Empowering Small Business Finance: The Power of Open Banking and Open Data

In the age of digital transformation, open banking and open data giving SMBs more control over their financial data, and the potential impact is profound. Last year, the value of open banking worldwide reached $57 billion—a figure that is expected to increase to over $330 billion by 2027. This rapid evolution of open banking and embedded finance is transforming the landscape for small businesses and financial institutions by enabling the secure sharing of customer financial data between banks, non-bank financial institutions, and third-party financial services providers.

By leveraging open data, fintechs and financial institutions deliver more robust experiences to their SMB (small to mid-sized business) clients while ensuring data security.

But first, what does open banking mean? What is open data? And why is open banking important?

What is Open Banking?

Open banking is a system where banks open their data in a secure, standardized way, allowing third-party developers to build applications and services that support customer needs. This concept relies on networks instead of centralization, using APIs (application programming interfaces) that enable these third-party financial service providers to access bank data with customer consent.

What is Open Data?

While open banking focuses specifically on access to payment account and transaction data, open data is important because it represents the broader journey towards individuals and businesses having control over—and granting access to—their own information. Open data encompasses a wide range of sources beyond finance, including data from sectors like government, health care, retail, and more. Open data allows for the fusion of financial data with non-financial data to enable the development of more innovative, streamlined, and personalized financial products and services.

But in the specific context of open banking, open data represents the evolution towards individuals and SMBs having control over a wider range of their personal financial data.

The Benefits of Open Banking

Open banking not only provides many significant benefits to organizations and their customers, including SMBs. Open banking is also playing a pivotal role in shaping trends across the financial industry. The proportion of digitally active banking customers using open banking has continued to rise, reaching 14% in the UK market thus far. That means 1 in 7 digital customers now have an open banking connection or have made a payment using open banking. This is an increase from last year’s corresponding figures of 11% and 1 in 9 customers.

And according to a recent survey by Visa, 87% of its US customers now use open banking to link their financial accounts to third parties.

Open banking’s development and increasingly widespread adoption are driving an increase in competition and innovation, an improved customer experience, and enhanced data security—just to name a few. 

As a result of open banking and open data, embedded financial services have emerged as a key priority for fintechs and financial institutions seeking to deliver more robust experiences to their SMB customers.

So, what is embedded finance? While open banking focuses on enabling third-party providers access to customer data, banking data, and services through APIs, embedded finance takes this further by seamlessly integrating financial capabilities into non-financial platforms and applications. 

In other words, embedded finance platforms allow companies across various industries—not just financial institutions—to offer banking services, such as accounts, payments, lending, and insurance, directly within their own products and service offerings.

And this is all enabled by BaaS (banking-as-a-service) providers. BaaS providers are equipped to offer SMBs the necessary infrastructure and regulatory compliance to leverage this powerful new technology. As a result, non-financial companies can much more easily embed financial functionalities without having to build an expensive, complex, comprehensive banking tech stack themselves.

With open finance technologies, banks can leverage consented business data to develop solutions to benefit both bank and business customers. Inclusion and transparency through open banking and finance can reduce money laundering, exposure to underground economies, and promote more personalized financial products to meet the needs of business customers.

The Emergence of Third-Party Providers Leveraging Open Banking APIs

When developing platforms to better serve customers, financial organizations rely on third-party providers (TPPs) with the capability to build and deploy open data platforms. These fintech TPPs must offer solutions that incorporate all the essential elements of business functionality.

Banks and fintechs can consider what data sources and integrations are available, how enrichment of raw business data is transformed into valuable insights, and compliance and security measures to be mindful of during the design of the platform infrastructure. 

APIs play a crucial role in enabling the seamless integration of financial services and data across platforms. These APIs allow third-party providers to securely access and share consented financial data, facilitating the development of innovative solutions that meet the evolving needs of small businesses. In fact, the number of open banking API calls—messages sent to a server requesting that an API provides a service or information—is expected to increase to 580 billion by 2027. By leveraging open banking APIs, TPPs can create third-party apps and platforms that aggregate data from multiple sources. This provides a comprehensive view of a business's financial health, empowering SMBs and financial institutions to better serve their customers, enabling more accurate risk assessments and personalized recommendations.

By integrating financial services directly into the platforms and tools that small businesses use on a daily basis, organizations can offer their customers a more streamlined and convenient experience. This approach not only saves time and effort, but also enables SMBs to access the financial services they need the most. Additionally, by leveraging open data, banking APIs, and advanced analytics, embedded finance solutions like the data aggregation platform 9Spokes provides can equip financial institutions and fintechs with the power to offer SMBs and their customers with real-time financial insights, helping them identify areas for improvement and seize growth opportunities as they arise.

The Regulatory Landscape and Government Initiatives

Governments and regulatory bodies across the globe are accelerating the implementation of open banking in support of the financial empowerment and transformation embedded finance and open data bring. Shifts in societal preferences around financial inclusion, financial transparency, and regulations have resulted in a greater propensity to share data and information between financial institutions, fintechs, and their customers.

Worldwide, the number of open banking users is expected to grow at an average annual rate of nearly 50%, with more than 132.2 million people using open banking services this year. Currently, the European market is open banking’s largest. In 2020, Europe reported roughly 12.2 million open banking users. This year, that figure is expected to reach over 63.8 million.

The UK has also been a leader in this space, having developed banking initiatives, standards for financial institutions, and a regulatory framework that has resulted in 750,000 businesses and 8 million consumers accessing open banking services. In Europe and the United Kingdom, open data has enabled banking customers to gain access to a variety of products and services, and this especially benefits those who are underserved.

This industry shift has started to occur across the United States and Asia-Pacific regions with recent changes to legislative provisions developed by the respective governments. In particular, the US is now following the UK’s lead. The Consumer Financial Protection Bureau (CFPB) has been actively implementing and advancing regulations concerning consumer and small business financial data rights, as part of its broader efforts to promote open banking and ensure data protection in the financial sector. These initiatives aim to provide more power to consumers, allowing them to earn higher interest rates on money earned, pay lower interest rates on money borrowed, and more efficiently manage their finances overall.

It is worth mentioning that changes to the Payments Directive Service 2 (PDS2) legislation—leading to PSD3—and open banking provisions in the Consumer Financial Protection Act (CFPA) in the US means the privacy and sharing of financial data will be regulated. This is bound to influence the way financial institutions implement and deliver open data services.

As open banking continues to expand its global reach to SMBs and consumers, regulatory bodies in the US and the UK are reviewing and introducing new rules to support fintechs and financial institutions.

The Impact of Open Banking on Global Economic Growth

The impact of open banking extends beyond individual countries, as open financial networks are vital for fostering economic growth. This is particularly true in developing countries, where open banking promotes financial inclusion, access to capital, and global trade. In fact, according to the McKinsey Global Institute, ensuring open financial access has been estimated to bring $3.7 trillion in growth for emerging economies between 2016 and 2025. 

Many people in developing countries do not have access to traditional banks or traditional banking services. By providing access to open and interoperable networks, consumers can access a range of financial services, including loans, savings accounts, and insurance. As a result, open data plays a vital role in financial inclusion, as it inspires financial institutions and fintechs to not only battle for market share in these regions but to innovate and create more robust experiences for their customers.

With open data technologies, banks and fintechs can leverage consented business data to develop solutions to benefit both bank and business customers. Inclusion and transparency through open banking and finance can reduce money laundering, exposure to underground economies, and promote more personalized financial products to meet the needs of business customers. 

Ensuring open and interoperable networks in finance is not just sensible, it's also the right thing to do. By providing access to financial services, these networks can help to reduce poverty and promote economic growth. This is why the World Economic Forum has been an advocate for policymakers to recognize the benefits of open networks and work to promote policies that enable them to thrive.

However, to fully actualize these benefits, both traditional financial institutions and fintechs must overcome the hurdles of digitization, data integration, and regulatory compliance. Financial institutions need to adapt to compete with fintechs (including neobanks) and meet the evolving needs of their customers, while fintechs face challenges in establishing trust and navigating complex regulatory landscapes.

Considerations for Decision-Makers: Connecting and Integrating Open Banking 

Traditional institutions have been slow to realize the tangible benefits open banking and embedded finance platforms can offer.  

Among other considerations, such as API standardization, the implementation and scaling of banking platforms and service-level agreements between the bank and third-party providers must be assessed when building out their data strategies or onboarding third-party data platforms. 

The use case for open platforms is expanding. While the concept is not new, adopting and understanding the benefits of open banking will continue to grow tremendously in the next few years.

1. Achieving Financial Transparency and Inclusion 

Financial institutions will need to consider how they aggregate and enrich business data.

• Business customers want and need information and knowledge to be presented in the most beneficial way to improve their business performance.  

• Reducing friction in customer experience by offering more lending opportunities to businesses and partnering with third-party data platform providers, like 9Spokes.  
• Adhering to internal risk appetite and industry compliance measures to maintain credibility and trust while increasing lending capability. 

2.  Integration of Data Points

Digital-first SMBs use more than 10 apps to manage their daily operations. Integrations most crucial to a small business are banking, accounting, eCommerce, payments, and inventory management. Without the ability to see a single, comprehensive view of these elements, SMBs are forced to manage numerous apps and risk missing key insights.

Small businesses seek tools and advice from their trusted banking institutions, suggesting that banks need to better engage their business customers. Integrating data insights providing the best and most essential app and bank coverage will enable more cohesive experiences for both the bank and business customer.  

Banks and fintechs need to consider data platform providers that articulate:

• The number of integrations and data sources they can provide at onboarding. 
• The percentage of banks and bank accounts they cover in each market. 
• The security accreditations they hold. 
• An end-to-end implementation plan and onboarding of clients outlined that includes API documentation, technical implementation review, and delivery and deployment timelines.

3. Banking API Standardization

Lack of standardization causes friction in the development process as different companies use different code languages. Third-party providers can provide Software Development Kits (SDKs) consisting of technical elements needed in the development process. This informs decisions around the product and feature functionality for open finance solutions and the hygiene that goes around accessing raw data and enriching data for insights.

Regulations, Compliance, and Data Security

Financial organizations must consider the impact of regulatory changes—such as PSD3 in Europe and the UK, and the Consumer Financial Protection Act (CFPA) Section 1033 in the US—as such initiatives will continue to influence the implementation and delivery of open data services.

And with cybersecurity attacks rising by 65% in the last year, it is vital to understand how data is processed, transferred, and stored when seeking a potential provider.

Business data powers open banking solutions with multi-tiered infrastructure. This means banking institutions and the providers they work with must follow industry best practices and have processes ready in case of threats and breaches. 

Compliance – Regulatory Changes Impacting Open Banking and Finance

In Europe and the United Kingdom, Payments Services Directive 3 (PSD3) is the next evolution of the PSD standard for payment initiation and open banking. PSD3 will address: 

• Strong Customer Authentication (SCA), which requires payment gateways to enforce multi-factor authentication when using credit or debit cards. 
• An amendment to open banking standards and protocols, simplifying the transaction process and increasing user confidence.
• The sharing of customer information between compliant authorities and banks. 
• Potential facilitation of cross-border payments, increasing choice and diversification. 
• Payment fraud mitigation to ensure high-level consumer protection. 

PSD3 will aim to regulate the sharing of data by enabling additional financial service areas, such as borrowing, investing and financial planning.

In the United States, the Consumer Financial Protection Bureau (CFPB) has launched the Financial Protection Act (CFPA) Section 1033 to encourage “decentralized and neutral consumer financial market structure [that] has the potential to reshape how companies compete in the sphere.” Recently, the CFPB proposed a new Personal Financial Data Rights rule through which it seeks to increase competition in the financial sector. This proposal is premised on Section 1033 of the CFPA.

The new rule is expected to be implemented in phases, with large financial providers held accountable to its requirements earlier than smaller providers.

The US is expected to have open banking provisions by the end of this year to:

• Accelerate innovation of products and services. 
• Increase competition to drive quality and rates within the financial services industry. 
• Regulate the privacy and sharing of financial data by incumbent banks.

Data Security – Validating Trust and Reducing Compromised Systems

Financial institutions should consider open platform providers that are ISO 27002 certified, ISO 27001 certified (like 9Spokes), or SOC2 Type 2 certified and complete rigorous penetration testing by independent auditors and banks to receive international standardization. Other security measures to consider include:

• Monitoring security and planning for Incident Response (IR). 
• Identifying and protecting endpoints with firewalls and industry standard approaches. 
• Protecting against code-level vulnerabilities such as cross-site scripting and structured query language (SQL) injection. 
• Modeling potential threats / test threats and developing procedures to mitigate future vulnerabilities. 

As open banking continues to expand and transform the financial sector, data security and privacy are paramount. As 9Spokes demonstrates, business banking platform providers must ensure compliance with data protection regulations, such as GDPR, and maintain global security certifications, like ISO 27001, to reassure SMBs and financial institutions that their sensitive financial data is safeguarded.

Maximizing the Potential of Open Banking Technology

To best serve SMBs, banks and fintechs need to collaborate to accelerate open banking and finance innovations alongside digital transformation.  

Core banking platforms already consolidate banking transactions, historic payments, and accounts in one place. But platforms could integrate open banking among accounting, cash flow management, risk management, and other functions together to improve customer service and satisfaction.  

New financial technologies create the opportunity for existing banks to better compete with the likes of neobanks and digital-first lenders. Open banking is quickly growing, allowing for banks to provide better business banking experiences with consented customer data.  

Banks and financial institutions can better engage small businesses by using comprehensive TPP platforms—like those offered by 9Spokes—to deliver valuable data insights. By allowing businesses to connect different business apps and financial data, banks and fintechs can deliver deeper and consolidated insights to their customers in a single place. It puts small business owners in control and allows them to benefit from their financial data to tackle critical business tasks.  

Open data would allow SMBs to access more competitive rates, digital tools and the ability to switch lenders at the click of a button. Financial institutions and fintechs are developing new mobile applications, offering more attractive investment options, and upgrading their services to digital platforms.

In all cases, those in the financial services industry that succeed in offering solutions powered by open data stand to benefit from improved customer engagement and satisfaction.

Bridging the Gap: Third-Party Providers and Open Data Platforms

Third-party providers like 9Spokes play a crucial role in bridging the gap between banks and fintechs and small businesses. These platforms offer configurable digital experiences, streamlined onboarding, and real-time insights powered by open data and embedded financial services. By integrating data points from various business apps and deposit accounts, open data platforms enable revenue-based financing (RBF), which is revolutionizing lending and enabling better-informed decisions.

Unlike traditional financing, RBF does not involve fixed monthly payments or interest rates. Instead, the borrowing company makes periodic repayments to the investor based on a pre-agreed, data-driven percentage of its predictable monthly, annual, or total revenues. 

SMBs often face unique challenges that require tailored financial solutions and personalized support. Providers like 9Spokes partner with banks leveraging open banking and open data to personalize the way SMBs manage their finances and engage with their customers. 

With open banking, SMBs have the power to grant trusted platforms access to their financial information. This freedom creates new opportunities for all parties—financial institutions, fintechs, trusted third-party platforms, and SMBs—to innovate and create new services and products. 

And by leveraging this data, third-party providers can offer personalized financial insights, enabling SMBs to make more informed decisions, optimize their finances, and seize growth opportunities.

The Future of Small Business Banking

The successful future of SMBs lies in the collaboration between financial institutions, fintech companies, and regulatory bodies to harness open data and deliver innovative, personalized solutions. 

Open banking and open data have transformed the world of finance, unlocking a new era of possibilities for SMBs, fintech companies, and financial institutions. Third-party service providers like 9Spokes are at the forefront of this transformation, leveraging secure, data-driven expertise to bridge the gap between the financial sector and its customers. By collaborating with these stakeholders, data platforms enable the seamless integration of financial services and data-driven experiences, empowering SMBs with the tools they need to succeed. 

As regulatory landscapes evolve and financial institutions and fintech providers continue to innovate, the future of financial services and SMB banking lies in the seamless integration of personalized solutions, robust data security, and a commitment to financial inclusion. By harnessing the potential of open data, financial institutions and fintechs can drive economic growth, support informed decision-making, and ultimately enable small businesses to succeed in an increasingly competitive world.