How open banking can help small businesses

Blogs 31 Oct 2023

Open banking solutions and apps can help cut businesses cut card costs, tackle late payments, find cost-effective borrowing, and deliver real-time business insights. Find out how with Open Banking Limited's quick guide.

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Written by Richard Newman, Director of Corporate Affairs, Open Banking Limited (OBL)

The past few years have seen unprecedented challenges for the UK’s 5.5 million small to medium-sized businesses – the pandemic, a cost-of-living crisis and inflation have seen increased running costs and restricted access to finance, as well as the long-standing issue of late payments.

However, there are some simple and effective ways to help tackle common business problems, courtesy of open banking solutions.

What is open banking?

Open banking enables businesses (and consumers) to securely share their banking transaction data, with a trusted third party in order to access tailored financial products and services, such as cheap loans. It also enables firms to access real-time financial data, giving an up-to-date snapshot of cash flow, often as part of a cloud-based accountancy package.

It also offers an alternative way to make payments out (for example, HMRC offers a ‘pay by bank account’ option to pay VAT and corporation tax), and for businesses to receive payments.

We know that about 750,000 of UK firms already use open banking solutions, but many business owners and sole traders are still unaware of the benefits it can deliver.

What are the benefits of open banking?

We explain how open banking can offer access to cost-effective lending, ways to cut card costs, new ways for customers to pay, and up-to-date insights into cash flow.

Cost-effective business borrowing

By consenting to share their business transaction data, potential lenders can access up-to-date data for credit analysis – rather than historic data – which offers powerful advantages.

Speedier and simpler loan applications

It speeds up loan applications and decisions – business owners can apply for loans in as little as five minutes. Because lenders can check eligibility promptly, they can often have a decision in days or even minutes.

Faster access to funding

Once loans are approved, this can also mean faster funding – some lending platforms can deliver funds within 24 hours, often with tailored repayment terms, including borrowing for as little as one day.

Accurate decisions

Better informed lenders are able to make more accurate decisions on risk and affordability, which means they are more likely to approve a loan, while effectively assessing a business’s ability to repay a loan also means that lenders can offer more competitive rates. One lender even offers a discount on the loan rate to firms which share their data.

Offer customers new ways to pay – and save on card payments

Open banking enables businesses to offer customers a wider range of payment options. ‘Pay by bank’ or ‘Pay by link’ options let customers initiate payments directly from their bank accounts, bypassing traditional card payment methods. Offering QR codes as a way to pay is also becoming increasingly popular with customers, charity donors, community-based organisations and social enterprises.

Both options can reduce transaction costs for organisations and provide customers with a secure, convenient payment experience and even eliminate the need to handle physical cash.

By leveraging bank-to-bank transfers, businesses can reduce the transaction fees associated with card schemes. For small businesses with lower transaction volumes or those operating on smaller profit margins this can offer compelling cost savings.

It can also assist with bulk payments. Surprisingly, around 46% of businesses still pay employee salaries using a manual process. Open banking platforms can connect to business accounts simply and securely to automate this process, speeding up the reconciliation of transactions, and the payment of salaries and bills.

Late payments and improved cash flow

With faster settlement times compared with traditional payment methods, small businesses can benefit from quicker access to funds. This can help improve cash flow and reduce the time between making a sale and receiving payment. Offering clients a ‘pay now’ option on an invoice via an embedded link in their accounts software makes it quicker for clients to make a payment.

Real-time insights improve decision-making

Many firms find it hard to get an accurate picture of their current funds – the Federation of Small Businesses estimates that 70% of SMEs can’t accurately forecast their finances. As a result, it can be difficult to control fluctuations in cash flow, prepare for unexpected shortfalls, and collaborate effectively with accountants and finance professionals.

Open banking enables seamless integration between banks and accounting software, providing real-time access to financial data. This ensures that forecasting and cash flow analysis are based on up-to-date information, generating more precise projections, and improving business decision-making.

Automated bank feeds can also save time on manual data entry, reducing errors and increasing efficiency.

How open banking can help your business

One small business owner recently told us that open banking was “like having an accountant and a financial adviser on your mobile phone”.

While we can’t claim that it can replace professional services, we are confident that growing use of, and familiarity with, open banking solutions can help many of the UK’s small businesses make big changes. Importantly, it can help them save time and money, and allow them to focus on their core business activities.

Find out more in our guide exploring how open banking can help small businesses.

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This content was provided by Open Banking Limited

Open Banking Limited (OBL) built the UK’s world-leading Open Banking Standard to drive competition, innovation, and transparency in UK retail banking. There are now 7 million active users – consumers and small to medium-sized businesses - of open banking-powered financial management apps and payment tools in the UK.