Open banking and open finance are buzzwords in the financial sector that have been sparking curiosity. They are frameworks that allow authorised third-party providers (companies or services that offer financial products/services to consumers) to access financial data from banks and other institutions via secure application programming interfaces (APIs).
In simpler terms, it’s like having a universal remote for your finances, enabling you to control and connect your financial information with different services.
Globally, open banking and open finance are at various stages depending on the region. However, both have generally focused on consumer payments and aiding individuals. This has left the needs of small and medium enterprises (SMEs) being overlooked – or assumed to be the same as those of individuals.
Yet, SMEs have existing needs that open banking can support or solve, whether that’s regular access to up-to-date financial data to help them forecast, secure credit or speed up payments. It can also help by providing alternative methods to making and receiving account-to-account (A2A) payments. These can be more cost-effective than card payments at a time when, for many small businesses, every penny adds up.
Why SMEs are embracing open banking
As technology advances and the world becomes more connected, open banking and open finance is gaining popularity. While often associated with consumer banking, SMBs are expected to be the fastest adopters of this new approach to finance.
The reasons? Greater transparency and efficiency in financial operations. Open banking allows businesses to easily share financial data with third-party providers, streamlining processes and improving decision-making. Businesses often deal with larger sums of money than individual consumers, making security measures such as two-factor authentication and real-time monitoring crucial. Open banking provides these enhanced security measures.
For example, we have partnerships with leading South African banks to enable businesses to automatically import transactions from their bank accounts to our accounting solutions. The bank feed integration allows customers to automatically import bank transaction history securely, eliminating manual entry and third-party connections. Data is transmitted safely and securely, using systems audited regularly to comply with the latest industry standards.
Challenges with legacy banking models
Currently, legacy banking models have their limitations when it comes to meeting the needs of SMEs.
Applying for a loan can be time-consuming and challenging due to extensive documentation and collateral requirements. Lastly, they do not always provide businesses with the real-time data needed to make informed decisions.
How businesses benefit
According to GoCardless, open banking offers solutions to these problems by providing improved access to credit, better cash flow management, and enhanced financial visibility. For instance, allowing third-party providers access to banking data makes it easier for businesses to apply for loans and access other financial services.
Businesses often have more complex financial needs than individual consumers. Open banking addresses these needs by providing real-time access to financial data, facilitating effective financial management. Moreover, businesses are often more willing to embrace new technologies in search of ways to improve their operations and gain a competitive edge. Open banking offers new opportunities for innovation and growth, which many businesses are eager to explore.
Open banking has led to a large wave of fintech innovation from both legacy financial institutions and start-ups. Whilst a lot of focus has been on the consumer benefits of open banking, SMEs have benefited from the simplicity and security it enables. Recent research from Open Banking Limited shows that roughly 750,000 SMEs are using open banking-related products and services in the UK, with a penetration rate of 16%, and likely to grow. However, compared to regions like Europe and the UK, open banking in South Africa is still in its developmental stages.
In conclusion
As of now, South Africa does not have a regulatory framework equivalent to the EU’s PSD2 (Payment Services Directive 2), which is the foundation for open banking in Europe.
The current state of open banking in South Africa includes; a number of banks providing API access and an increasing focus on digital transformation within the banking sector, including the use of AI and other technologies.
Open banking, and open finance support SMEs and enable them to focus on what matters most – growing their businesses. As we look ahead, it’s clear that open banking will continue to evolve and reshape the financial landscape, with businesses at the forefront of this transformation.
Jordaan Burger | Vice President | Finance | Africa & Middle East | Sage | mail me |
Related FAQs: Open banking for Small and Medium Enterprises (SMEs)
Q: What is open banking and how does it benefit SMEs?
A: Open banking is a system that allows banks and third-party providers to securely share financial data through APIs. For SMEs, the benefits of open banking include better access to finance, streamlined financial management and the ability to use open banking solutions to enhance their business models.
Q: How can open banking help small and medium-sized businesses automate their financial management?
A: Open banking can help SMEs automate financial management by integrating their banking platform with accounting software. This allows for real-time financial analytics, automated invoice processing and seamless transaction data management, ultimately saving time and reducing errors.
Q: What are some use cases of open banking in retail banking for SMEs?
A: In retail banking, SMEs can use open banking to enhance their access to financial products and services. For example, lenders can access transaction data to assess credit risk more accurately, providing better lending options tailored to the specific needs of business owners.
Q: How does open banking work for SMEs looking to improve their access to finance?
A: Open banking works by allowing SMEs to share their financial data securely with lenders and fintechs, enabling these entities to offer more personalised financial products. This creates a more competitive environment, which can lead to better financing options for small and medium-sized businesses.
Q: What are the advantages of for business owners?
A: The advantages of open banking for business owners include improved financial data visibility, access to innovative fintech solutions, and enhanced ability to negotiate better terms with lenders. This can lead to more favorable business lending options and improved cash flow management.
Q: Can open banking help SMEs in managing their cash flow more effectively?
A: Yes, open banking helps SMEs manage their cash flow more effectively by providing real-time financial insights and transaction data. This allows business owners to make informed decisions regarding spending, saving and investing, leading to improved financial health.
Q: What role do banks and third-party providers play in the banking ecosystem for SMEs?
A: Banks and third-party providers collaborate in the open banking ecosystem to deliver a range of financial products and services to SMEs. Banks provide the foundational financial data, while fintechs use this data to develop innovative solutions that cater specifically to the needs of small and medium-sized businesses.
Q: How do banks ensure data security for SMEs?
A: Open banking employs strict security protocols and regulatory standards to ensure data security for SMEs. Only authorised third-party providers can access financial data, and this access is granted with the customer’s explicit consent, ensuring that sensitive information remains protected.
Q: What financial products can SMEs access?
A: Through open banking, SMEs can access a variety of financial products, including business accounts, loans, credit facilities and payment solutions. The integration of open banking enables lenders to offer tailored products based on the real-time financial data of the business.
