By Jonny Hawkins, Head of Data Science at Liberis, a leading alternative fund provider for SMEs
The Open Banking regulations, which took effect in the UK on 13 January 2018, are a safe and secure way to give funding providers – just like Liberis – access to financial information quickly and efficiently, saving time and hassle for any applying businesses. Providers can access the necessary details through collaboration with open service developers and then use the data to decentralise decision making.
Naturally, providers have to comply with data protection rules, including GDPR regulations and best practice. Open Banking is also part of a sweeping piece of European legislation known as the second Payment Services Directive or PSD2. PSD2 are the rules that require banks to open up their data to third parties, and Open Banking dictates that they do so in a standard format.
In particular, it has been noted that small and medium sized businesses (SMEs) have had problems accessing finance through the traditional route of the banks; especially as the mainstream banking system has so significantly retreated from funding small businesses in recent years – with the total amount of bank overdrafts and loans outstanding to small businesses decreasing by nearly £6 billion*in the past five years. (*UK Finance Q2 2018 research).
Faster and easier application to access finance
To maintain growth and their contribution to the economy, SMEs are in need of simpler, faster access to finance; an alternative solution to the common lengthy applications and approval processes of traditional banks.
Open Banking is set to enable this improvement by putting customer data in the hands of those who are willing to fund quickly and responsibly. Where cashflow once existed in a complex ecosystem of different financial systems, businesses will now be able to enjoy greater simplicity at the click of a button. The potential for a single dashboard – powered by Open Banking – that securely unifies all accounts in real time will help maximise supply chain value.
Increased transparency through Open Banking all data and information is accessed
With Open Banking, finance can be more tailored to the individual needs of SMEs with the ability to build and access real-time reporting, liquidity positions, forecasting scenarios and supporting foreign exchange.
Open Banking may also help SMEs address many of their common challenges such as cash-flow and paperwork, as many new fintechs become the source of innovative solutions when it comes to answering these pain points.
Data protection and security
The security of Open Banking is ensured by the use of smart, integrated APIs. This technology is used by both the banks and the service providers – and sometimes a third party Open Banking processor too – to move the data. The law requires account providers to use strong customer identification, a procedure which allows the payment service provider to verify the identity of both user and the service.
There are 5 levels of security and data protection:
- Bank-level security – Open banking utilises rigorously tested software and security systems similar to those used in online banking.
- It’s regulated – Only businesses that have been approved by the Financial Services Authority (FSA) will be allowed to use the Open Banking system in this initial phase.
- You are in charge – SMEs can choose when and for how long they give providers access to their data.
- Extra protection – The bank or building society will pay the money back if fraudulent payments are made, there is additional protection by data protection laws and the Financial Ombudsman Service.
- Planning and forecasting – Open Banking can allow timely data which will allow more effective planning for future strategic initiatives.
Beyond UK borders
The most programmatic approach has been taken in the European Union, through both PSD2 and a broader effort to foster competition in retail banking through the United Kingdom’s Open Banking Standard. A key provision of PSD2 aims to foster competition and innovation for payments service provision in the European Economic Area by opening account access to nonbanks.
The United Kingdom’s pending separation from the European Union is not expected to alter these data-sharing protocols, as many of PSD2’s customer protection provisions are already protected in UK law and both the government and financial community have signaled a desire to preserve banking services compatibility— another strong indication of data sharing’s momentum. Italy, Belgium, and Germany each instituted common protocols as early as the 1990s to provide access to account information to smaller banks and third parties.
We are seeing the early stages of a seismic industry migration that will come into full force over the next five years. The emergence of innovations with the potential to drive simplicity and increase flexibility are turning a once complex web of financial institutions into unified tools to maximise value creation.
Open Banking is here to stay and it’s those fintech companies that adopt it are the ones destined to succeed in the future.
