By Andrea Varga, head of innovation at Aryza.

Open finance is poised to transform the financial services sector and unlock much-needed access to funding for SMEs. As an extension of the now-familiar open banking concept, it encompasses a wide range of other financial products.

While open banking is the approved sharing of client information between authorised banks, open finance allows other financial providers to use this model helping them understand more about how the business operates and how its customers use its service.

Investments, pensions, lending, credit and insurance are all included, and the big institutions are realising the benefits and reaping the rewards. But what will adoption by small businesses mean?

Better experiences for borrowers

For firms looking for finance, there is a clear advantage to be had in terms of their own financial management. As data is collected and processed, information from their banks or lenders can be viewed easily via an account portal. This helps them better understand their financial position, be that in terms of cash flow, capital, investments, spending or business goals.

Crucially, this visibility, and the increased financial awareness it instils, has the ability to enable businesses to work on hurdles that may have been a barrier to finance in the past. And, as providers are more clearly able to see changes in how they conduct their operations, the barriers are more easily removed.

The benefits for financial institutions

For lenders themselves, open finance offers a revolutionary step change. The very point of open finance is that the collection and visibility of information gives lenders a much deeper view of a business looking to borrow than is possible with conventional practices.

Because of the better understanding of risk that this allows, products can be tailored more specifically to each borrower, reducing risk and enabling it to be more affordable for the customer.

This information is visible in an account dashboard, offering a 360-degree view of how an account is operating. It is updated constantly — not just restricted to when the business customer files its financial reports. Neither is it limited to the details within those records. Transactional data, as well as management accounts and Companies House information, is all refreshed in real time.

This means that lenders are better able to more accurately evaluate affordability and risk, leading to more reliable decision-making when it comes to assessing whether to offer credit. It also means that, given the amount and nature of the data that is visible, advice can be given to the business on how it could improve to qualify, should it be unsuccessful in its initial application.

Speeding up processes and freeing resource

Depending on the system used, the onboarding procedure no longer has to be time-consuming and laborious, with specialist solutions about to automate the entire process. This not only makes for a seamless customer journey and a better standard of service, but is significantly faster.

With much of employees’ time within lending institutions spent on the routine but time-intensive administration tasks involved with taking on new clients, an automated system using open data to streamline the process makes for a significant cost saving.

It also creates a notable amount of extra resources, without any extra investment being made. Those employees are then free to apply their talents and financial knowledge to complex issues that require more consideration.

Administrative staff are also freed up too. The organisation is then able to invest in broadening their skills, either for customer-facing roles or in an analytical capacity.

The new roles created

This latter aspect remains important because, as data on how those businesses are using the credit they have been lent is visible in real time to the lender, their financial health needs to be monitored.

Credit books can be re-underwritten or intervention strategies deployed at a much earlier stage than previously possible, but this will always require human input and decision making. And, as the technology enables financial institutions to process the data from more clients, through helping them to grow, the number of skilled financial analysts required will increase.

Whereas technology is sometimes feared, threatening the reduction of experts’ roles and a downturn in the job prospects for newly qualified, this has the capacity to do the opposite.

In short, open finance is not only good for SMEs looking to borrow, but it is also hugely beneficial to the financial services sector itself — in terms of growth, profitability, job opportunities and recruitment.