Open Banking – Charting industry progress and exploring complementary data assets

We were lucky enough to sit down with Richard Davies (SME Banking Director @ TSB) and Nick Vanstone (Director of Business Information Consulting @ Experian) last month to discuss Open Banking. It was an engaging and informative dialogue and one that paints a picture of opportunity and unparalleled connectivity, although not without its challenges.

We have also documented the discussion in our latest paper; Open Banking – Charting industry progress and exploring complementary data assets, but please read on for the highlights.

‘Plenty of progress has been made from what was effectively a standing start’

Richard’s view is clear. New regulatory changes that effect market technology, especially broad-based ones like Open Banking, will take a period of adoption while organisations develop and adapt. Nick agrees, suggesting a period of ‘three to four years’ for Open Banking APIs to become significantly more embedded and offering value to SMEs.

They also paint a positive picture for the UK Government’s speed-to-market approach to API connectivity. ‘The UK is ahead of other developed markets in general,’ says Richard, ‘we’re ahead of Europe and PSD2 for example.’ Nick believes the UK’s ‘standardised approach’ is also a big plus and will help regulate and develop the Open Banking market in the future.

Other territories have been getting involved too. Nick highlights the work that banks in South Africa have been doing to share bank statements (PDFs via a data exchange network) for mortgage applications, an idea he believes, ‘paved the way for initiatives like Open Banking’.

What are SMEs struggling with and how does Open banking help overcome these challenges?

‘Getting the right product or service at the right time,’ states Nick. ‘SMEs need money and normally need it quick and currently everything is too slow.’ He believes that Open Banking will help turn transactional data into rich intelligence, helping SMEs manage their business better.

Richard highlights trust as a key factor in the speed of adoption. ‘Imagine a safety deposit box, people want the virtual equivalent,’ he says, ‘but it will take time for trust to spread.’ He believes the use cases for Open Banking are endless, ‘lending is an obvious one, but also, insights, benchmarking, unbundling FX and getting better return on their spare funds.’

Nick sums up the SMEs position nicely, ‘they just want to get on and run their business and know about the issues, stresses and opportunities within it.’ Data connectivity and innovations, such as Open banking, will help SMEs do this.

The opportunity for connecting API-enabled data assets

The conversation drifts through Government support, consumer attitudes to data and arrives at the benefit of connecting multiple data assets via API. ‘Customer experience is very important,’ says Richard. He firmly believes you start with the customer and work back to which data connections you need. He highlights Amazon as an example of a mature API-connected business with a highly customer centric approach.

Nick is keen to stress that, ‘traditional data assets still underpin the SME market in the UK.’ But in the future SMEs will need to be able to answer questions like; are we covered from an AML/ Fraud/ Credit Risk perspective? Do we understand what facilities we have today and are they paying the bills? Can we cover the credit we are taking on? Nick continues, ‘connectivity is good and overlaying data assets with Open Banking, such as Management Account data, helps SMEs better understand the risks of their business and their ability to service their debt.’

The conversation settles on this complementary data asset and we discuss how Management Account data specifically (extracted directly from an SMEs accounting package) offers a unique compliment to Open Banking data and should make up a key part of a Lender’s data strategy as it is readily available source today.

Why partner Open Banking data with Management Accounts?

Open Banking APIs are in a primitive stage of development and yet promise great opportunity for consumers and SMEs alike. Accessing Management Accounts in real-time offers a wealth information to the organisation servicing the SME.

There are five clear areas that Management Account data compliments Open Banking data:

1. Coverage – Open Banking only covers 9 banks initially and it will take a long time before it sits industry-wide. Management Account data provides comprehensive information across all banks, lenders and commercial card companies because the data is drawn directly from the SMEs accounting package (so the only prerequisite is they have such a package). If an SME currently banks outside of the 9, then there will be no ability to share their information under the Open banking initiative right now.
2. Transaction classification – One critical element of the value of transaction data in Open Banking is the ability to classify revenue and spend transactions. This is extremely complex with Open Banking and can only be approximated. Expense and income classification is available instantly in Management Accounts in a standardised way. This enables a much finer understanding on how an SME spends its cash.
3. Forward looking information – Management Accounts include invoices not yet paid, as well as payments due, which provides a perspective on future cash flow position.
4. Breadth of information – Open Banking gives a good insight on cash flow, but provides no information about Assets and Liabilities and P&L. All this is available as structured reports with real-time Management Account data.
5. Quality of management – By analysing Management Accounts, we can see how often an SME carries out account reconciliation, whether it pays its VAT on time, etc. This provides a unique insight into how the SME leadership manage their financials. This information is not available when just looking at transactions information from Open Banking.

Faster, smarter lending decisions

The advent of Open Banking dawns a new financial era where considerably more information will be available for lending decisions and other use cases. This will likely transform how financial organisations review SMEs and will benefit a Lender, for example, as they will better understand an SMEs financial situation, and therefore the risk of credit. It will also benefit SMEs who will be able to access credit levels and prices more relevant to their requirements. However, it will quickly become apparent that the added information provided by Open Banking can easily be enhanced using Management Account data and provide an even finer understanding of risk and opportunities.

Richard sums up our conversation nicely, ‘I think it will be transformative over a 5-10 year period. I hope the data sources will change the market in the favour of the SME, balancing profits and pricing to increase choice.’

Download our latest white paper discussing the progress of Open banking – Download the paper >>

This article is a paid-for placement by Validis

About Validis

Validis is a London-based FinTech and the developer of DataShare, a secure data extraction and standardisation solution used by banks and alternative finance providers to optimise their SME lending processes.

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