Why we need a new approach to Open Finance that prioritises SMEs

At Codat, we recently outlined an alternative approach to Open Finance. We chose to do this because we strongly believe that, although still in its infancy, current frameworks being  discussed risk neglecting those that stand to benefit the most—small businesses.

Unlike some, we don’t believe that Open Banking has been a failure. The benefits, like better visibility across finances and cheaper, faster payments are significant, and will continue to grow. But it’s certainly true that the current framework in the UK is heavily skewed towards the consumer.

Small businesses are seen as a smaller subsection of the 'consumer' category, instead of a separate, equally important group with distinct needs. This has a knock-on impact on the way that policy is designed and how offerings are created to benefit SMEs. In fact, only around a third of Open Banking solutions in the UK cater to SMEs, despite those businesses being just as willing as consumers to utilise third-party solutions, if not more so.

Worryingly, we are now seeing these very same consumer-focused policy discussions play out in relation to Open Finance—an approach that builds on Open Banking to enable the open sharing of far broader sets of financial data. Once again, the 5.5m small businesses in the UK, which make up over 99 per cent of the business community and account for around half of turnover in the UK private sector, are not having their needs considered.

If we compare the financial requirements of consumers to small businesses, it quickly becomes clear that even the smallest SME has significantly more complex needs than the individual consumer. They must calculate and file their own taxes, pay wages, dividends, and expenses, as well as manage customers and suppliers and comply with often complex, industry-specific regulations.

If we take accounting as an example, according to our recent Open for Business report, nearly two-thirds of businesses in the UK, the US, and Australia believe that time spent on accounting admin takes them away from growing their business. There is a strong appetite to automate this admin, through financial integrations made possible by Open Finance. 7-in-10 businesses believe financial integrations make their business operations faster and more efficient, according to the same survey.

But instead, discussions around Open Finance have been steadfastly focused on data sets such as mortgages and investments, which tend to have little or no relevance to the average SME. What’s more, the sharing of data sets that are the most central to SMEs’ financial management and wellbeing—like accounting and sales data—are being ignored.

To make Open Finance something that benefits not only consumers but also SMEs, developments in Open Data policy should take into consideration the frequency with which different data sets are shared, and the value this sharing offers. This will enable a framework that takes into account the needs of small businesses.

While it’s true that many financial platforms used by small businesses already have open APIs, the reality is that there are a plethora of hidden barriers that make accessing and sharing data difficult; significant costs and red tape are widespread and are preventing providers from developing innovative solutions that would benefit SMEs.

The performance of small businesses will of course be a critical factor in the post-pandemic economic recovery. SMEs need to be given full ownership of their financial data, and this means that they should be able to share it freely with whomever they like—no matter which system holds that data.

It's early days for Open Finance in the UK—the CMA, FCA, and PRA are due to set out a joint roadmap for its design and governance in early 2022. But if we don't act now to give the small business community the emphasis it deserves, those that stand to benefit the most will miss out, and the gap between SME and consumer access to digital services will widen. Appropriate regulation would help to level the playing field, ensuring that Open Finance can benefit the entire small business community—regardless of business size, time in business, or turnover.