A big opportunity for small business

Open banking is beginning to transform the back office for SMEs, but providers need to get their messaging straight, say Leon Muis, Chief Business Officer for YTS, and Lars Vonk, Founder of Zilverline

We live in an information age – and a misinformation age.

The coronavirus pandemic has received saturation coverage and comment across the world, with constant dissection and reinterpretation of the facts. Mistrust is very much a trend of our time. And it can be seen elsewhere, too – take ignorance around open banking, which is built on the sensitive area of private financial data.

According to the UK’s Open Banking Implementation Entity (OBIE), three million businesses and individuals are using open banking services three years after they were launched in Britain and the EU… not exactly the whip-cracking speed of adoption that policymakers were hoping to see.

Whether technology or psychology has held it back, it’s hard to say. But misunderstanding doesn’t help.

A survey of around 1,000 business leaders in finance, retail and personal finance software, by Yolt Technology Services (YTS) late last year, found that, while the majority understood open banking to be a secure way to give providers access to an account holder’s financial information, 23 per cent wrongly believed it allowed companies to access the data, regardless of consent. Ironically, as the YTS report points out, the regulatory drive behind open banking with 600 now connected in Europe. One of its clients is Amsterdam-based Zilverline, which uses YTS to provide the API rails for its small-business accounting software, Jortt.

Zilverline’s co-founder, Lars Vonk, agrees open banking has had a disappointing start, but he believes it has the ability to transform small businesses, especially in the back office. And the activity that’s currently being disrupted the most, and will continue to be in his opinion, is accounting.

He says: “One of open banking’s promises was to improve security for customers, and PSD2 and open banking are delivering on that, considering that in the old days we were sending bank files to each other via email to share data, and I don’t think there’s anything less secure.”

A recent survey from Ipsos MORI suggests that, since the COVID-19 pandemic started, around half of small businesses are, in fact, now using open banking services. Among those, Cloud accounting is top of the list, at 24 per cent, followed by cash forecasting, at 21 per cent. For both of these services, open banking allows immediacy and improved

was explicitly about giving consumers more control over their financial information, not less. Consent is at the core. If a quarter of industries most affected by open banking don’t ‘get’ that, no wonder ordinary individuals and small business account holders aren’t falling over themselves to take advantage of it.

The YTS survey was conducted in the two territories in which the company operates as both a payment initiation services (PIS) provider and an account information services provider (AISP) – the Netherlands and the UK. Its findings also showed uptake of open banking products and services to be higher in the former than in the latter, where confusion over consent was more widespread, perhaps demonstrating that providers need to be much clearer about the messaging.

“There are many misconceptions about data privacy, when the fact is that privacy and security are absolutely embedded in open banking,” says Leon Muis, chief business officer at YTS.

“Our Unlocking The Value Of Open Banking survey showed that’s one of the main barriers to leveraging open banking, so we must keep educating the market. It’s come a long way, from a few million API calls in 2018, the first year of open banking in the UK, to 700 million a month now, but has it delivered on its promise? I don’t think so.”

YTS provides APIs for open banking,

Open banking is unlocking the door:

But will the banks enable everyone to walk through?

accuracy, since data is no longer input manually. At 18 per cent, alternative lending was the third most popular service among those small business users who were starting to leverage open banking.

The YTS report similarly revealed that, among firms using open banking, 57 per cent were making use of account information services, while 34 per cent were using it for data enrichment.

“Accounting is one of the clear-cut use cases, where it’s really adding value in the customer process,” says Muis. “If you need to be able to solve a problem for a customer, open banking is just a means to an end. And the problem, in the accounting space in general, is that, while there are some direct accounting connections to some of the big banks, you still often need to download MT940 files, or CSV files, and then upload them with your accountant. Open banking introduced the possibility of an automatic connection with the bank, over an API, with the consent of the business owner, so that we can fetch the data in the background and feed it into the accounting system. It’s a more accurate, more customer-friendly process.”

There are many misconceptions about data privacy, when the fact is privacy and security are absolutely embedded in open banking

Leon Muis, YTS

For Zilverline, it means it can concentrate on the data itself.

“We don’t want to be the best API connector in accounting software, because that doesn’t make any sense; it’s not our core business,” says Vonk. Instead, it has succeeded in automating 88 per cent of the accounting tasks for its main target users. “That will mean that the role of a typical accountant will drastically change in a year or two,” adds Vonk.

The most popular open banking tool employed by small businesses (used by 67 per cent), according to YTS, however, was payment initiation, which allows payments to be processed directly from bank accounts without the need for credit or debit cards. The keen take-up is not so surprising, given the potential for cost savings. According to one metric, 1.2 million transactions per year, with an average value of £429 and card network fees at one per cent, would cost a merchant £5,148,000 to process, while the same transactions carried out over open banking rails would cost £660,000.

Of course, consumers value the extras that card firms provide, such as fraud protection and cashback, but Muis believes this year will see a ‘breakthrough moment’ in PIS use – so long as businesses and consumers know the data is protected and secured.

As Muis points out: “PIS is more secure than card payments because there are no credit card details stored on the merchant side – payment via open banking increases security.” But, in his opinion, there are things that need to be evident to build users’ confidence in the service.

“First, if a customer wants to share their data, it should happen with a redirect from their own banking environment which has strong, multi-factor authentication. Secondly, within open banking, security should be embedded within APIs, the so-called FAPI (financial-grade API) standards. On top of that, we at YTS encrypt data both at rest, when it is stored, and in transit, moving from the bank. And, finally, to be able to interact in the open banking system, firms need to be regulated and authorised by a regulator such as the Financial Conduct Authority.”

He’s beginning to see PIS deployed across multiple environments, ‘from court houses to vending machines’, opening the door to alternative contactless payment methods, such as QR codes.

Listing the benefits open banking has brought them, respondents to the YTS survey put improved customer experience top, followed by improved efficiency, customer and partner insights, reduced transaction costs, increased revenue, better security of transactions and data handling, maintaining competitive edge and reaching new customers. Vonk and Muis agree, though, that open banking is but a stepping stone to an even greater prize: open finance. That will unlock data from across the financial services industry, and, with it, new applications.

“What we are currently missing, for instance, is access to savings account information under the revised Payment Services Directive (PSD2), so we only have half the data that we want,” says Vonk.

“We’re already seeing demand from people who want help with savings or pensions – I believe there will be pensions initiatives from smaller players, which will mean people no longer need the big institutions. It will also greatly benefit the lending industry,” he adds.

In the old days, we were sending bank files to each other via email to share data, and I don’t think there’s anything less secure

Lars Vonk, Zilverline

YTS is establishing such relationships in a nascent open finance ecosystem, which Europe hopes to encourage with an incoming open finance framework.

“The move towards an open finance ecosystem isn’t easy because insurance, mortgages, lending and savings are very products with their own data attributes. That’s a challenge that, as a wider ecosystem, we must overcome,” says Muis. “But it should lead to customers getting the best value and choice of services, products tailored to their needs and a holistic overview of their finances. Open finance is coming and we, for one, have connections on the pensions side, and with wealth and savings parties already offering bespoke APIs.”

So, there is already sufficient maturity in the ecosystem to take the next step.

“We’re at the tipping point,” agrees Muis. “But will these companies and banks provide bespoke, maybe commercial, APIs for all other product types? Or will the regulator have to force the industry in that direction? It will be interesting to see what happens.”