How Open Banking is delivering financial inclusion to millions of SMEs

In this season of giving, Open Banking now offers hope to all those small to medium-sized businesses facing financial exclusion across European, Middle East and Africa (EMEA).

The numbers speak for themselves when it comes to the value SMEs contribute to our economic wellbeing. The OECD (Organisation for Economic Co-Operation and Development) regards this sector as the dominant form of enterprise across its region. Approximately 99% of all firms come under this umbrella, creating around 70% of all jobs.

Yet banks have traditionally struggled to invest in this crucial segment, given the historic challenges in assessing the creditworthiness of SMEs.

At the same time, a pain point for smaller businesses is trying to demonstrate their own cash flow, as they must manage it closely. Since SMEs tend to receive small, frequent deposits into their bank accounts, they can find themselves short-changed when it comes to securing a loan.

So, how can firms capitalise the potential of this lucrative sector? Open Banking and PSD2 are now changing the game by improving access to finance for even more SMEs, sole-traders and microbusinesses.

The sharing of SME’s bank transactional data gives financial institutions a clearer picture of a firm’s finances and its individual circumstances. By identifying, recording and categorising the frequency of the deposits, lenders are able to develop a more sophisticated and accurate assessment of the applicant’s affordability.

Alternative or unstructured data are also key in vetting applications, and can help create scorecards, cut overheads through automated processes, and reduce costs for high volumes of lower-risk applicants.

For the data-savvy small business owners, this new era of open data additionally offers the option of sourcing the best financial services for their independent circumstances at the best price. As a payoff for choosing who they share personal information with, these customers are enhancing their affordability and gaining access to the market’s most competitive deals.

With access to more comprehensive information and data sets around loan applicants, lenders too can retain a competitive edge by providing near real-time risk evaluation.

In short, Open Banking data is fuelling not just SME productivity but also enabling credit lenders to be more competitive.

Experian has already invested heavily in Open Banking and categorisation technology to help the SME sector, delivering a host of insights when it comes to lending to SMEs.

To find out more about how Open Banking and access to new and alternative data sources can better serve the SME sector, click here.