The open banking effect on micro businesses

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If you’ve never come across the term open banking before, the chances are you’ve experienced the concept in practice already.

Many micro businesses who use accounting software like Xero, for example, will be using invoice processes that are linked directly to their bank account using the software’s own API.

So while open banking – the process of banks and other financial institutions opening up data for regulated providers to access, use and share – is already in common use, its implications for micro businesses looking to trade online are less widely known.

And with EU countries and the UK being at the front of the regulatory curve, open banking and its more recent evolution into open data and open finance stands to offer significant benefits to all parties involved.

Open banking usage in the UK

According to the Open Banking Implementation Entity (OBIE), set up by the Competition and Markets Authority to deliver structures and architectures to power open banking, there are 4.5 million regular users of open banking in the UK, one in eight of which are small businesses.

That figure is growing, with around a million new users being added every six months. But with 5.5 million SMEs in the UK, of which 4.2 million are micro businesses with no employees, there’s a huge sector of the business community who are unlikely to yet recognise the benefits of what open banking can bring.

Covid lockdowns expedited an unprecedented acceleration in the growth of online retail, with 40 percent of shoppers saying it would change how they bought in future.

Any business looking to capitalise on these trends should, ideally, ensure that their customers are able to pay easily, preferably while minimising the cost of transactions to their business.

Ecommerce pinch points for micro businesses

Research carried out last year by TrueLayer and YouGov of more than 1,200 online shoppers and ecommerce merchants suggests that half of merchants rate high online payment costs in their top two pain points.

From consumers, a third of merchants receive complaints about slow or lost refunds while two in three shoppers say they have refrained from buying something online over payment security concerns.

This points to an appetite for adopting easier, safe payments and a tendency from customers to support retailers who offer a greater choice in payment methods, including instant bank transfers.

It’s easy to see why. As Ossama Soliman, CPO of TrueLayer says in the YouGov report: “Traditional bank transfers take shoppers away from the checkout and force them to manually copy over transaction details.

“Open banking enables instant, native bank transfers which dramatically improve this flow: payments start and finish within the merchant’s app or website and there’s no need to manually key in payment details.”

Open banking benefits 

Open banking in online accounting software allows any business to easily issue and monitor invoices and manage cash flow, providing valuable insights into their financial position and improving efficiency.

However, there are other benefits too, which can help micro businesses and owners with profit margins, customer retention and loyalty. These include reduced transaction fees (expected to be as little as 1 percent), faster payments offering speed over direct debit, and simpler refunds.

Security can be enhanced, too, through use of biometric data, over the sharing of card credentials, during the purchasing process.

All these factors point to operational benefits for small business owners, as well as increased customer conversion and loyalty thanks to a better user experience.

Forging ahead into finance and data

While many micro businesses will be unaware they are already using open banking services, the concept is already evolving – into open data and open finance.

This involves extending data sharing and third party access to a wider range of financial sectors and products such as pensions, investments and insurance.

This could well have implications for small business lending, with reduced costs across a range of services and increased access to credit and finance.

Lenders will be able to quickly assess eligibility and financial information such as revenue, profit, or liabilities making the whole underwriting process quick and convenient.

How can small businesses get on board

We have discussed the benefits that we have found of open banking for business management, increased profitability, supporting finance and improving customer loyalty.

At BaseKit what we are considering is the adoption of open banking interfaces through our e-commerce product, BaseKit Store. This would potentially give users of our product a faster and more secure way for their customers to pay for goods and services, authorised directly from their bank account.

Clearly this involves complexity, which requires considerable due diligence. However as a UK-based company with a unique global reach of hundreds of thousands of micro businesses, we thrive on change to better the chances of micro business long term survival. Implementing open banking is certainly an interesting proposition for us, our partners and the users of our software.

We have spoken previously about the huge potential of open ecosystems to improve user experience through vendor collaboration. As we look to further our mission to democratise tech – we’re constantly looking at ways in which we can integrate BaseKit software at different levels and in different ways. Open banking for our global ecommerce customers is an opportunity which we are looking to explore.

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