolution of financial services has opened the door for open banking to take place.
While in the U.K., Europe and elsewhere, regulations mandate that financial institutions open up customer data to third-party platforms, in the U.S., market forces have created a similar, open banking-friendly environment, even without regulatory requirements.
But open banking itself is enduring an evolution, too, as finserv players explore new use cases for data interconnectivity.
While the paradigm was initially looked at as a positive disruptor for consumer financial services at a time of a surge in personal finance mobile app development, increasingly, the framework is setting its sights on the small business banking sphere, and exploring opportunities for financial institutions to integrate SMB client data with third-party enterprise apps like Enterprise Resource Planning (ERP) platforms and accounting software.
Now, a potential new phase in the evolution of open banking is taking shape, one that focuses less on providing interconnectivity for SMB-facing FinTech, and instead turns to opportunities for the banks themselves to benefit from data integrations.
This strategy was demonstrated in the recent announcement from Codat, a U.K.-based FinTech enabling SMBs to integrate their back office platforms with each other via API. The company recently announced it has joined five°degrees’ Open Banking Marketplace, enabling Codat’s SMB clients to connect their accounting platforms with their bank accounts in what Codat Co-founder and Chief Operating Officer Alexander Cardona described as an “Open Accounting” framework, according to the company’s press release.
Speaking with PYMNTS, Cardona discussed the opportunity the SMB accounting industry has to embrace open banking and API connectivity in use-cases that reach beyond straightforward data sharing between company bank accounts and accounting portals.
“Accounting platforms are increasingly positioning themselves at the center of the small business ecosystem,” he said, adding that this evolution “makes a lot of sense” with many companies considering the accounting portal the “single source of truth” for company finances.
While the ERP platform may have been considered that single point of truth for larger corporates, the accounting platform has the opportunity to act in a similar fashion for SMBs and, via open banking frameworks, holds valuable information that can be used to develop value-added services on top of that platform.
“When it comes to open banking, currently accounting platforms are taking advantage by allowing their customers to synchronize their banking transactional data into their accounting system,” Cardona said. “However, we see this as just the beginning.”
Expanding Use Cases
Some accounting solutions, including Xero and Quickbooks, have introduced value-added features like the ability to initiate payments from within their solutions as a result of this data connectivity capability, he said.
Codat’s joining of the Open Banking Maketplace is targeting a new use-case, enabling banks to connect into accounting data to more quickly and accurately underwrite SMB loans. According to Cardona, accounting data is in a unique position to ease some of the largest challenges of SMB lending.
For the borrowers themselves, those challenges include a lackluster end-user experience involving manual data entry and aggregation to apply for financing, a process Cardona said can
“feel like a second job.”
For the banks themselves, inaccurate or incomplete information makes loan underwriting not only less efficient, but potentially more risky, leading to more expensive financing rates. And because the application process is so long, he noted, by the time the bank does collect all the necessary information, the data is likely a few months old.
At best, information from Companies House, the U.K.’s registrar of companies, is outdated. At worst, it’s “borderline useless” for lenders, according to Cardona. And because the majority of credit bureaus rely on Companies House data to assess SMBs, there is a “significant gap in which a company’s position may change dramatically, and that change will not be reflected in their credit score.”
Expanding Open Banking’s Horizons
The adoption of an open banking framework to mitigate SMB loan risk, promote up-to-date credit scoring and streamline the underwriting process is one example of how data integration with SMB accounting platforms are taking center stage in a new financial services (finserv) market paradigm. Cardona said he expects to see more ways emerging for accounting portals to introduce value-added services to SMBs and target other points of friction for service providers.
Further, he noted, there are other financial platforms with a similar open banking opportunity.
He pointed to an example in which an engineering company uses a personnel management software package, “which should feed payroll information directly into their payroll platform, which in turn should feed payment information directly into their bank.”
American Express announced last week a new solution designed for startups and entrepreneurs that connects these small business owners with a commercial card, which is in turn integrated into that business’s bank account. That data connectivity, the bank noted, allows the issuer to offer startups a dynamic credit limit based on real-time bank account information, another application of the open banking framework taking shape in SMB financial services.
Of course, key to taking full advantage of open banking, noted Cardona, is ensuring that SMBs have digitized their accounting and other financial processes.
“Accountants have done a great job over the last few years moving their clients onto cloud-based accounting packages, but there’s still a lot of work to do,” he said, adding that often, SMBs can lack the resources to initiate change, or may even be afraid of it, although he noted that regulatory initiatives can help drive digitization.
“Technological change takes time, often for good reasons,” he said, “and if small businesses stay ahead of the curve the future is bright.”