Open banking has emerged as a catalyst for innovation, granting individuals unprecedented control over their financial data. This transformative movement, fueled by regulatory reforms and industry initiatives, not only promotes global financial inclusion but also signals the initiation of a thrilling journey toward the complete digitization of financial activities for individuals and small businesses.

As we approach a new era marked by the third Payment Services Directive (PSD3), the new Payment Services Regulation (PSR), and the Financial Data Access (FiDA) framework, a clear call to action resonates. The objective now is to champion open finance in a manner that fully addresses the distinctive needs of small and mid-sized businesses (SMBs), supplementing the existing consumer focus.

Igniting Payment Innovation: A Holistic Approach

This forthcoming wave of innovation transcends the boundaries of open banking, constituting a transformative leap that encompasses a broader spectrum of bank accounts, financial institutions, account-to-account payments, and diverse financial data types. To genuinely benefit SMBs and fortify the economy, a paradigm shift is imperative—one that nurtures an ecosystem benefiting all stakeholders.

To streamline business operations and expedite payment processes, a collaborative effort is indispensable. Banks, governments, and financial service providers must unite to eliminate the inefficiencies hampering business payments.

While open banking has successfully addressed consumer payment services, boasting an impressive 132.2 million users globally by 2023, the unique challenges of the B2B sector have often been overlooked. Unlike consumer transactions, businesses engage in multiple payments within a single process, contend with multi-layered approval requirements, and deal with financial institutions beyond the regulatory scope. These businesses demand more sophisticated solutions than those currently available to replace outdated, manual processes.

Unlocking the Full Potential of Open Banking for SMBs

Frameworks and technologies must evolve to meet the specific needs of SMBs, encompassing creditworthiness assessment, as well as streamlining financial processes like reconciliation and payroll. The next phase of open finance must prioritize these business-specific requirements.

Despite a predominantly consumer-centric approach, a significant number of UK SMBs are already reaping the benefits of open banking. With approximately 750,000 SMBs harnessing its power for tasks like reconciliation and efficient payments, the impact is undeniable. However, with only a 16% penetration rate, there remains vast potential for more businesses to leverage these solutions.

Crafting Future-Ready Regulatory Frameworks

In the UK, open banking regulations have played a pivotal role in advancing payment services. The next generation of legislation should set a new benchmark, aligning with business needs as we transition into the digital era of finance. Sage’s ‘Blueprint for digital-led growth’ in the UK proposes government actions to enhance growth and productivity through digitization, impacting areas like tax efficiency, late payments, digital identity, and digital trade.

The introduction of Smart Data legislation in the UK is a step toward building a regulatory framework that supports SMBs across various sectors. This legislation not only safeguards business interests but also paves the way for the realization of open finance, providing a clear roadmap for all involved parties.

In conclusion, transforming open banking into truly open finance is more than a regulatory shift; it’s a comprehensive overhaul of the financial landscape, promising a future where businesses and consumers alike reap the benefits of a fully digitized, efficient, and inclusive financial world.

By Impact Lab