What Open Banking Can Mean For Small Businesses

Bernardo Martinez is the Vice President of Global Merchant Lending at PayPalleading the company’s merchant lending strategy.

Data protection continues to be a central focus for small-business owners. This is imperative for business security, protecting trade secrets, and of course the data of employees and customers. The challenge becomes balancing the security of data while also leveraging the untapped benefits of authorized access to trusted partners.

Consumers already have this choice. For example, when they want to connect their PayPal accounts to a traditional bank account, PayPal works with partners to link to those accounts. This allows for both accounts to easily talk to one another to benefit the consumer’s management of their finances. What about small businesses though? Small businesses either don’t have this ability or run into complications that make the connection difficult and hard to establish.

Small businesses face challenges across the board. Macroeconomic trends are causing labor shortages, supply chain issues, challenges in acquiring new customers and restricted credit access. One of the overlooked solutions to help entrepreneurs address some of these challenges is the ability to easily link their accounts across financial institutions to allow for more “digitally native” services.

The linking of these accounts and leveraging more consumer data is often referred to as open banking. Two important benefits that open banking can provide include:

Efficient And Often Seamless Business Management

Small-business owners are regularly tasked with wearing lots of hats. They are the company visionaries, accountants, marketers, payroll and more—leading to an incredible amount of work that needs to be streamlined. Open banking can help optimize operations by facilitating access to banking information, allowing entrepreneurs to leverage third-party software that can automate various tasks. This level of automation allows the business owner to focus on other parts of their business. For example, they can use the banking information to forecast cash flow to better manage their business operations.

Convenient Access To Loans

One of the more potentially impactful benefits of open banking is easier access to capital for small businesses. Small businesses require capital to drive efficiency by upgrading equipment, increasing revenue by adding inventory or investing in marketing to acquire customers.

Currently, small businesses face incredible hurdles when it comes to accessing capital. The traditional route is time-consuming and may be prohibitive as many small-business owners believe they will be denied. An alternative lender—such as a payment processor—could provide a simpler service but may not see the full financial picture of a business, leading to less favorable terms on a loan.

Not all challenges are application based. In fact, a 2021 Wakefield Research study commissioned by PayPal found that of the 1,000 SMB owner respondents, 32% who considered applying for a small-business loan between 2020 and 2021 did not apply due to assumed barriers. Other respondents cited decision barriers, as well as time gold documentation barriers. Additionally, 24% of SMB owners who responded expressed concern about getting rejected by future loan providers if they were declined for a business loan.

Open banking could help reduce these concerns. It can allow alternative lenders to see a greater picture of the business’s health, allowing for stronger decision-making and potentially higher eligible amounts. Additionally, open banking information can serve as an alternative credit scoring model by leveraging the transactional flow of small-business customers to understand their capacity to pay and payment history.

It’s important to consider that open banking adoption requires that customers feel safe and secure when sharing their data with financial institutions and/or service providers. Not having a standard may create concern for customers using open banking, limiting the number of users. In addition, not having a standard may limit the use cases as financial institutions may share different information for different customers, resulting in potential friction when building new customer experiences or limiting the possibility to use it. For example, banks may decide on different numbers of months and fields available via open banking, which may limit fintech providers to build algorithms to enable great customer experience.

All these benefits need to be balanced with the need for responsible and secure sharing of data, even when the data is consented to be shared. One thing is for certain, open banking can benefit small businesses by enabling them to have better access and offers, and more efficient processes for their business.


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