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Rob Furness of Fintech firm Ledgerflow says now is the time for lenders to explore the opportunities presented by open accounting if they want to work more effectively with their smaller business client base.
The UK banking sector has scaled back its high street presence over the years as new technology promised greater efficiency and savings. Yet, the change has cost traditional financial institutions the close relationships they enjoyed with many SMEs. As a result, a true understanding of the challenges and needs smaller businesses face has eroded away.
New developments in open accounting could see the trend reversed. The technology and changes in the regulatory landscape can enable lenders fill the knowledge gap, helping them to better understand SMEs’ needs and offer real value and potentially greater returns.
With open accounting insights that enable a much more accurate and up to date projection of future cashflows, banks and other financial service providers have the opportunity to really understand at a micro and macro level the current financial position of smaller businesses. The advantages in more targeted products and product development, reduction of lending risks and improved customer service give banks the opportunity to gain a real competitive advantage – and without huge investments in resources.
So what is open accounting?
Open accounting is the process by which the accounting records of business are purposefully shared with the consent of the business owner to allow a trusted third party (TTP) to better serve the business. For instance, open accounting may assist in providing data to underwrite a loan or to help a broker to source more attractive terms from the loan market.
What open accounting delivers
In order to manage the risks associated with lending, it is necessary to have information which gives insights into both a firm’s current andits future money flows. While useful, the data from what are historical bank transactions is limited for the purpose of looking forward and Companies House or statutory accountsdata is probably 12 months out of date.
The open accounting solutioncan provide the financial health of a small business through a full picture of last month’s Profit and Loss statement, and bank balances together with more recent sales invoices, credit notes, purchase orders, aged debtors and aged creditors which are the critical indicators of ongoing business health.
What is more, it is available as a live picture of a firm’s liquidity.Recent changesintroduced by HMRC such as Real Time Information (RTI) and Making Tax Digital (MTD) necessitates that UK SMEs keep their digital records up to date. This has provided the perfect opportunity for small business accounts and open accounting to become a reliable source of business information both inside and outside the company.
The role of Fintech developers
The market, using Fintech firms, can develop the most effective solutions for financial institutions to gain ready access to this data.
Small businesses use many different accounting systems and each use proprietary database structures and data access methods, nevertheless Fintechs are starting to build individual accounting platform integrations. However more usefully there are enterprising Fintechs, like ourselves, which have built integrations to all the popular accounting platforms and are able to provide access to the data in multiple accounting platforms via a single API.
So financial service providers can use the data owners’ consent and a single access point for open accounting data without needing to worryabout the proprietary nature of the source dataset.
A word about data privacy
There is no conflict between open accounting and ensuring the privacy and protection afforded by GDPR is upheld.
Let’s take an example of a key GDPR principle in respect to the above - the concept of data minimisation. This is based on the assumption that firms are holding on to data, without a sufficiently strong justification, such as after a particular enquiry or sale is completed.
The whole purpose of open finance and accounting is quite the reverse of the above example where GDPR guards businesses against unexpected retention of personal data following a historic purchase. With open accounting the firm initiates the process of providing data to a TTP and voluntarily agrees to contribute its data to the service provider or lender in exchange for receiving a better and more targeted service.
It’s the opportunity to access this rich data and to understand the business needs better that gives SMEs and lenders a mutually beneficial outcome. The TTP would need to make a request to the business owner who would then need to grant permission for their data to be shared. Should an SME wish to rescind this access, then the TTP would no longer have access to the data and would have to delete any historic data.
Open accounting – a solution to think about
It is critical for lenders to understand and give the right support to smaller businesses. While many SMEs are unsophisticated, they can be quite specific in their needs and these will change over time.
The need to understand current cash flowis critical and there is no better option at present than the rich data afforded through open accounting.
Open accounting is the opportunity for both SMEs and lenders to build new relationships and understanding through the flow of live accounting data that has full knowledge of historical transactions and future inflows and outflows of cash – based on commitments already made with customers and suppliers, but which have not yet hit the cash in the bank – this will benefit both parties.
Rob Furness is a founder of Ledgerflow, an open accounting SaaS service launched by open accounting data extraction and transformation specialists Ledgerscope.