Why ‘open banking’ signals a welcome change for small businesses

With criticism that many of financial services offered to start-ups are complex and irrelevant, Nesta says its time to embrace the upcoming "banking revolution"...

Change is sometimes viewed with scepticism, sometimes cautious anticipation.

However, if you are one of the UK’s 5.5 million small business leaders and are underwhelmed by the quality of the financial services your business receives, you may be reassured to hear that banking for small and medium enterprises could be about to undergo a major overhaul.

In spite of economic headwinds UK small businesses and start-ups are optimistic, according to recent figures from the quarterly Small and Medium Enterprise Trends Survey report, with upbeat expectations for continued growth.

Assessing the current landscape

Research by the Nesta Open Up Challenge has discovered that many of these small businesses feel stifled by the burden of financial administration and a lack of quality financial products and services which are relevant to their needs:

  • 40% of British entrepreneurs find managing their finances and banking the most stressful part of running their business.
  • Small and medium enterprises are spending an average of five hours a week of their personal time managing financial matters.
  • Small businesses struggling with financial administration are also unimpressed by the lack of transparency and access to the best banking products and services.

While shopping for car insurance or a new mortgage has become much easier for consumers in recent years, this is not true of small business products; there are few digital platforms where business finance products and services can be easily compared.

According to our research, a quarter of business owners say that they don’t have time to switch their business bank account, and one in five small business owners say that they wouldn’t know where to look if they wanted to make a change to their banking or financial arrangements.

Whilst in recent years carefully designed, technology-enabled financial products such as peer-to-peer lending have grown, the majority of small businesses find accessing services built around their needs a struggle.

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But this could be set to change with…

The introduction of open banking

Recent UK and EU legislative developments mean that “open banking” will be a reality in 2018, and some argue that this could bring a revolution to the UK banking sector.

Open banking will enable small businesses to share their financial information securely with third parties, who can in turn help them to find – or provide directly themselves – financial products and services tailored to their needs and circumstances. Open banking promises a radically different relationship between small businesses and providers of financial services.

So, what will an open banking future mean for the UK’s 5.5 million small businesses?

Currently, the majority of small business banking services, such as loans, overdraft facilities and current accounts, are offered by only a small number of financial institutions with the four major banks taking the lion’s share.

A key objective of regulators in driving forward open banking is to trigger greater competition among banks and other providers of core financial services such as bank accounts, loans and overdrafts, resulting in more transparent pricing and the emergence of more tailored products for small business customers.

In addition, open banking aims to empower small businesses by enabling them to tap into the expertise of third party developers and data scientists through secure sharing of banking transaction data. This could equip small businesses with automation and insights tools previously only available to big businesses.

For a sole trader it could, for example, mean staying in the black and avoiding overdraft charges by automatically moving cash between accounts if there’s a danger of dipping into the red.

Ultimately open banking could enable entrepreneurs to spend more time growing their businesses and less time struggling with financial administration.

With small and medium enterprises vital to the UK’s economic health, this is one change that we’re certainly not anticipating with caution but enthusiastically embracing.

Nesta is calling on businesses to enter its ‘Open Up Challenge’, a new £5m prize fund created by the order of the Competition and Markets Authority to inspire the creation of next-generation services, apps and tools powered by open banking and designed for the UK’s 5 million small businesses. Applications close on 31 May 2017.


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