How Open Banking can benefit small businesses

By Ryan Edwards-Pritchard on 11th April 2019

Challenger Banks

Open Banking is still early days, but it has the ability to deliver a sea-change for small business owners, says Funding Options' Ryan Edwards-Pritchard

How Open Banking can benefit small businesses

Open Banking should deliver a sea-change in the way that people and businesses in the UK bank, yet it’s fair to say that the majority of UK small businesses are yet to experience the new array of products and services that are currently entering the market as a result. However – hopefully – things won’t stay this way for long, as research shows that 32.7m consumers and 4.8m small businesses are expected to adopt Open Banking by 2022. 

As we enter this new world of Open Banking, we’re not just looking at disruption in the financial sector but a seismic shift in the relationship between banks and their customers. For the first time, small businesses have more choice and new-found knowledge to manage their finances thanks to a host of innovations. Small businesses no longer just have a selection of a few products and services offered by the high street banks. Instead, they can access new products by alternative providers that are designed to respond to their needs. 

This transformation is a pivotal time in history for financial services that could also change the destinies of our small business community and our wider economy. It’s easy to forget that there are 5.4 million microbusinesses in the UK in 2018, accounting for 96% of all businesses - a phenomenal statistic when you consider that there are 5.7m private enterprises in the UK in total. 

We’re talking about plumbers, hairdressers, shop owners, contractors, accountants, tech start-ups, consultants – the businesses that make up the backbone of the UK economy. They are the businesses that don’t have the time or resources to think about their financial operations and procedures, and can be reluctant to seek finance or because of the perceived difficulties involved. 49% of small businesses who didn’t get the full amount they wanted when seeking a loan either gave up, cancelled plans or put plans for finance on hold, while 70% are willing to forgo growth instead of borrow. 

These are just some of the reasons that originally underpinned the introduction of Open Banking and the CMA’s package of measures. Designed initially to stimulate competition and choice in the financial sector, Open Banking has now morphed into an exciting opportunity that could consolidate the UK’s position as an innovative trailblazer globally. 

However, for the small business owner struggling to make payroll and a small profit margin, their concerns are much more immediate. While they might not appreciate the enormity of the effect Open Banking has had behind the scenes of the financial sector, they will certainly appreciate the new products and services designed with them and their pain points in mind. 

We’re already using Open Banking to speed up the process of lending and recently we were able to provide a £10,000 loan to a beauty salon in Kent in less than an hour and a half. There are a range of other companies such as Coconut which is a current account for freelancers and self-employed people that keeps track of your expenses and how much tax you owe, and OpenWrks which has created a service to provide small businesses with a personalised comparison of banking products based on how they run their business. 

These are just a handful of the hundreds of new innovations designed to solve real-life small business problems that are being created by the fintech community – either in partnership with larger players or as entrepreneurial start-ups. There’s a lot of momentum behind these new developments coming from not just the fintech sector itself but also from investors, government and the business community. Indeed, investment in UK fintech rose by 18% to $3.3 billion in 2018 while the London Mayor’s office is prioritising the fintech sector to maintain the capital’s position as the world leader. 

However, there’s still work to be done. Open Banking has the power to put control into the hands of small business owners for the first time, but unfortunately there is still a lack of trust and awareness which needs to be addressed first. As an industry we need to work together to show small business owners the benefit of using these new technology solutions and help them walk tall. If we support these individual small businesses to grow, we can also support our economy as a whole. 

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