By Amelia Isaacs on Tuesday 16 August 2022
Christoph Rieche spoke to AltFi all about the benefits open banking holds for small businesses, if only they are empowered to take advantage of them.
Many small businesses are feeling the pressure as news from the Bank of England warns of a looming recession, interest rates hiked up to rates not seen in 27 years and the economy is looking as bleak as it did in 2008.
With almost half of brokers submitting more loan applications for small business financing in the last month compared to the previous, according to iwoca’s SME expert index, access to funding is hugely important right now.
One of the first companies to hop on the open banking train, iwoca has been using the technology to help support small businesses for about five years now.
Founded in 2011 by Rieche and CTO James Dear, the SME lender has been there for open banking “since the very beginning”, Reiche told AltFi.
“We’ve seen quite a lot of shit during these 10 years, lots of crises haunted us from basically the very beginning,” Reiche said.
“We started out of a crisis and it didn't take long for new crises to emerge, long before the pandemic. But our mission and commitment to financing and million small businesses is unwavered.”
While many businesses still aren’t being served by major banks, iwoca now has a personal best of two minutes and 37 seconds to fully onboard a customer and fund their account with cash – something that can only come from being 100 per cent automated, Reiche said.
The SME lender was the first to sign up as an alternative lender to the CMA9 to facilitate open banking lending.
While Rieche by no means put forward open banking as a faultless solution, he explained it has had a “pretty significant impact” both on the company and its customers in their borrowing and lending relationships.
Here are his top three benefits for open banking for SMEs…
As a lender, being able to give customers choice when it comes to how they provide their information is a huge benefit, Reiche said.
If they choose to go through the opan banking route, lenders can get access to a long data history of bank statements on customers.
What customer will want to manually upload, for example, 36 statements to get three years’ worth of data?
“So you can imagine, you can't ask any customer to do that,” Reiche said.
“Usually you can't really ask for more than three, or four, maybe six [statements].
“But it's just the convenience that comes from being able to do it digitally and all of this information is good for our underwriting if we have a longer history.”
“In theory, it should be highly reliable, because they can't tamper with it,” Reiche said.
“Unfortunately, there are a few people under us that are not trying to play by the rules, and they're trying to game us and they turn to fraudulent activities, like making their bank statements look a little better than they are.”
This is only a small percentage of all activity though, and there are standards in place and the company’s own fraud detection mechanisms to ensure they are not being “gamed”.
With the vast majority of customers, open banking is “highly reliable”, making it a more secure option for lenders.
Seeing data on an ongoing basis, rather than requiring users to upload documents again and again, allows lenders to approve customers on an ongoing basis and to monitor the health of the business, Reiche explained.
With access to continuously updated information, customers can be approved on an ongoing basis, so if they have repaid they have the option of accessing additional financing.
“Where open banking is really making probably the biggest difference from a customer perspective is that we can offer customers a product where we link their repayments to us to the actual revenues that they generate,” Reiche said.
“Because through open banking we have this ongoing access to their data, we can see what revenues they generate in real time and then we can aggregate that on a periodic basis whether that's weekly, daily or monthly, and then agree before they withdraw their money from us, you will pay say 10 per cent of your revenues every month.”
Then, with open banking, it can aggregate revenues through different merchants, whether that’s eBay, Amazon, Stripe, and see incoming cash to calculate end revenue.
With a focus on instant working capital – the clue’s in the name – the ability for loans to be “actually living and breathing with your cashflow” is something that has been a huge value add for iwoca and popular with customers, Reiche said.
And finally… a bonus benefit on the payments piece.
“It's just making the payment industry a lot cheaper because you're cutting out, of course, Visa and MasterCard,” Reiche said.
“These bloodsuckers make 80 per cent of the fees while the nice people like the Stripes and the Checkouts, make a tiny sliver of the total cost that we have to pay when we are getting a repayment through a card from one of our customers.”
All in all these benefits stack up to provide a better experience for both banks and lenders, however, that’s not to say that everything is all fine and rosy in open banking land.
For iwoca, open banking has had a significant impact on it as a business and its customers in the borrowing, lending relationship.
It has helped it come a long way in terms of product development, provided convenience for customers and allowed for continuous ongoing data updates for lenders.
“All I'd wish is it was working a bit better from a technical perspective, and that some of the developments on the payment side, in particular, were moving on a little bit faster,” Reich said.
“Because we do a great job of talking about this for years, but it takes such a long time for things to go live, which is a bit frustrating for a fast moving company like us.”
The company has now made funding available to 70,000 businesses, and since covid has innovated to more than double the maximum size of its core lending product up to £500,000.
Applications to the Flexi-Loan via open banking are now twice as likely to be approved using open banking versus those that are not (51 per cent versus 18 per cent).
While Reiche encouraged the use of variable recurring payments, forcing more banks to play a more active role is using the technology and increasing the quality and standardisation of bank APIs, he stressed that the main issue is that more small businesses need to be encouraged to use open banking.
The way forward? Normalising open banking and educating consumers and small businesses on its benefits.