The pace of digital transformation in the financial services industry has accelerated by leaps and bounds since the beginning of the global pandemic. But long before COVID-19 transformed our daily lives, open banking was making headway around the world. As business customers fully embrace the digitization of banking, now is the time for forward-thinking business banks to embrace open banking.

“Open banking is the biggest revolution to hit the banking industry in the last 50 years. It will level the playing field,” says Rohit Arora, CEO and Co-founder of Biz2Credit, the parent company of Biz2X. “Customers are ready for open banking and like the idea.”

What Is Open Banking?

The term “open banking” refers to the way that financial institutions can provide “open access” to a customer's financial data so account holders can more easily use digital banking services to secure financing products.

Open banking uses open APIs (application programming interfaces) designed by third-party providers (TPPs) to give financial institutions access to customers’ aggregated financial data from held-away accounts. For example, you might be able to see a customer’s insurance information, held-away bank accounts, credit card accounts, supplier accounts and inventory.

Financial services providers have long accessed some of this information from data aggregators throughout the financial ecosystem, using a process known as “screen scraping,” which requires users to share their login credentials. Compared with screen scraping, APIs offer a more secure way to share customer data, using tokenization and other security tactics to battle data breaches, Customers have control, giving case-by-case permissions for their data to be shared and gaining transparency into they allow to access that data.

Spurred by government regulatory initiatives, the Asia-Pacific region and Europe have led the pack in adopting open banking. For example, beginning in 2018 the revised Payment Services Directive (PSD2) required large EU banks to build APIs allowing third parties to access their data. In Australia, the Consumer Data Right, introduced in 2020, heralded the launch of open banking.

The concept has been slower to take hold in the US, where regulators have not issued any laws equivalent to the PSD2. However, EY ranked the US fourth in its list of the top 10 markets poised to profit from open banking, and many large banks in the US have already moved to adopt the principles of open banking (even if they aren't exactly calling it that just yet).

Open banking opens the door to greater transparency, reduced lender risk, and innovative new products and services that will create more choice for customers—and more profits for financial service providers.

Benefits of Open Banking for Business Customers 

On the retail banking front, almost half (48%) of Americans aged 18 to 21 believe they will benefit from open banking. Budgeting apps such as Mint and PocketGuard that pull customers’ financial data from multiple sources have shown many consumers the value of of data sharing. EY notes that Millennials—who are a growing cohort of small business owners—are very comfortable with online financial transactions.

Open banking offers many benefits for business customers, including:

  • Save money: Open banking can make it easier for small business customers to compare loans and other financial products from a variety of banks without going through a complicated loan application process for each.
  • Improve access to loans and other financial products: Institutional bias prevents some small business owners from getting the capital they need. For example, Black, women and Hispanic business owners have traditionally been underserved by financial institutions. For lenders, the labor required to manually process and underwrite small business loans often outweighs the financial benefits of making the loan.

Open banking combined with digital lending platforms can solve both problems. Artificial intelligence (AI) supplied with a full range of real-time data on each borrower can create a fuller picture of risk while reducing bias. Automated loan processing saves man-hours, making small business loans more profitable.  

  • Faster loan disbursement: As the recent Paycheck Protection Program (PPP) loan process proved, small businesses seeking capital often need it now. Traditional loans can take weeks or months to approve and fund. Automated loan platforms using open banking can speed up the entire process, potentially enabling loans to fund in a matter of hours.

Benefits of Open Banking for Financial Services Providers 

Open banking can help financial institutions:

  • Reduce risk: Armed with access to current, accurate account information from a wider range of sources, banks can more easily assess a borrower’s creditworthiness and design loan terms appropriately.
  • Increase loan volume and profitability: Digital lending platforms using open banking streamline the loan application process and automate loan decisioning and underwriting, enhancing efficiency. When human intervention is needed only for complex loans, your institution can make more loans in less time.
  • Lower costs: Automating work formerly done by bankers reduces administrative and personnel expenses. Bankers’ time can be spent not on paperwork, but on complex transactions, relationship-building and other high-value tasks.
  • Enhance efficiency: Already, the ability to upload digital documents has accelerated the loan application process. With open banking, everything from loan applications and loan decisioning to disbursement and customer onboarding can happen even faster.
  • Monitor risk: With real-time visibility into a borrower’s aggregated financial information, including held-away accounts, lenders can better monitor risk and maintain compliance during loan servicing. This will require customers to grant continued access to their data, but many will be willing to do this if it means benefiting from new financial products or better loan terms.
  • Upsell customers: Using the new data provided by open banking, your lending platform’s data analytics can identify cross-selling opportunities so you can offer customers precisely tailored products based on their financial needs. For example, if your dashboard shows a small business borrower’s orders and revenues are growing rapidly, you could offer a working capital loan or increase the customer’s credit line limits.
  • Create new revenue streams: Tracking your commercial customers’ financial data may generate ideas for new financial products. Just as consumers are flocking to budgeting and money management apps, business customers may want financial advisory services or dashboards that they can use to better manage their business finances.
  • Attract and retain customers: By providing a better customer experience, greater access to capital and additional financial products, open banking entices new customers and enhances existing customers’ loyalty. This can give your institution a critical advantage when faced with fast-moving neobanks or fintechs in today’s competitive lending environment.

Keys to Implementing Open Banking

Will US small and midsized business customers embrace open banking? If Americans’ rapid adoption of digital platforms during the pandemic is any indication, the answer is a resounding “Yes.” Most business owners are willing to trade access to their data for greater convenience, quick capital and financial products that can help their companies grow.

Banks that use a digital lending platform are poised to gain the most from the open banking revolution. Traditional banks that aren’t already using such a solution should start the ball rolling now. Plugging aggregated customer information from open banking APIs into a digital loan platform’s AI-powered data analytics engine can take your lending from zero to 60.

When launching open banking initiatives, you must consider your institution’s underwriting policies, your organizational goals, and your business customers’ needs. “In my view, the best strategy for banks would be to make platforms which are easily configurable to develop a customized experience for customers,” says Arora.  

Open the Door to Open Banking

The open banking train is pulling out of the station, and lenders that fail to climb on board are putting themselves at a disadvantage. Open banking opens the door to greater transparency, reduced lender risk, and innovative products and services that will create more choice for customers—and more profits for financial institutions.