Key Podcast Highlights
What Is Open Banking?
If you go to get a loan from a bank right now, you’re sharing your information with that specific bank and it’s just between you and that bank that you’re applying for. What open banking is, is you agree to share all of your business and personal financial information on sort of an open network. And a lot of banks and lenders can look at that information at one time and they can determine whether or not they would be a good financing option for you.
What Are the Pros of Open Banking?
The upside of open banking is that if you go to an open banking platform, you can say, “Hey, I’m looking for a loan for $50,000 or a hundred thousand,” or whatever it is. That request goes out to a bunch of different lenders that participate. They’re all sharing the same information so they can come back to you. Some may say they don’t want to do business with you and others may think there are opportunities.
What Are the Cons of Open Banking?
One of the cons with open banking is the security of information. Given the high amount of data hacks that go on and breaches, there’s no guarantee that your information won’t be stolen. Obviously the platforms out there do promise that they will protect your financial information and make sure that you’ve got the utmost in confidentiality and privacy. But this can still be a concern. You don’t always know what their internal controls are.
Transcript
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Gene (00:02):
Hey everybody, it’s Gene Marks and welcome to this week’s episode of the Hartford Small Biz Ahead podcast. Thank you so much for joining me. This week, I’m gonna talk to you about open banking. It’s a growing trend in Europe, open banking could increase the access to financing for small businesses. Now, first of all, what exactly is open banking? What do we mean by that when you hear that term? Well, it’s this, if you go to get a loan from a bank right now, you’re sharing your information with that specific bank, and maybe you’re already banking at that bank. So they already have your information, your checking account, your savings, your financial history, and it’s just between you and that bank that you’re applying for.
Gene (00:58):
What open banking is, is you agree to share all of your businesses and your personal financial information on sort of an open network. And a lot of banks and lenders can look at that information at one time and they can determine whether or not they would be a good financing option for you. You know? So, obviously there’s some scary stuff to this, right? I mean, you would’ve to share a lot of your private and confidential information about yourself and your business. Obviously there are platforms out there that do this, and they promise upwards and downwards that they will protect your financial information and make sure that you’ve got the utmost in confidentiality and privacy. But obviously that is still a concern. You don’t know who these people are, you don’t really know what their internal controls are.
Gene (01:51):
And also, given the high amount of data hacks that go on and breaches, there’s no guarantee that your information won’t be dealt with or stolen. So that’s an issue obviously, is the security this information. But then, there’s an upside. And the upside is that if you go to a open banking platform, you can say like, “Hey, I’m looking for a loan for $50,000 or a hundred thousand,” or whatever it is. That request goes out to a bunch of different lenders that participate. They’re all sharing the same information so they can come back to you and ones that don’t wanna do business with you will say so, others that think that there are opportunities will say so as well.
Gene (02:39):
So it’s saving everybody a lot of time. It’s saving you having to go around and knock it on different banks doors to try and get information that’s submitting that information again and again and again. Also it saves the bankers time as well. I mean, they can immediately look at the shared information as determine whether or not their platform is good enough for you. So it’s interesting. The website Pymnts, P-Y-M-N-T-S… Here’s what they say… They say that transaction data that we’re sharing publicly with the network of lenders, it provides real-time insights into our cash flow and revenue patterns and spending behavior. And by analyzing this data, lenders can make more accurate risk assessments and leading to fair lending decisions.
Gene (03:30):
Now remember, a lot of this data is… you actually connect your accounting systems to the platform. So it’s all real time. I mean, it’s not like you’re submitting a financial statement every month. It’s literally pulling out data from your accounting systems as it’s happening. Pymnts goes on to say that this type of arrangement is particularly beneficial for small businesses with a limited credit history or seasonal revenue fluctuations because traditional scoring models may not accurately reflect their financial stability. Open banking facilitates faster approval and disbursement processes for financing solutions, and it provides a quicker access to funds. Now, by the way, some of this is already being done. Some of the point of sale services like Square or PayPal or even QuickBooks point of sale, they often, what they call merchant advances, where you tie your system into their system and they’re looking at your data on a daily basis and they’re literally calculating on a daily basis how much credit you can get.
Gene (04:33):
So if you want to get in advance, they say, well, look at your cash flow. We could advance you X amount of dollars. It’s real time, it’s using and it could be done almost immediately. So it’s not like this is like a new concept, but what’s kind of new about this is that it’s a way to share your data all at one time with a bunch of lenders and then have them make that decision whether or not you’re good for it, you know? Now listen, it’s a tough financing environment right now. I mean, interest rates are still high and a lot of banks have been pulling back on extending loans, particularly to small businesses when they can’t really prove that they’ve got the ability to service that debt. But the open banking services right now is even believed by even people at the Consumer Financial Protection Bureau, that it will supercharge competition, it’ll improve financial products and services, and it’ll discourage junk fees.
Gene (05:31):
In other words, it’ll put everything out there on one shared platform, all of your financial data and then you can have all the different players basically bid on the work for you. So it really does improve competition. And on top of all of that, it may definitely come back to reducing your fees or even the interest rate that you pay. So, what’s the bottom line? Open banking, I think is a trend that’s gonna happen more and more, and I think it’s gonna impact all of our businesses. Again, it’s already established in Europe but there are now a growing number of banks and financing companies that are now participating in open banking arrangements. So what I would advise to you is this. I would start googling around and searching, or maybe asking ChatGPT or your AI platform to explain open banking to point you towards platforms where financing institutions participate and share information on an open banking type of thing.
Gene (06:30):
It is definitely something that you should be looking into. And if you look at some firms, and there are firms that you can check out, you know what I mean? There’s Yodlee, for example, there’s Finastra, for example, there is the Finicity. It’s called F-I-N-I-C-I-T-Y, these just a few that open banking platforms that can facilitate this type of financing arrangement. All you need to do is go on Google and just google open banking platforms, and you’ll see a bunch of different choices that you can consider and evaluate and think about. And it really might be an opportunity for you to get financing where, otherwise you wouldn’t have been able to get it. Maybe even negotiate better fees and, and interest rates as well, depending on the platform and the competition that’s involved.
Gene (07:19):
You just have to be willing to share your data and assume that risk. But hey, listen, in this world of technology, even in the world of data breaches, we have to always evaluate risk versus reward. And if the reward is getting financing because you’re participating in an open banking platform, it may very well be worth the risk. My name is Gene Marks, and you have been listening to this week’s episode of The Hartford Small Biz Ahead podcast. If you need any advice or tips or help in running your business, please visit us at SmallBizAhead.com or SBA.thehartford.com. Hope you had some good information out of this little rant that I did about open banking. I’ll be back to you next week with something else that impacts your business and some thoughts that will hopefully help you. Look forward to speaking with you then. Take care.
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