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Providing opportunities for small businesses through open banking

Experts weigh in on how organizations can benefit from access to a broader array of financial services.

Oct 5, 2023 / Technology

The concept of open banking is typically from the retail customer’s perspective—their control over their information, how APIs can make payments and other services easier for them and what providers are doing to minimize the risk of fraud now that their data is shared more broadly. 

But on the other end of that payment is a business, and it’s often a small business striving to streamline its operations, reduce its cost structure and strengthen its customer connections. 

What role do financial institutions (FIs)—many of which are now paying more attention to SMBs—play in this dynamic environment? Three experts weigh in. 

Julie Morlan, senior managing director of Jack Henry Digital Solutions, based in Monett, Missouri 

Small businesses have as much to gain from open banking as retail customers, if not more. Open banking standards make it easy for businesses to control and permit secure access to their data, allowing them to leverage the best financial relationships. 

Recent Mastercard research shows that 86% of SMBs need a consolidated place to check on the financial health of their business, and 87% would like to better use their financial data to make informed decisions. Banks with an open business banking platform meet this need with a safe and secure central location to view, analyze and manage their entire financial portfolio. 

By embedding third-party fintechs into the digital banking environment, business customers can better control their expenses, cash flow, payment rails, permissions, loans, forecasting and other financial activities from their trusted banking environment. This single source makes many tasks easier, such as preparing for tax season. Allowing a bank to be the central hub for finances reduces the complexities and vulnerabilities of dealing with fragmented financial providers and can ultimately improve the financial health of the business. 

Once a relationship is established and business finances are aggregated within a trusted relationship, the bank can offer its business customers more competitive services, such as better loans, or strategic solutions for their unique business needs. Open banking empowers banks to offer the financial data and insights that SMBs desire, attracting new businesses, building relationships and helping businesses scale from solopreneurs into financially strong SMBs. It’s a benefit to the bank as well as the SMB. 

Wade H. Barnes, financial services practice leader at Hartman Executive Advisors, a strategic technology and cyber advisory firm based in Timonium, Maryland

Open banking doesn’t only have advantages for FIs to expand their reach and increase their transactional accounts and interchange opportunities—it can also provide a great opportunity to help their SMBs grow and prosper.

For example, let’s think about a roofing company focused on solar panel installation. Previous government subsidies aided sales of solar, but as those funds deplete, potential solar clients may be shocked at or unwilling to outlay the upfront cash for the project. In turn, the roofer’s business slows, and their business with the bank isn’t as robust as it otherwise could be. 

Imagine a case where the FI works with a fintech partner who private-labels a loan origination solution for the FI, branded as the roofing company’s private financing arm. Within minutes, the roofer can process an application for financing, which can run through an automated underwriting process and offer instant approval. The roofer gets a project, the FI gets a loan from the property owner and the FI’s relationship with the roofer becomes stickier.  

While this is just one example, it could be applied across trades, services and products. It gets back to the root of community banking—rising tides lift all ships, whereby everyone’s business and the communities they support are stronger. 

FIs must understand how technology is shifting the way in which they will compete to acquire and retain business. Those that are serious about exploring this should consult with experts to learn best practices for building these capabilities to ensure competitive relevance for the future. 

Anna Kooi, national financial services leader at Wipfli LLP, based in Chicago, Illinois 

Core and other service providers are continuing to move in this direction and push the benefits of open banking and APIs. A lot of FIs are being bombarded with messaging but have concerns around shared data, open banking partners, competition with their own business, privacy and regulatory issues stemming from all of these concerns. 

Many seem to be hesitant to adopt for the same reason that many FIs were hesitant to move from on-premise servers to the cloud—it’s a change to how customer information is handled, which is usually met with skepticism. The current post-Silicon Valley Bank regulatory environment and third-party risk guidance are adding more pressure, as are the unknowns around what the next exam will look like. 

FIs need to have a high level of sophistication to understand the associated tech and risks, as well as have people in the institution with expertise in this area, which many FIs don’t. This is an area where outside expertise in tech strategy and risk could be a great help to those FIs that want to look harder at the risks with tech. 

A number of fintechs might not be aligned well with FIs from the standpoint of protecting the customer and their account info. They say they are, but they are not regulated like FIs. This is another reason why FIs are hesitant to jump in. They believe that many fintechs are focused on making money and exit plans, and FIs will be the ones on the hook if anything goes wrong. Again, the expertise in evaluating the potential partner and ensuring that they understand the regulated industry that they’re trying to support is important. 

It will also be interesting to see how privacy laws continue to develop in the U.S. and how they impact the handling of customer data. As more states develop different rules, it might make things more difficult and more expensive for FIs to manage. 

From the client perspective—personal or business— most customers really don’t have a good understanding of what they’re actually sharing or what the risks are to engaging with an open banking solution. Or, they don’t care. If it makes things more convenient, then it’s a win—until something goes wrong. If they can save steps by entering their online banking credentials, they usually will. 

It’s similar to buying a new iPhone. How many people actually know the amount of data that’s being collected and shared when their phone is on? And even if they do, how many go in and change the settings to limit it? 

Katie Kuehner-Hebert is a BAI contributing writer. 

We offer actionable insights on other open banking topics that can benefit financial institutions in the BAI Executive Report, “Creating new opportunities through open banking.”