The global pandemic and subsequent government actions such as lockdowns and border closures have led many small businesses to seek financial relief to stay afloat. While government aid has bridged some of the gap, these support schemes have added significant complexity to assessments when businesses request access to credit from financial institutions.
The biggest issue is a combination of the unprecedented nature of the pandemic and the outdated ways in which institutions evaluate an organisation’s suitability for credit, often based on a historical period of lower financial stress. The result is an inaccurate assessment of financial viability and a slow approvals process at a time when many Australian businesses need responsive credit solutions to survive.
Open banking is based on the regulated Consumer Data Right (CDR) regime that gives consumers the right to share their data with organisations they trust. With consented access to this data, institutions will have more accurate information to make better-informed decisions and give businesses clearer oversight of their financial situation. Here’s how Open Banking is the key to small business recovery.
Better cashflow management
More than 70 per cent of small-business owners do not have adequate visibility and control over expenses and cash reserves. Readily available credit to overcome short-term cash needs and the on-time collection of payments are necessary for a robust cashflow cycle, factors critical to their survival and recovery. Unfortunately, obtaining credit has been difficult – applications were either rejected or took too long – and more than half of invoices were paid late.
The last two years have been so disruptive to businesses that traditional budgeting tools, which look at historical data, are next to useless for predicting and managing cashflow and financial performance. Fintech startups are looking to leverage open banking to make more accurate predictions of cashflow based on real-time data, reducing volatility in Australia’s business environment.
Improved credit assessment and monitoring
Obtaining credit from lenders is often hampered by manual processes, long timeframes and high rejection rates. Open banking gives lenders real-time secure access to business financial performance data. This gives clearer context to an organisation’s capacity to repay the loan. Open banking can then be used going forward to keep abreast of changes in the business environment with ongoing monitoring. In short, this will help lenders provide faster and more accurate credit assessment and monitoring, while also monitoring at-risk customers early on and potentially prioritising these before it becomes too late.
We might see a case where a business owner doesn’t have a great credit score but open banking identifies that they have the capacity to repay the loan. If the business is struggling during their loan period, a proactive lender could use open banking to analyse the business’ financial situation to see that additional assistance could help the business thrive rather than taking a punitive approach that might end the business. Open banking gives lenders the tools to understand the context of their client’s businesses and encourage the development of more suitable products for their customers.
Smoother customer onboarding
Managing an onerous credit application process can compound existing stressors when a business is struggling. By sharing their information digitally through open banking, they have the potential to secure a credit offer in days or even minutes. Businesses thus have access to credit faster and cheaper, with way less hassle. It can also unlock more digital customer experiences for the application, therefore saving time for both credit assessment and the application and onboarding process.
In this period of uncertainty, open banking provides a critical opportunity to enable timely and easy access to credit for small businesses while assuring lenders that the loan recipients have the capacity to thrive with the right financial assistance.