Open Banking has provided a much needed shake-up of financial services in the UK for consumers, providing tools that help with everything from budgeting to improving their credit score – all of which are very welcome given the increasingly volatile economic conditions we find ourselves in.
The initiative has helped boost choice and given people greater control and insight into their finances, and when so many in the UK are seeing their finances stretched to the limit, this is more important than ever. Since coming into force in 2018, Open Banking recently celebrated its fourth anniversary by passing the milestone of five million users. And there are now nearly 300 regulated providers of Open Banking services.
Consumers have moved ahead
Although consumer tools are now really taking off, we must remember Open Banking originally came off the back of the Competition and Markets Authority’s (CMA) investigation into the supply of personal current accounts to consumers and banking services to small businesses.
Initially, the focus fell very much on identifying small business use cases. This was exemplified by the CMA-mandated Open Up Challenge, run by Nesta Challenges, which searched for fintechs that were building innovative products and services to help small businesses unlock the intelligence in their financial data to save time and money.
However, as time has passed we’re seeing much wider adoption in the consumer sphere, with a plethora of options available in the personal finance space. This includes personalised banking, which relies on a comprehensive understanding of customer data. Accenture has highlighted that nearly two-thirds (63%) of global banking customers are now willing to trade personal data for tailored advice and services.
Despite some initial momentum, the small business world is now lagging behind and the services that consumers benefit from are eluding the UK’s entrepreneurs at a time when they could benefit the most. According to the Federation of Small Businesses, Open Banking is often underused by small businesses due to a lack of awareness and concerns over financial security.
Tackling misconceptions in the small business space
While the financial services world may be becoming more familiar with Open Banking as a concept, there are still widespread misconceptions among lenders, brokers and other providers about how it can be used and what it does. It’s no wonder that end users are confused when the financial services world is too. Awareness is increasing but there is still too much confusion about the benefits of Open Banking, how it works and its availability.
This has been borne out by the conversations we’ve had with those in the financial sector, as well others we’ve been made aware of. We’ve heard those in the sector call out the need for categorisation engines to better harness data, or the difficulty faced in building scorecards. However, these solutions exist today and are readily available. There is a clear need to further raise awareness and understanding in this area.
There’s a pressing need to educate the financial services market. We must overcome these misconceptions so that end users too – particularly small businesses – can benefit from the game-changing power of Open Banking.
As businesses emerge from the pandemic, they’re facing further economic challenges as inflation spirals and prices rise. A better understanding of their financial circumstances, the support and products available to them, and how to improve their own creditworthiness is crucial.
To achieve this, we must move far beyond using Open Banking simply for aggregation – which just allows a business to see all its financial data in one place. The real value lies in actually understanding that data, categorising it and analysing it with accuracy and speed.
For example, CRIF’s transaction categorisation engine is able to do this, developing a creditworthiness assessment based on balance bands, income bands, monthly available income and on a score centred around current account transaction information.
New tools for a new age
Structured data is easily searchable, but this doesn’t exploit its full potential. Data needs refining and processing using technologies which, while sophisticated, are readily available today.
To fully leverage and make sense out of the rich data becoming accessible through Open Banking, it’s fundamental to use advanced analytics applications such as AI-based categorisation engines, including machine learning for gradient boosting and deep neural networks. These engines can apply AI text mining to detect and classify data for commercial purposes.
Drawing on these tools, small businesses can understand their financial situation in more holistic detail, including how to improve their creditworthiness and, if needed, successfully secure finance from their provider. Through deep categorisation via Open Banking, small businesses can better assess the products and services that are most relevant – and this benefits both them and their provider.
By improving awareness of Open Banking products and services, particularly those which help businesses to get lending-ready and categorise their finances, forward-looking financial services providers can help business owners to weather tough times and even boost growth, supporting the UK economy as a whole.
Written by Sara Costantini, regional director for the UK & Ireland at CRIF (main image)