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How open banking fuelled loans help grow SMEs

Abílio Rodrigues
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Last editedMay 20233 min read

After a few decades of lack of investment and increased cost of borrowing, small and medium-sized enterprises struggle to secure financial aid in order to take their businesses to the next level. 

The time these businesses spend researching and submitting credit applications is somewhat appalling, more so if we consider the astonishing rejection rates. Why are they getting rejected? Well, mainly because lenders think twice, if not thrice, before considering SMEs as low-risk and granting them credit. 

This is not something that is happening just now with the post-2020 economic uncertainty, although things tend to get harder because of the macroeconomic scenario we are experiencing. The lending industry has remained stagnant for decades, with prejudice to both businesses and lenders alike. 

The role of open banking in lending

Fortunately, something that we know as open banking has entered the picture, enabling third-party financial services providers to access banking information such as transactions and payment history.

Why is this relevant to this topic? Well, first, this data sharing through regulated APIs (application programming interfaces) allows lenders to access the most updated information about a customer’s financial picture. With accurate data in hand, lenders can then have a clear overview of where each potential customer sits. 

Open banking is particularly important to quickly and efficiently determine risk profiles and understand default probabilities, combining strategies that range from financial habits' analysis to accessing additional information on income type, source, regularity, or disposable income.

Lenders who choose to use open banking solutions can also improve their customer experience, offering a wider range of loan options that adjust to each client’s needs. This is particularly important for SMEs, as they immensely vary in scope and industry.

You can find below some examples on what information is available to lenders through open banking loans:

  • Transactions

  • Balance History

  • Spending Habits

  • Recurring Payments (subscriptions, loans, etc)

Open banking empowers lenders to apply complete overviews that improve conversion and approval rates for creditworthy customers, saving all parties involved a lot of time and money. This is great for SMEs, as they usually have tight budgets, and struggle to accommodate even the smallest shifts without a heavy impact on their operations.

SMEs’ worst nightmares end with open banking

Documents like bank statements have always been the main source of information for lenders. But that was before open banking made its showing in this industry, streamlining a previously complicated and time-consuming process.

This new source of reliable data, pulled straight from the borrower’s bank account, allows professionals to take a less risky approach to loan applications. Affordability has never been so easy and convenient to assess, something that has positive repercussions on SMEs, as they more swiftly understand where they stand with lenders.

With open banking, both sides benefit. Lenders improve their customer experience by providing customised offerings that adapt to their customers’ needs, and SMEs get faster access to much-needed credit lines that can keep them on par with the competition. 

But this process does not end at the beginning. Creditworthiness is not the last step, or at least it should not be. Open banking allows lenders to reduce the probability of default payments, by keeping an eye on SMEs’ financial data. 

Open banking fuelled payments also provide a safe and fast way for SMEs to initiate payments directly from their bank account, giving lenders a lot of peace of mind when it comes to receiving repayments — something that can improve credit acceptance rates. 

Open banking means more growth for SMEs

It's very apparent, now more than ever, that SMEs will have increasingly easier access to credit as time goes by, and as open banking becomes more and more mainstream. 

Thanks to technologies like open banking, lenders are now more aware of the struggles of SMEs and even startups. Their historically risk-averse stance is becoming overpowered by the necessities of smaller businesses, with constant financial analysis playing a determining role in decision-making.

Open banking opens the door to more loan approvals, because the amount — and most importantly — the quality of the information provided allows lenders to make smarter decisions based on historical data and current financial situation. 

Lenders feel more at ease working with these businesses, because peace of mind is priceless. Open banking is a lender's most powerful ally, saving them time and money, decreasing risk and increasing revenue that can be channelled to the development of products and services personalised to better fit SMEs’ needs. 

For SMEs, this means more opportunities to thrive, even in uncertain times. And we should never forget that more prosperous businesses make for stronger and more resilient economies.

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