“SMEs have historically been a neglected segment. Open banking provides an opportunity to address this by enabling better understanding of the needs of businesses, and focusing on making it easier for them to achieve their goals, rather than just providing financial products,” says EY Open Banking Leader, Hamish Thomas.
While open banking offers a more dynamic way to handle finances, sharing highly sensitive data with third parties will be viewed by some SMEs as a risk.
Robust regulation of open banking is a given in some parts of the world, while a more organic approach is being taken in others. The customer is ultimately in control of who sees their data and how they handle it.
The pay-off for skeptical business owners will be jettisoning the administrative headache of onboarding with lots of separate providers. And if circumstances change – relocation, expansion, new staff, or a switch from one finance provider to another – avoiding more time-consuming paperwork.
Digital passporting enables access to a firm’s most up to date information through a single secure portal from which multiple service providers such as financial institutions, telcos, government departments or utilities can be given permission, wholly controlled by the business, to access the key information they require to better support that business’s needs. This means companies need only input and update information once, keeping admin simple and convenient. SMEs can also link accounts and products from the various providers they use to gain an outlook of their international finances in a single view.
This is especially important for SMEs, who are chronically underserved by current banking models – in the UK in 2015, just 18% of SMEs applied for financing from their banks, despite making up 47% of the private sector. In emerging economies, 40% of “unbanked” SMEs are not able to gain financing.
A key reason for this underservicing of SME customers is the challenge banks face in performing KYC (know your customer) and the due diligence measures around them. SME operations are often opaque, complex, and low scale. This makes them difficult for banks to understand, and therefore of limited value as customers.
Better digital passporting measures, therefore, could simplify multiple steps of the onboarding process, and make SMEs generally more attractive customers for banks.