While Europe, the U.K. and Australia are well on their way to adopting open banking, in the U.S., sharing banking customers’ data freely and securely with third parties remains uncommon. The pandemic may change that.
Banking customers – particularly small businesses – are increasingly realizing the value of sharing their data amid COVID-19. Benefits can include better understanding of one’s financial position, forecasting cash flow, and quickly applying for loans and government grants.
While some of these tasks are traditionally managed through spreadsheets and manual uploads, the urgency of COVID-19 has revealed the value of electronic and often automated solutions that offer speed, security and accuracy. Whether open banking is led by private sector initiatives (U.S.) or government mandate (U.K.), sharing data via an application programming interface is moving from a “nice to have” to a “must have.”
For example, in the U.K. and Australia, small business accounting platforms automatically receive customer transaction data daily from banks via API. Business owners are accustomed to seeing their transactions imported every morning. This gives them an instant overview of their financial position, makes it easy to track money coming in and going out, and eliminates time spent manually importing data and reconciling transactions.
During the pandemic, this automated data flow is helping to deliver insights that can keep a business solvent. Accounting platforms in recent months have built tools that transform this banking data into a business snapshot. The result is a dashboard of key metrics showing business performance at a glance.
Over time, businesses are learning to identify trends and evaluate their position – including the ability to see how COVID-19 has impacted their revenue compared to the same period last year. This function has been particularly important in Australia, where federal COVID-19 wage subsidies require that an employer submit data that compares their current revenue to before the pandemic.
Other novel uses of open banking amid COVID-19 concern cash flow. An April survey of U.S. small businesses found that those with less than $10,000 in monthly bills had enough cash on hand to cover only one month of expenses. With this vulnerability in mind, some accounting platforms in European and Asian markets have rolled out cash-flow prediction tools.
For businesses, these applications use data – including bank account information, bills and invoices – to project bank balances 30 days into the future, showing the impact of existing bills and invoices if they’re paid on time. Business owners can work out which invoices they should follow up on and model how their cash flow will change if they pay a bill this week versus next week.
Cash flow crunch
Even the best data can’t overcome a complete lack of revenue, but banking and accounting data, shared via API, can help businesses quickly access the capital they need to stay afloat in truly difficult times.
In the U.K., where open banking has been underway for two years, small businesses can direct banks to share their account data to access loans and government grants. Some private sector lenders offer five-minute application processes for loans of up to £250,000 ($325,000), with the promise of approved funding delivered within 24 hours.
In Australia, open banking was taking only its first steps when COVID-19 appeared. But the nation’s businesses already had some of the world’s most robust direct feeds of bank transaction data, thanks to a decade of integration with cloud-based accounting solutions. Businesses there can apply for unsecured loans of up to A$500,000 ($360,000) from a variety of bank and non-bank lenders by sharing their accounting-platform data, receive a decision within minutes and get funding in as quickly as a day.
In the U.S., banks that offer APIs for sharing data are rarer. We are, however, hearing success stories about the utility of having that data easily accessible. Some advisors have used this information to expedite applications for the federal government’s Paycheck Protection Program, while others are using it to help customers better understand their financial position in real time.
The pandemic’s course from here remains unpredictable, but we know small business owners will need every edge that technology and the free flow of financial information can provide. We expect the demand for open banking to only grow from here, and its benefits to accrue to both the financial sector and the small businesses they serve.
Edward Berks is global executive general manager for financial partnerships at Xero.