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Open banking: Why businesses are leading the charge

By , Vice President Finance, Africa and Middle East, Sage.
21 Jun 2024
Jordaan Burger, Vice President Finance, Africa and Middle East, Sage.
Jordaan Burger, Vice President Finance, Africa and Middle East, Sage.

Open banking and open finance are buzzwords in the financial sector that have been sparking curiosity. They are frameworks that allow authorised third-party providers (companies or services that offer financial products/services to consumers) to access financial data from banks and other institutions via secure application programming interfaces (APIs). In simpler terms, it's like having a universal remote for your finances, enabling you to control and connect your financial information with different services.

Globally, open banking and open finance are at various stages depending on the region. However, both have generally focused on consumer payments and aiding individuals. This has left the needs of small businesses being overlooked – or assumed to be the same as those of individuals.

Yet, SMBs have existing needs that open banking can support or solve, whether that’s regular access to up-to-date financial data to help them forecast, secure credit, or speed up payments. It can also help by providing alternative methods to making and receiving account-to-account (A2A) payments. These can be more cost-effective than card payments at a time when, for many small businesses, every penny adds up.

Why SMBs are embracing open banking

As technology advances and the world becomes more connected, open banking and open finance is gaining popularity. While often associated with consumer banking, SMBs are expected to be the fastest adopters of this new approach to finance.

The reasons? Greater transparency and efficiency in financial operations. Open banking allows businesses to easily share financial data with third-party providers, streamlining processes and improving decision-making. Furthermore, businesses often deal with larger sums of money than individual consumers, making security measures such as two-factor authentication and real-time monitoring crucial. Open banking provides these enhanced security measures.

For example, Sage has partnerships with leading South African banks to enable businesses to automatically import transactions from their bank accounts to Sage accounting solutions. The bank feed integration in Sage Accounting allows customers to automatically import bank transaction history securely, eliminating manual entry and third-party connections. Data is transmitted safely and securely, using systems audited regularly to comply with the latest industry standards.

Challenges with legacy banking models

Currently, legacy banking models have their limitations when it comes to meeting the needs of SMBs. Applying for a loan can be time-consuming and challenging due to extensive documentation and collateral requirements. Lastly, they do not always provide businesses with the real-time data needed to make informed decisions.

How open banking benefits businesses

According to GoCardless, open banking offers solutions to these problems by providing improved access to credit, better cash flow management, and enhanced financial visibility. For instance, allowing third-party providers access to banking data makes it easier for businesses to apply for loans and access other financial services.

Businesses often have more complex financial needs than individual consumers. Open banking addresses these needs by providing real-time access to financial data, facilitating effective financial management. Moreover, businesses are often more willing to embrace new technologies in search of ways to improve their operations and gain a competitive edge. Open banking offers new opportunities for innovation and growth, which many businesses are eager to explore.

Open banking has led to a large wave of fintech innovation from both legacy financial institutions and start-ups, and whilst a lot of focus has been on the consumer benefits of open banking, SMBs have benefited from the simplicity and security it enables. Recent research from Open Banking Limited shows that roughly 750,000 SMBs are using open banking-related products and services in the UK, with a penetration rate of 16%, and likely to grow.

However, compared to regions like Europe and the UK, open banking in South Africa is still in its developmental stages. As of now, South Africa does not have a regulatory framework equivalent to the EU’s PSD2 (Payment Services Directive 2), which is the foundation for open banking in Europe. The current state of open banking in South Africa includes; a number of banks providing API access and an increasing focus on digital transformation within the banking sector, including the use of AI and other technologies.

Sage's role in open banking

At Sage, we recognise the importance of open banking and open finance, particularly in supporting SMBs. We are committed to creating cost- and high- efficiency products and services that help SMEs focus on higher-value work.

Despite businesses being faster adopters of open banking practices, there is a significant gap in the current standards and thinking regarding B2B needs. Regulators and markets have yet to consider or meet these needs adequately. However, with the need for benefits such as downloading account information, facilitating payments, and streamlining processes, businesses will undoubtedly lead the charge towards open banking adoption.

To support the success of SMBs, Sage partners with a broad, integrated partner ecosystem that specialises in providing funding solutions tailored to the needs and ambitions of our customers. One such platform is Swoop, which seamlessly integrates into Sage Accounting solutions and provides debt, equity, and other financing options to SMBs. These partners act as a conduit and bridge the gap between what businesses need and the vastness of what banks have available, ensuring that SMBs have access to the funding they need to grow and thrive. As cash flow is a key metric for business success, these funding solutions are crucial for SMBs looking to achieve their goals.

In conclusion, open banking, and open finance support SMBs and enable them to focus on what matters most – growing their businesses. As we look ahead, it's clear that open banking will continue to evolve and reshape the financial landscape, with businesses at the forefront of this transformation.

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