By Adam Prince, VP Product Management at Sage
Open banking has emerged as a beacon of innovation, empowering individuals with unprecedented control over their financial data. This revolution, sparked by a blend of regulatory reforms and industry initiatives, has not only fostered financial inclusion globally but has also marked the beginning of an exhilarating journey towards the complete digitization of financial activities for individuals and small businesses.
As we stand at the cusp of a new era with the third Payment Services Directive (PSD3), new Payment Services Regulation (PSR), and the Financial Data Access (FiDA) framework, the call for action is clear. The objective now is to champion a form of open finance that fully embraces the distinctive needs of small and mid-sized businesses (SMBs), alongside the existing consumer focus.
Igniting Payment Innovation: A Holistic Approach
This upcoming wave of innovation isn’t just an extension of open banking. It’s a transformative leap, encompassing a broader array of bank accounts, financial institutions, account-to-account payments, and diverse financial data types. To truly benefit SMBs and bolster the economy, a paradigm shift is essential – one that fosters an ecosystem benefiting all stakeholders.
To streamline business operations and accelerate payment processes, a collaborative effort is essential. Banks, governments, and financial service providers must join forces to eliminate the inefficiencies plaguing business payments.
So far, open banking has predominantly catered to consumer payment services, reaching an impressive 132.2 million users worldwide by 2023. Yet, the unique challenges of the B2B sector have largely been overlooked. Unlike consumer transactions, businesses often engage in multiple payments within a single process, have multi-layered approval requirements and deal with financial institutions beyond the regulatory scope, such as those not covered by the second Payment Services Directive (PSD2). These businesses require more sophisticated solutions than those currently available, to replace outdated, manual processes.
Unlocking the Full Potential of Open Banking for SMBs
Frameworks and technologies must evolve to address the specific needs of SMBs, from assessing creditworthiness to streamlining financial processes like reconciliation and payroll. The next phase of open finance must prioritise these business-specific needs.
Despite a consumer-centric approach, a significant number of UK SMBs are already benefiting from open banking. With around 750,000 SMBs harnessing its power for tasks like reconciliation and efficient payments, the impact is undeniable. Yet, with only a 16% penetration rate, there remains a vast potential for more businesses to leverage these solutions.
Crafting Future-Ready Regulatory Frameworks
In the UK, open banking regulations have been pivotal in advancing payment services. The next generation of legislation should set a new benchmark, aligning with business needs as we transition into the digital era of finance. Sage’s ‘Blueprint for digital-led growth’ in the UK proposes government actions to enhance growth and productivity through digitisation, impacting areas like tax efficiency, late payments, digital identity, and digital trade.
The introduction of Smart Data legislation in the UK is a step towards building a regulatory framework that supports SMBs across various sectors. This legislation not only safeguards business interests but also paves the way for the realisation of open finance, providing a clear roadmap for all involved parties.
In conclusion, transforming open banking into truly open finance is more than a regulatory shift; it’s a comprehensive overhaul of the financial landscape, promising a future where businesses and consumers alike reap the benefits of a fully digitised, efficient, and inclusive financial world.
