Small- to medium-sized businesses (SMBs) represent a puzzle that banks have long struggled to solve.
SMBs need fast, flexible and digital-first solutions that help rather than hinder growth. However, their needs have been traditionally underserved by banking incumbents who view them as too small to warrant the tailored services afforded to corporates, yet too diverse to be addressed in a scalable way like retail banking clients.
However, the inability of the market to meet SMBs where they are hasn’t stopped the business cohort from needing financing solutions and working capital products to power their operations. As financial institutions continue to tighten the spigots around their lending products for small businesses, observers are wondering whether innovations like open banking can help offer benefits for SMBs seeking improved financing solutions by drawing upon transaction data to streamline alternative decisioning models and provide new channels to better assess creditworthiness more rapidly.
A 2024 working paper from the National Bureau of Economic Research on open banking’s impact found that a “small business’s transaction data could inform lenders about its health” and that open banking can enable SMBS to establish “new FinTech lending relationships.”
Open banking allows financial institutions and FinTechs to access transaction data securely with customer consent. The data can provide a comprehensive view of a business’s financial health, streamlining the application process for financing.
Rather than relying solely on traditional credit scores or lengthy paperwork, lenders can quickly assess the business’s creditworthiness based on its transaction history.
Read also: Alternative Data Revolutionized Small Business Lending in 2023
To provide business lending products, banking incumbents have historically been tasked with gathering a plethora of unstructured data around SMB prospects to determine their creditworthiness.
Now, with the access to transaction data that open banking provides, lenders can offer more personalized financing solutions tailored to the specific needs of SMBs.
Transaction data provides real-time insights into a business’s cash flow, revenue patterns and spending behavior. By analyzing this data, lenders can make more accurate risk assessments, leading to fairer lending decisions. This is particularly beneficial for small businesses with limited credit history or seasonal revenue fluctuations, as traditional credit scoring models may not accurately reflect their financial stability.
Open banking facilitates faster approval and disbursement processes for financing solutions. By automating the analysis of transaction data, lenders can expedite the underwriting process and provide quicker access to funds.
For example, a lender may offer a flexible line of credit based on a company’s cash flow patterns or provide invoice financing based on outstanding receivables. These tailored solutions can help small businesses address their financing challenges more effectively and in a much quicker manner than traditional offerings. Speed is crucial for SMBs facing urgent cash flow needs or seeking timely opportunities for growth.
By enabling access to transaction data through open banking APIs, regulators promote competition and innovation in the financial services sector. FinTech startups and alternative lenders can use transaction data to develop new financing products and services that cater specifically to the needs of small businesses, fostering a more dynamic and diverse lending landscape.
See also: An Uncertain Economy Weighs on Embedded Finance Innovation for Marketplaces
PYMNTS Intelligence found that small businesses are at a crossroads in accessing and tapping credit. Nearly 34% of SMBs do not use credit but want to start. Over half of SMBs said they anticipated using corporate cards into the middle of 2024, surpassing business loans from online lenders (22%) or working capital loans from banks (21%).
“It’s not simple for small businesses to get a loan, even if it’s a small loan,” Galileo Financial Technologies Chief Product Officer David Feuer told PYMNTS in an interview posted in October. “Banks are becoming increasingly sophisticated in their use of data and their use of [artificial intelligence] to make intelligent decisions about who to make their offers to.”
The marketplace is beginning to react to the ways in which tech-first financing solutions have democratized SMB lending.
During this month alone, HSBC announced it is expanding its U.S. commercial banking operations to bolster its startup lending, while Nav partnered with Fundbox to ease the way for SMBs to access capital. With its algorithm that uses more than 45 data points and the user’s business data, Nav crafts personalized financial health insights and introduces small business owners to a network of financial providers.
Also at the start of March, Fundica, a North American funding search engine, teamed up with Visa to help traditionally underserved small business communities access additional sources of working capital.
We’re always on the lookout for opportunities to partner with innovators and disruptors.
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