How Opening Bank Data Can Transform SMB Lending

Open banking’s impact on small- to medium-sized businesses (SMBs) continues to proliferate as traditional financial institutions (FIs) embrace the opportunity to unlock data for third-party platforms.

FinTechs continue to push the envelope to see how far open banking frameworks can go in improving the SMB banking experience, and increasingly, SMB lending is shifting to the center of these collaborative efforts.

In the U.K., with open banking now more than 2 years old, the financial services industry has discovered that unlocking data can have a significant impact on the satisfaction of SMB borrowers, even facilitating easier bank switching for SMBs in search of a better user experience.

But Michael Ellis, head of commercial at Equiniti Group’s EQ Riskfactor, said the market is also quickly discovering that lenders themselves can benefit from unlocking data to improve SMB financing operations, and the U.K.’s experience is quickly influencing the way SMB lenders approach open banking in other markets like the U.S.

A Win-Win for Banks and SMBs

With open banking driving bank-FinTech collaboration and data sharing in the financial services space, partners have uncovered an opportunity to greatly improve the SMB borrowing experience.

“Regulation around open banking has certainly been of great benefit to businesses in the U.K., opening up the market and enabling innovation with the differentiation of new players who, due to size, are able to bring changes to the market far faster than the traditional larger banks,” said Ellis in a recent interview with PYMNTS.

The user experience is one of the strongest drivers of data-sharing initiatives today, with the ability for lenders to more seamlessly collect data on SMB borrowers making for a significantly less painful and faster on-boarding experience. Unlocking data also means an easier bank-switching process for SMBs in search of improved borrowing processes.

But lenders themselves, even industry incumbents, are also quickly recognizing the potential that unlocking data has not only on improving the SMB borrowing experience, but on significantly improving their own internal operations, particularly when it comes to risk mitigation.

Ellis cited that benefit as a key motivation behind EQ Riskfactor’s recent partnership with Codat, an accounting integration API provider that will enable EQ Riskfactor to wield Codat’s API to facilitate the sharing of SMB data to lenders.

Automated and accurate data aggregation means enhanced underwriting processes, particularly when data sharing occurs beyond SMBs’ bank account data and begins to include a wider set of data from accounting and other platforms. For lenders, unlocking data also means strengthened fraud mitigation.

This is particularly important in the supply chain finance arena, where heightened scrutiny of buyers’ supplier payment practices has elevated pressure on financiers to take a closer look at corporate balance sheets and potential indicators of financial trouble before any payables are financed.

“Whilst the lenders we work with have traditionally focused heavily on invoice data and verifications, the reality is that a business with financial pressures is more likely to commit fraud,” explained Ellis, adding that, especially in today’s market of uncertainty and volatility, fraud and default risks are certainly on lenders’ minds. “Early warning indicators and data validation from multiple sources provide an opportunity for lenders to create a positive dialogue where they both manage their position between and improve customer experiences.”

The U.S.’s Open Banking Path

The U.K.’s experience with open banking continues to be closely monitored in other markets around the world, including the U.S., where data sharing is gradually taking hold even without a regulatory mandate.

While more financial service providers in the U.S. are embracing opportunities to unlock data for third-party platforms, adoption of open banking remains relatively limited in the context of SMB lending.

“The roadmap to regulation has been in place [in the U.K.] for some time now, but it did take a while to drive implementation, particularly for larger businesses which often sit on different platforms to smaller businesses,” said Ellis.

He noted that companies like EQ Riskfactor have “a lot of work to do” to demonstrate the value of unlocking financial data for U.S. banks, including in the area of SMB banking, but progress is being made.

As that value is realized, Ellis noted an array of areas in SMB banking and finance that stand to gain from open banking frameworks.

Enabling financiers across lending products, from supply chain finance to asset-based and unsecured loans, to collaborate supports the development of best practices in risk mitigation, with data sharing a crucial component. He also pointed to the opportunities of historical data analytics to assess risk before an SMB is ever onboarded, enabling financiers to deepen ties between risk management, sales and marketing.

And looking ahead, said Ellis, risk mitigation also stands to gain from unlocking data in other areas of the enterprise like procurement and payments, especially as businesses embrace blockchain for many of these functions.

“There are limitless possibilities for the enhancement of business client lending improvements through the use of data sharing,” he added.