Opinion Digital Banking

Open Banking has failed small businesses (but Open Accounting might not)

Accounting platforms are fast becoming the universal operating system for small businesses. This creates a massive opportunity, writes Codat’s Alex Cardona.

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A ‘revolution’ in financial services: that was how the dawn of Open Banking was described at the start of last year. Its advent, coming as the result of major Europe-wide regulatory change, was put up in lights and widely seen as heralding a transformation in the way consumers and small businesses interact with their finances. Those expectations have, to put it bluntly, not been fulfilled. Both consumers and small businesses have seen very little change in the way they manage and access financial services. This is especially true of the small business market, and the reason is clear: no business manages its financial affairs from its bank account; they do it from their accounting software which are fast becoming the de facto business operating system for small firms. Understanding the actual financial health of the small business in question is very difficult from just the data that sits in any small business’s bank transactions. So to truly transform the financial services landscape for small businesses, it’s no good just enabling access to the data held at the bank, you need the data that sits in a business’s accounts. In short you need Open Accounting, not Open Banking. By giving permission in a consented and contributed way to third parties to access information contained in their accounting platforms, small firms can open up better, more tailored products and services. This means – for example - when a small business seeks a loan, it can choose to share complete, up to date, richly contextual information with a lender instead of risk being declined based on the partial, out of date and incomplete data held by most credit bureaus or Companies House. Enabling the SME to leverage their own accounting data means a better chance of acceptance and radically faster decision times. The limitations of the current landscape is now being recognised more widely. In his recent Mansion House speech, Mark Carney acknowledged that because lending it is only by opening up a “broader set of information” on which to base lending decisions that the £22bn funding gap for small businesses can be addressed. So, what needs to happen next? Open Accounting is much harder to achieve than Open Banking. The data in a small business’ accounting software is significantly more complicated than the data in your bank account. The market for accounting software is also fragmented – including cloud-based and on-premise options. If you’re a lender to small businesses and you want to use your borrowers’ accounting data, you’re going to need to plug in to lots of different software providers that all capture and label information differently. There is no central regulation guiding accounting software providers on how to build accessible APIs in the same way we’ve seen with banks and open banking. Crucially, data can flow the other way too: for example, open accounting means real-time information from point of sale terminals, like iZettle, can be plugged directly into a merchant’s accounting package, providing them with accurate, up to date sales data. All too often, small businesses have been an afterthought of product development. Banks have found it incredibly hard to build good products for small businesses as the information they need simply isn’t available without undertaking a manual, time-consuming, resource-intensive, expensive process that can kill the unit economics of any potential product. Making real-time data easily accessible to challengers and alternative lenders can make this a thing of the past, enabling challengers and alternative lenders to develop new offerings for small firms. Open Banking may have been a disappointment for small businesses, but Open Accounting can be truly revolutionary.

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