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“Open banking” is a new directive which was introduced in the UK in January. It has the potential to fundamentally change the way companies manage their finances, access capital and make strategic decisions.
Introduced by the Competition and Markets Authority, open banking is designed with the intention to increase competition and innovation within the banking market. In practice this means that the nine largest banks in the UK have to give businesses and individuals control over their financial data.
For the first time businesses will be able to easily transport and connect their banking data to third-party apps and tools which will give them greater insights into their operational performance and predicted future activity.
By default account holders will have to opt in to enable third parties to access and use their data.
A number of innovative companies are currently testing and developing uses for open banking by registering licences from the Financial Conduct Authority. In this piece we explore some of its most useful potential applications for businesses.
Open banking will make it easier for businesses to overcome one of their most common pain points, accessing finance.
Online applications for lenders and brokers will be able to take into account up to date live banking data, alongside existing historic data from Companies House and cloud accounting software. This will increase competition in the lending marketplace due to creating more choice and options.
A number of online lenders such as Funding Options, Capitalise and Growth Street are already testing how they can incorporate live banking data into their application processes.
This holistic view will allow lenders to showcase which debt products businesses qualify for, as well as simplify and speed up loan applications.
This complete financial picture will also allow companies to access an interest rate relevant to their true credit worthiness. Additionally, a number of startups are exploring how open banking data can be used to boost the credit score of companies before they require finance.
Being able to connect bank data to third parties will grant businesses the opportunity to see whether they are getting the best deals within their procurement supply chain.
Bud is an online marketplace for consumers which uses open banking data to connect to over 50 different financial services companies, and lets them see whether they are getting the most competitive offers on ISAs and pensions.
It is only a matter of time before the advent of a similar product for businesses which will let them see whether they are overpaying on their insurance, heating or gas. Such a service would enable business owners to be prudent with their purchasing decisions and also be a vital tool to increase operating profits.
Online banking enhances the accuracy of cashflow forecasts by having the ability to incorporate live data to predict future activity.
As running out of cash is regularly cited as one of the main reasons for businesses failing, this is perhaps the most immediately obvious benefit of open banking.
Cutting edge cash flow forecasting tools such as Fluidly and Fractal give companies greater accuracy on their predicted future cash position by being able to blend user created budgets alongside both historic cloud accounting inputs and open banking data.
The combined data set will allow businesses to better plan for their cash requirements. For example, they will able to to identify short term cash gaps alongside a more accurate view of when they will need to raise or borrow finance.
This will be most useful for high growth businesses seeking equity finance. Knowing in advance the optimal time to go to market and raise equity finance will put business owners in a strong negotiating position and ensure that they can command a high valuation and not sell company equity too cheaply.
Banking and your accountant
It is important to work with an accountant with a firm understanding of banking processes to ensure that you have access to everything you need to run your business efficiently in line with your own turnover, cash flow and financial requirements. Talk to us today about your financial needs, Cottons Chartered Accountants not only have a network of knowledgeable accountants but also have a corporate finance department. Get in touch with your local office, we have branches in London, Northampton, Rugby and Daventry.