Open banking has been responsible for an entire revolution in the financial sector, forcing traditional banks to embrace financial technology (fintech) and persuading investors and the public that the sharing of sensitive information does not come with all the imagined risks that were once touted about it. Despite a recent stagnation in global fintech investments across the UK and EU, open banking alone is seeing enormous year-on-year usage increases, which is promising for the industry and users who want to see more investments made in improving the products they use.

Numbers to Consider:

  • A report by Statista told us that between the first half of 2021 and 2023, the nine largest UK banks and building societies reported that the number of successful open banking payments rose from 9 million to 54.5 million.
  • Open Banking (OBL) reported that in January 2024, at least 1 in 7 people were using services powered by Open Banking.
  • SPGlobal found global fintech investments were down 42% in 2023, with signs of a resurgence approaching 2024.

The downward trend in investments pits open banking and fintechs on the whole, really, at an interesting point for the future, but regardless of that, the numbers and interest in open banking products cannot be denied. With this in mind, today we’ll go through some of the main reasons why open banking is as useful and secure as it is and why SMEs should continue to support and embrace it if they want to improve their financial management.

The Current State of Open Banking

Despite the current dip in investment trends, open banking is continuing to gain momentum, with the UK and EU leading the way in developing and enforcing safe usage between banks and the third-party fintechs who produce our open banking platforms. It is through APIs in particular, or ‘application programming interfaces’ that we can securely integrate our banking accounts with an open banking platform, and thanks to numerous mandates and regulations, in 2024, this security has never been more… secure!

UK and EU Leading the Way

It is worth taking note of the regulatory bodies and efforts the UK and EU are making to ensure that fintech products remain safe to use and continue to improve, ensuring the sensitive data of their users can be transferred securely across servers and between banks. While we will focus on the UK bodies below, it is also worth noting the contribution of the EU in accelerating the usage of open banking platforms:

Revised Payment Services Directive (PSD2): Since 2018, this mandate has ensured banks, established and new, both in the UK and Europe, open their payment services and customer account data to third-party providers, in this case, fintechs, and has effectively been the reason why so much innovation has occurred in the sector, fuelled by competition.

Financial Conduct Authority (FCA): This is the UK’s primary regulatory body, and it has been responsible for overseeing how fintechs, and more specifically, in this case, open banking, operate within our jurisdiction. This body sets the standards and guidelines that fintechs must adhere to, authorising and supervising to ensure regulatory compliance.

Open Banking Implementation Entity (OBIE): This body is constantly innovating and is tasked with all things technical, security, and consumer-focused; it sets the standards for fintechs to ensure any data shared between banks and those third-party providers is safe and secure.

With these bodies at work, the state of Open Banking has never been better, and they will be a large contribution towards why more and more people are trusting the technology and using it. Of course, it is a convenience, but without trust and faith in the product, customers would reject its usage, and we’re not seeing that.

Integration and Data Sharing

Let’s start breaking down more of the concepts we have already touched on now and focus on how open banking works by exchanging data between banks and third-party providers via the use of APIs. Essentially, when a customer consents, and only when their bank then provides access to the said third party, specific information regarding finances is then exchanged. The data will typically include transaction histories and account balances, as well as any other relevant and necessary info.

APIs then facilitate these safe and secure exchanges, providing end to end protection as data is transferred through the cloud. APIs are important because they have ‘standardised’ the format through which open banking functions, and has made compatibility and ease of integration across brands and platforms possible, once again encouraging innovation that results in better products and services.

Benefits of Data Sharing for SMEs

There are plenty of significant advantages that SMEs gain from using open banking software, most notably the access they can gain to tailored financial products or loans, which are typically offered or refused instantly based on cash flow history. Sharing their financial data also means specific advice that is based on up-to-date numbers can be given to help with business strategies, leading to improved cash flow regardless of loan intentions.

Future Innovation for Financial Solutions

Open banking has also opened the doors to other financial technology tools like our own Pulse by merging banking data with open banking and accounting software. The integration streamlines financial management, providing a comprehensive view of a business’s financial health to both the business’s owner and their financial advisors. We’ll have a closer look at Pulse and all the innovative solutions it has to offer further below!

Enhanced Financial Management

Another benefit is that open banking significantly simplifies SMEs’ financial operations by automating routine tasks like categorising transactions and reconciling accounts. These manual tasks have always been prone to human errors and have been extremely time-consuming, but open banking eliminates all of that.

Most importantly, automation greatly improves operational efficiency by allowing business owners and their financial managers or advisors to focus on strategy. They say time is money, and open banking creates that time, allowing businesses to divert resources to activities that generate growth in their sector.

Improved Cash Flow Management

It’s no secret that effective cash flow management is vital for the survival of any business, no matter its size, and understanding cash flow has never been easier with open banking. With real-time visibility into their cash flow, business owners effectively have a way to monitor their financial situation in real-time, and once again, tools like Pulse can then integrate with that data and generate financial insights by following cash flow trends, helping to highlight potential shortfalls or suggest corrective actions to suspected shortages.

Integration and access to real-time financial data also help business owners make informed decisions proactively because they have a cash flow forecast as opposed to just the numbers in their bank account, empowering SMEs when making financial decisions. Let’s summarise with a few use cases:

Open Banking Use Cases

  • Identifying Trends: By analysing transaction data, businesses can uncover spending patterns and seasonal trends. This insight can guide inventory decisions or marketing campaign planning.
  • Optimising Spending: Real time insights into expenses help businesses identify chances to save costs through options like renegotiated supplier terms or cut expenditures.
  • Planning Investments: Reliable financial data lets SMEs evaluate their capabilities and strategise for future investments in new products, market expansion or technology upgrades.

Regulatory and Security Considerations

Let’s go deeper into the security that open banking and other third-party tools can integrate with offers next, as this has no doubt always been a subject of weariness for leaders and SMEs who are on the fence about fully adopting its use. There are a number of key technologies used in open banking that allow for encryption, authentication, and data monitoring:

  • Encryption: Encryption plays a role in making data unreadable to unauthorised individuals both during transmission and storage ensuring the protection of sensitive financial information from interception and misuse.
  • Multi-Factor Authentication (MFA): With MFA an additional layer of security is added by requiring multiple verification steps before granting access. This helps reduce the risk of entry even if one authentication factor is compromised.
  • Continuous Monitoring: Continuous monitoring of data access and transactions is essential for detecting and responding promptly to any activities that raise reason for concern, lowering the likelihood of data breaches and strengthening overall security.

Transparency and Consent

Through the work of bodies like the FCA and OBIE, fintechs like open banking are built with transparency and ensure that the customer, or in this case, SME, remains fully informed about how their data will be used. Customers can also withdraw consent at any time, which has further strengthened the trust in open banking and the services it offers.

Final Thoughts

In all then, the future of banking has great potential in both helping SMEs with easy financial management and granting the continued sharing of data, which allows for the connections to be made with other open accounting tools, further amplifying the strengths open banking already supplies. Along with the continued development of security boundaries, there is no doubt that open banking will continue to evolve and be the go-to fintech for SMEs seeking to grow financially.

Integrating Open Banking with Pulse

Empower your SME with seamless financial management by integrating open banking with Pulse. Our platform connects effortlessly with Open Accounting and Open Banking software, providing real-time data insights and personalised financial analytics. Our fintech tools for accountants and business leaders specialise in cash flow forecasting, performance reporting, and small business financial insights, ensuring you are equipped to handle any financial challenge. Sign up today and experience how Pulse can revolutionise your financial management and strengthen your contingency planning.