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Open Banking: How It Can Be the Next Big Thing for Small Businesses

The best thing about technologies is that there will always be something new, something better. Open banking is another example of technology that can make things better for customers and for banks. Open Banking is the new revolution in the financial service industry. There are tons of products and services being powered by open banking APIs. In the UK (the global open banking leader) there are over 100 regulated open banking apps. But what is it that open banking APIs and open finance can do for small businesses?

Open Banking products and services have the capability of revolutionizing online payments methods. Here are the most common benefits offered by open banking APIs to small businesses:

  • Improving cash flow
  • Avoiding wasting time due to late payments
  • Having visibility over which customers have and haven’t paid
  • Enhancing the rate of successful payments
  • Real-time digital payments 24/7
  • Reducing the amount of manual work needed to reconcile payments

The reason for open banking being the hype throughout the industry is because it can offer the above-mentioned benefits and more to businesses. There are certain benefits that any business can’t achieve by leveraging ordinary technologies.

What is Open Banking?

Open Banking describes the process of banks and other financial institutions being open with their data for regulated providers to access, share and use the data to build custom products and services. 

Banks are putting in time and resources in place for their customers’ data to be shared simply and more easily with authorized third parties, with customer consent. It is vital that customers give consent about their data being shared as open banking isn’t a scheme to allow banks to sell the customers’ private data. The goal of open banking is exactly the opposite, open banking was conceived to improve financial services for the customers. By banks sharing their in-house data, new companies and new products can come to the market, they can use this data to build custom products and services. 

Open banking can also be used to initiate Account-to-Account (A2A) payments. There are several companies in the market leveraging this feature to enhance the digital payments platform. 

Scale of Open Banking

The origin of open banking in the UK was first talked about in 2013 with a proposal from the European Commission to revise an EU regulation known as PSD2. The Open Banking Implementation Entity (OBIE) came into existence in 2016, it’s responsible for creating software standards and industry guidelines that allow open banking. In 2018, they launched the Open Banking Standard and since then open banking in the UK has seen a boost, and all the signs suggest that the industry will keep growing.

Data collected from OBIE signifies the scope and growth of the open banking industry in the UK:

  • 300 new FinTechs and innovative service providers have joined the industry.
  • 2,500,000+ UK consumers and businesses now use open banking-based products to manage their finances, access credit, and make real-time payments. 
  • 100,000+ UK consumers and businesses are becoming active members of the open banking platform. 

It’s not just small-time players, even the bigger players are leveraging open banking technologies in their products. That’s not all, even the industry giants like Visa and Mastercard are expanding their time and money on the space, showing their trust in the technology and the level of seriousness. Since 2018, Visa and Mastercard have invested almost $3 billion in the major acquisition of open banking providers. 

In the US, in the 1950s, card payments came into existence with BankAmericard. Today, card payments happen every second. But the favor for card payments is falling. That’s one of the biggest reasons why banks and other institutions are dumping billions of dollars to develop open banking-based technologies. Open Banking has pushed the need for innovation and a need for healthy competition in the financial services industry. 

Open Banking Payments: Businesses that Invoice

The features that the open banking landscape has to offer are seemingly vast. So it can be tough to understand what these products are, how they work and the benefits they provide in turn of traditional solutions.

For most small businesses, the only way of getting paid is to invoice a customer and receive payment using manual bank transfer 30 days later. This results in late payment and it’s not a small problem for small businesses. The late payment problem causes billions of dollars worth of losses each year globally. In some situations, small businesses end up dying because of late payments. 

Automating the payment collection using Direct Debit addresses the root cause of late payments. However, some customers may refuse to pay this way. 85% of small businesses with recurring revenue need to collect one-off payments outside their invoicing cycle. Whenever payments require instant payments, Direct Debit isn’t a suitable option for business. 

Payment methods based on open banking technologies address these problems. While manual bank transfers are tedious and time-consuming, open banking payments can offer smooth flow and real-time payments.


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