Open banking has enormous potential for SME lenders, to do such things as:
Verify applicants’ identities much more quickly.
- Make faster and better-informed credit and affordability decisions.
- Reduce fraud risk.
- Provide a better customer experience due to the speed and ease of onboarding.
- Speed up your cash flow due to being able to close deals more quickly.
- However, new use cases and innovations are still being discussed and discovered, and dialogue is critical to unlocking the full potential of open banking for players in the space.
In this recent webinar, How Open Banking Can Drive Customer Intimacy in SME Lending, Yolt CPO Dan Mines was joined by experts from lending and lending-related fintech businesses including October, Funding Xchange, creditshelf, and Tide. This post is a summary of some of the key insights shared by the webinar guests. You can access the full webinar at the link below the blog post.
Insight 1: Creating the right the value exchange is key
It would make things easy for lenders, open banking providers, and fintech alike if SME businesses saw open banking transaction access as a standard question on an application form. However, this is not the reality today. In fact, according to Patrick de Nonneville, CEO, October, “If you give the choice, SMEs won’t give the data. Any alternative route they can take they will. Most prefer PDFs.”
Educating prospects and customers on benefits of sharing transaction data and other common concerns such as data security are important. However, perhaps the most effective route to ensuring that SMEs are more open to sharing their data at this stage is through creating the right value exchange. If prospects and customers see the benefit, they are more likely to share their data.
Insight 2: Open banking can be more valuable as a second line of defence rather than a first
Related to the first insight are questions such as the when, how, and why you may ask SMEs for open banking transaction data.
For example, Funding Xchange does not ask for transaction data at the beginning of a customer relationship – partly because the right level of trust and value exchange is not yet optimised to get the best results. Rather, the organisation asks for this only if additional products are wanted. They have found that at this stage of the customer journey, SMEs are happy to share the data and only a small number drop off.
According to Katrin Herrling, CEO & Co-Founder, Funding Xchange, negativity comes around misunderstanding around value exchange, and you need to work to identify appropriate level of information you ask for the appropriate value you give back to make the relationship work. “Solve a customer problem, and they will work with you and provide access to data. Some banks want to get open banking data before they provide value, and that is not a successful path,” she advises.
Insight 3: Transaction categorisation can be a differentiator for nimble SME lenders
Many open banking providers offer transaction categorisation, but most of these offerings are standard across consumer and B2B. However, SME lenders need different types of categorisation to make smart business lending decisions. For example, where key points of interest in consumer transaction data may be income, rent or mortgage repayments, and living expenses, SME lenders are more interested in categorisation such as salaries, taxes, providers, even diversity in supply chain and customers, and others. “We’ve invested to make sure we work to identify SME categorisation, because we realised there was a big gap there,” says Dan Mines.
Insight 4: Regulations will only get us so far to true openness – incentives will take us the rest of the way
According to Oliver Prill, CEO of business financial platform Tide, mandates such as PSD2 are only going to get open banking so far in terms of its true potential. This is because they ask banks to invest substantial amounts of money in compliance exercises that do not directly benefit them. The result is that most banks will then put the minimum possible effort into making account data open and accessible.
Further, he notes that while the concept of “value exchange” is often applied to open banking in terms of the appropriate benefits lenders or other businesses can give to customers and consumers. However, the concept can equally apply to other parties in the value chain – including banks. He sees a future in which mandates such as PSD2 ensure basic open banking data is available for free, but anything additional data will be seen as a premium tier which will need to come with commercial incentives to ensure that third parties can access it. In his opinion, ensuring that every player in the value chain stands to benefit from the value created will open up the real potential to transform the market.
Listen to the webinar, or contact us for more information
The full webinar can be found on the AltFi website here (registration required). If you’d like to find out more about how categorisation can help your SME lending business grow with open banking, contact us.
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