The financial services industry is undergoing a transformation. Open finance, the evolution of open banking, is reshaping how businesses and consumers interact with financial services. At the heart of this revolution is a simple but powerful idea: your financial data should work for you.
From Open Banking to Open Finance
Open banking started as a regulatory initiative, primarily in Europe and the UK, requiring banks to share customer data (with consent) through secure APIs. The goal was to increase competition and innovation in financial services.
Open finance takes this concept further. It extends beyond bank accounts to include:
- Investment and brokerage accounts
- Insurance policies
- Pension and retirement accounts
- Mortgage and loan data
- Accounting and business financial data
This last category, accounting data, is particularly transformative for SMEs. While open banking focuses on bank transactions, accounting data provides a much richer picture of a business's financial health.
Why Accounting Data is the Missing Piece
Bank transaction data tells you money moved. Accounting data tells you why it moved.
Consider what accounting software captures that banks don't:
| Bank Data | Accounting Data |
|---|---|
| $5,000 deposit on Jan 15 | Invoice #1234 for consulting services, Client: ABC Corp, 30-day payment terms |
| $2,500 payment on Jan 20 | Bill for inventory purchase, Supplier: XYZ Inc, Net 60 terms, part of $10,000 order |
| Monthly balance trends | Profit margins, customer concentration, seasonal patterns, receivables aging |
For lenders trying to assess creditworthiness, accounting data provides context that transforms raw numbers into actionable insights.
How Accounting Data Aggregation Works
Modern accounting platforms like QuickBooks, Xero, and Sage offer APIs (Application Programming Interfaces) that allow authorized third parties to securely access financial data. Here's how the process typically works:
- User Consent: The business owner authorizes access through OAuth, the same secure protocol used by "Login with Google" buttons.
- API Connection: A secure, encrypted connection is established between the aggregator and the accounting platform.
- Data Retrieval: Financial data, including invoices, bills, accounts, and transactions, is retrieved in real-time or near-real-time.
- Normalization: Data from different platforms is standardized into a common format for analysis.
- Analysis: AI and machine learning models extract insights and calculate financial health metrics.
Key Security Features
- Read-only access: Aggregators can view but never modify your data
- Token-based authentication: Your password is never shared; only temporary access tokens are used
- Revocable consent: You can disconnect access at any time
- Encryption: All data transmission uses bank-level TLS encryption
The Impact on SME Lending
Accounting data aggregation is fundamentally changing how lenders evaluate small businesses:
1. Faster Decisions
Instead of waiting for businesses to gather and submit documents, lenders can access up-to-date financials instantly. What once took weeks now takes minutes.
2. Better Risk Assessment
With access to detailed financial data, lenders can make more nuanced credit decisions. A business with strong receivables and consistent revenue patterns might qualify even with a lower credit score.
3. Reduced Friction
Businesses no longer need to manually prepare financial statements or hunt for tax returns. The data speaks for itself.
4. Ongoing Monitoring
With consent, lenders can monitor financial health throughout the loan term, enabling early intervention if problems arise and potentially offering better terms for improving metrics.
"Open finance isn't just about data sharing. It's about creating a financial ecosystem where businesses can leverage their own data to access better services."
The Future of Open Finance
We're still in the early days of this transformation. Here's what's coming:
- Expanded data types: Integration with payroll systems, e-commerce platforms, and point-of-sale systems will create even richer financial profiles.
- Real-time underwriting: As connections become faster and AI more sophisticated, lending decisions will become instantaneous.
- Dynamic pricing: Loan terms will adjust in real-time based on financial performance, rewarding businesses that improve their metrics.
- Embedded finance: Financing options will be integrated directly into accounting software and business tools.
Privacy and Control
With great data comes great responsibility. The success of open finance depends on maintaining user trust. Key principles that must be upheld:
- Explicit consent: Data should never be shared without clear, informed permission.
- Minimal access: Only the data necessary for a specific purpose should be requested.
- Transparency: Users should always know what data is being accessed and by whom.
- Easy revocation: Disconnecting access should be as simple as granting it.
What This Means for Your Business
If you're a business owner, open finance and accounting data aggregation offer tangible benefits:
- Faster access to capital: No more weeks of document preparation.
- Better rates: Lenders with better data can offer more competitive terms.
- More options: Compare offers from multiple lenders without repeating the application process.
- Improved financial visibility: Aggregation platforms often provide insights into your own financial health.
The businesses that embrace these tools will have a competitive advantage in accessing the financing they need to grow.