Can open banking drive benefits for small businesses?

The Consumer Data Right (CDR), or open banking, was introduced in 2018. The rollout has been delayed at various stages and the uptake is slow-moving, leaving Australians waiting to experience the full potential that open banking has to offer.

The consumer benefits of open banking have always been clear, from driving more competition between providers to greater control over their data. However, with December 2020’s changes to the legislation, open banking is now set to positively impact the two million small to medium-sized businesses around the country.

Streamlining accounting

Accounting takes up precious resources that many SMEs cannot afford to waste. Despite innovations and high-tech software, accounting processes remain convoluted and manual, often resulting in late payments, poor cash-flow and a drain on resources.

This impact to cashflow plays a major role in business failure – 51 per cent of businesses fail as a result of inadequate cash flow, according to ASIC. And, while card payments and bank transfers currently make up a high proportion of invoice payments for SMEs, problems exist with both options. For card payments, high fees, risk of payment failure or fraud are just some of the issues. While bank transfers require manual processing, which can result in overdue invoices and blocked cashflow.

The data-rich capabilities of open banking will enable small businesses to access innovations that provide greater oversight into clients’ accounts patterns and their own. For example, automating integration of business banking data to accounting software or providing insight into the ideal day to take payments based on clients’ wage schedules. Meanwhile the speed offered by the New Payments Platform will ensure payments are received instantly, vastly improving cashflow.

Trusted payments

Payment verification and account authentication is another element of financial services that’s due for an upgrade. Payment fraud remains a huge concern for Australian businesses, of all sizes, with the Australian Payment Network stating that card fraud alone costs businesses $447.2 million in FY20.

Take, for example, a business that relies on recurring payments as their main source of income – a gym, perhaps. With current technologies, there is a risk, when taking payments, of being provided with falsified bank account information and, consequently, experiencing failed payments. Or perhaps the credit card they used expired: until those details are updated, the gym cannot get paid. It also increases the risk of customer attrition, if the customer simply abandons their membership.

With the free and secure flow of customer data being made available by the open banking regime, authentication and verification will become increasingly simpler and more efficient, lowering rates of failed payments and improving the costs of fraud for small businesses.

More competitive business lending options

Finally, the broader rollout of open banking is set to overhaul business lending. Fintech disruptors who have entered the market to compete with the Big Four have yet to make a real splash in Australia’s business banking sector. This may be partly to do with the fact that businesses are hesitating to switch financial services providers because of the costs and difficulties associated with switching. However, open banking presents the opportunity to greatly simplify the process with simple and seamless data enabled switching for accredited service providers, which will undoubtedly increase competition in the sector.

In fact, as of the 1st of November this year, businesses are set to reap the benefits of the expanded CDR regime that will require account providers to make business and other non-individual customer data available to accredited data recipients, opening the floodgates to better deals and more choices for Australian small businesses.