Understandably, a lot of the buzz that resides around Open Banking disseminates from the belief that great opportunities await the everyday consumer. And I am not one to say this won’t come to fruition, but certainly there is a long road ahead of us. Given
my role at Validis, a B2B-focussed Fintech, I’m much more interested in the world of the SME and the opportunity Open Banking will provide for them.
It has been well documented that smaller organisations in the UK and Europe will be able to shop around more effectively when applying for credit. This is good. Notoriously under served and actively discouraged from opening accounts by the bigger banks,
regulatory-driven data sharing can only be positive.
I believe the banks, challenger banks and alternative finance providers can go one step further when accessing Open banking data, by pairing it with live Management Account data from SMEs. Combining these two datasets, you compliment the transactional, cashflow-centric
Open Banking data with a far more rich and contextual financial history and future projection, supplied by Management Accounts. Together they facilitate faster, more informed lending decisions for SMEs.
What does Open Banking data access provide on SMEs?
Currently only APIs for Personal and Business Current Accounts and Transactions have been published – it is anticipated that they will be extended in the future to cover other accounts such as unsecured lending and commercial cards.
These APIs cover the following areas:
- Account details
- Balances and credit lines
- Direct Debits (incl. ID, names, status, previous payment date and amount)
- Standing Orders (incl. ID, name, status, frequency, date and amount first payment, date and amount next payment, date and amount last payment)
- Transactions (incl. ID, amount, credit/debit, status, date, Transaction code, Merchant ID, name and category)
Value of Open Banking APIs for lending decisions
The Open Banking APIs provide a detailed overview of the bank accounts, and transaction history within these accounts and are far more up to date than Audited Accounts; this enables the potential Lender to understand past cash flow trends over time, as well
as income and expenditure trends. This is a great start and may be all that is required for a lender to make an informed decision as it provides a current view of the financial situation of an SME.
But can we take this one step further?
What does Management Account information bring in addition to Open Banking data?
1. Coverage – Open Banking only covers 9 banks initially and it will take a long time before it sits industry-wide. Management Account data provides comprehensive information across all banks, lenders and commercial card companies because the data is drawn
directly from the SMEs accounting package (so the only prerequisite is they have such a package). If an SME currently banks outside of the 9, then there will be no ability to share their information under the Open banking initiative at the moment. Further
to this, if an SME has a small deposit with one of the 9 banks but a much larger deposit with a bank residing outside of the 9 then this information wouldn’t be available to influence lending decisions.
2. Transaction classification – One critical element of the value of transaction data in Open Banking is the ability to classify revenue and spend transactions. This is extremely complex with Open Banking and can only be approximated. For example, how to
distinguish supplier payment from employee salary payments for small companies; how to distinguish payment for general expenses vs travel, equipment purchase, etc. For income, it will be difficult to differentiate between a supplier’s payment from a transfer
from a deposit account. Expense and income classification is available in Management Accounts in a standardised way. This enables a much finer understanding on how an SME spends its cash.
3. Forward looking information – Management Accounts include invoices not yet paid, as well as payments due, which provides a perspective on future cash flow position.
4. Breadth of information – Open Banking gives a good insight on cash flow, but provides no information about Assets and Liabilities and P&L. All this is available in as structured reports with real-time Management Account data.
5. Quality of management – By analysing Management Accounts, we can see how often an SME carries out account reconciliation, whether it pays its VAT on time, etc. This provides a unique insight into how the SME leadership manage their financials. This information
is not available when just looking at transactions information from Open Banking.
Faster, smarter lending decisions
The advent of Open Banking dawns a new financial era where considerably more information will be available for lending decisions. This will likely transform how lenders review SMEs and will benefit both lenders who will understand better SMEs financial situation,
and therefore the risk of credit, and the SMEs who will be able to access credit levels and prices more relevant to their requirements. However, it will quickly become apparent that the added information provided by Open Banking can easily be enhanced using
Management Account data, and provide an even finer understanding of risk and opportunities.