Time to share

Obliging banks to share customers’ account information was designed to encourage the introduction of new financial services. But with most open banking services aimed at consumers rather than businesses, small enterprises may be unaware of the potential benefits.

Open banking is a broad term that refers to initiatives that require banks to make bank customer account data available to third parties – with the consent of the account holder of course.

These third parties are then able to offer additional services such as allowing customers to have a single view of all the accounts they hold at the same time (even if they have accounts with different banks), or giving a lender or investor access to income and expenditure history over a specific period.

Such services are not necessarily new, but under open banking they are easier to access and more secure.

Bringing it all together

The concept of making customer bank account information available to service providers other than their bank was a key element of the second Payment Services Directive, a major piece of EU legislation known as PSD2.

One of the objectives of the directive is to make it easier for account holders to manage their money, which has obvious appeal for small businesses who need good visibility of their financial position.

Since late 2018, Irish banks have launched APIs or application programming interfaces that enable third party service providers to develop apps and services that leverage each bank’s customer data. These third parties are either payment initiation service providers (who can connect to the account to execute a payment) or account information service providers, who offer financial management apps.

What’s in an app?

The economic turmoil caused by coronavirus means businesses of all sizes have understandably been focused on achieving the best possible visibility of their bank data. Open banking apps enable these businesses to identify issues early and take remedial action.

Businesses can also benefit from intelligent automation where the use of manual processes such as payment status tracking and reconciliation can be lowered, reducing the scope for manual error and increasing operational efficiency.

Standard payment services should become cheaper, while the ability to give lenders access to historical financial data should simplify the process of applying for trade finance. Down the line, machine learning and predictive analytics could assess the likelihood of an invoice being paid on time, reducing dependence on expensive cash flow products such as invoice finance.

Open for business?

Reluctance on the part of some businesses to embrace open banking services can be put down to a cautious approach to working with new service providers as well as a sense that existing processes are working just fine.

But there are obvious advantages to being able to access account information regardless of location – a feature that should be particularly appealing to users of cloud-based accounting solutions such as Big Red Cloud, who can already access their financial accounts remotely.