Advantages of Open Banking

 Open Banking is a new legislation, introduced in January 2018 by the Competition and Markets Authority (CMA). It is designed to open up competition within the banking industry by forcing providers to enable customers and SME businesses to share their account information and data securely with other third party providers.


These changes are likely to help facilitate SME businesses seeking finance with an increasing amount of choice, alongside enhancing the internal due diligence systems of lenders. The latter will allow companies to access finance faster and more easily.


SMEs will also be able to benefit by being able to better plan for their financing needs by creating predictive cash flows and scenarios through associated API integrations.


Open Banking Will Create More Choice For SMEs Seeking Finance


Open banking is likely to increase the choice companies have in seeking finance due to being in control of their live banking data and deciding how they use it. Up until now, companies have had limited flexibility when reviewing their funding options due to a combination of banks typically not lending to them, alongside not being able to easily transport their banking data to see whether they are deemed credit worthy by other providers.


Whilst alternative finance has opened up competition within the marketplace (UK funds transacted in 2017 were £4.6 billion), this choice is now likely to be accelerated further by businesses being able to submit live banking data to funding providers. 


API Marketplace


There is now an open banking marketplace emerging, which will allow API companies like Bud to take the banking data of SMEs, and connect them directly to innovative lenders.


This will allow SMEs to find out about niche products which may be relevant to them such as Crowd2Fund’s venture debt.


Whilst Bud is a relatively new service, it already works with over 50 financial services companies.


Open banking is also enabling SMEs to demonstrate their credit worthiness to would-be lenders. Services such as Credit Data Research use advanced technology to help SMEs manage their credit profile and enhance their chances of receiving debt finance.


Open Banking Will Enhance The Internal Processes Of Lenders To Make Decisions More Quickly.


Open banking will provide the likes of Crowd2Fund with another data point on which to make lending decisions.


Combining this live data with historic management accounts and statutory filed accounts will help to build a more complete picture of a business to provide more thorough due diligence processes.


Being able to port this data directly to platforms will speed up lending decisions and ultimately facilitate companies with faster access to cash.


It is also possible that this new data point will result in more accurate lending decisions, with businesses who may have been turned down in the past now being able to access finance.


Enhancing Cash Flow Planning And Financial Management For SMEs


Open banking is primed to support to SMEs to better plan for their funding requirements by empowering them maintain more accurate forward looking cash flows.


Tools like Fractal and Fluidly use real time open banking data to predict future cash flows. This will enable companies to better plan how to allocate their resources, as well as giving them advance warning of when they are likely to need a fresh cash injection.


Having a more accurate forward view will allow companies to anticipate shortfalls and allow them to access these funds ahead of time. This will give owners peace of mind that they will be able to meet their financial obligations and grow their businesses.


Additionally, being aware of these cash gaps ahead of time can aid businesses seeking to raise equity finance to be able to better negotiate valuations, giving them more time and leverage to seek higher valuations due to being in less of a rush to close fundraising rounds. 

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Risk warning

Investments like these involve risks including loss of capital. Please see our risk section before making an investment decision