Who’s afraid of open banking? Answering five questions about how technology has changed the game for business finance

Open banking plays a crucial role in the financial industry, yet few businesses know how it works and the advantages it gives them.

Who’s afraid of open banking? Answering five questions about how technology has changed the game for business finance

Open banking plays a crucial role in the financial industry, yet few businesses know how it works and the advantages it gives them. 

Often, Swoop’s work starts when the bank says “no”: a business has found that they need to borrow money for a project, to cover a bill or to purchase a property, gone to their bank and been turned down for the funds. 

While everyone at the bank might agree that it’s a great use of money, the customer is a good one and the business is sound, these reasons alone are sometimes not enough to get the cash into your business account. 

Enter Swoop: we have access to the whole of the market for business finance. How many lenders is that? The number is growing all the time, but at the time of writing, it’s more than a thousand. It used to be seven. No wonder businesses need a helping hand to find their way through this complex and diverse world. 

What changed? 

In a word, digitisation. The UK’s financial services industry is one of the most innovative in the world, and over the last decade has invested heavily in digitising the sector. Whether this means your traditional high street bank (Lloyds, NatWest, etc) has offered an app for your mobile or you’ve signed up to a digital-first disruptor bank (Starling, Monzo, etc), you’ll likely be used to making online payments, checking your balance online and doing the banking you used to go into the branch for through your computer. 

Open banking relies on banks storing their data on computers and securely sharing the information with each other.

What is open banking?

​​Open banking is the process of sharing banking information and data, such as account type, transactions made, standing orders and direct debits, with other entities. This information feeds into your online banking experience so that the things you need are presented to you while products that are irrelevant or for which you are not qualified are hidden. Open banking proactively tailors its offering to your profile and makes recommendations to you as the customer while helping providers to develop new services that are more relevant to your needs.

If you use accounting software, you are already using open banking, as these platforms make use of the data drawn from your business bank account. 

Why is it important for SMEs?

The benefits of open banking to SMEs are that lenders are increasingly able to offer products that suit the needs of these customers. For example, the Merchant Cash Advance (MCA) is a relatively new product that answers the needs of businesses that have sharp seasonal fluctuations: the lender puts a fixed price on the amount they lend, and repayments are made as a percentage of your credit card receipts. The more business you do, the faster you pay back. 

The other reason why SMEs need open banking is that better decisions can be made by lenders and solutions can be found. Rather than going through hundreds of lenders and thousands of products manually, APIs (which are the means by which two computers talk to each other) can find the most appropriate existing product for your needs. Just because your regular bank won’t lend you money, that doesn’t mean there isn’t another lender out there who is hungry for your business. 

Can you trust open banking?

Open banking is regulated by the FCA. This means companies have to follow strict rules and stringent standards to keep your data secure.

With open banking, you share the minimum data necessary for the product or service you want to use through a secure and encrypted digital process; the consent to do so may be withdrawn at any time. 

The final layer of protection is that should something go wrong, your bank or building society is obliged to pay your money back in the event of an unauthorised payment. You are also protected by data protection laws and the Financial Ombudsman Service.

What are the benefits of open banking?

Through open banking, an institution might be able to see that you are spending a large amount on rent, energy or foreign exchange. They can then find offers for the customer to save them money, such as a commercial mortgage, a cheaper energy tariff or a better deal on FX. 

In the future, lenders may offer more innovative products that suit the needs of businesses better than the traditional unsecured business loan. 

If your bank says “yes” quickly, congratulations, you have struck gold. But beware: there are hundreds of other lenders out there and unless you think you got lucky with the best deal first time, it may pay you to shop around.

Swoop uses open banking to help SMEs access funding across grants, borrowing and equity. The company also finds better deals for customers across a range of must-have products and services.

Andrea Reynolds
Andrea Reynolds

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