Open Banking: what you need to know

Open Banking is hugely significant for the accounting profession. It opens up big opportunities for accountants to harness the power of digital technologies.

The UK’s large banks have resources to invest in digital services, but the question is who will truly harness the opportunity of Open Banking over the next few years? There will be winners and losers as banks and a growing number of challengers define their strategies. Right now, this includes building, buying, and partnering to so they can deliver the best small business banking.

The smartest banks and fintech players are already recognising the important role that accountants play in supporting businesses through this transition. Competition for mind-share among accountants will amplify in the coming months as new services and experiences become available across banking, payments, and lending.

Here’s what Open Banking means for accountants and bookkeepers:

Get more from bank feeds

While Open Banking only officially launched very recently, the key concepts, like bringing data sharing capabilities to a broader audience, are not new. They have been the preserve of a fortunate few for some time.

Direct bank feeds are one such example. Xero was the first accounting system in the UK to integrate banking with small business accounting. This was one of the first steps in opening up accessible digital finances, and it transformed the expectations small businesses have of their bank.

Moving the game on again, HSBC and Santander recently launched Xero bank feeds which are provisioned digitally – without paper forms. This very much reflects the great user experience which will be delivered under Open Banking.

Looking ahead, rather than continuing with what have effectively been custom-built banking projects to deliver feeds, Open Banking will enable better digital bank feeds to be made available through standard APIs. This is a game changer.

Slicker payments

When making payments as a small business, whether to settle invoices, reimburse expenses or make payroll, it’s likely that the journey begins in the accounting application.

Under Open Banking, Payment Initiation Service Providers (PISPs) will provide the capability to initiate and execute payments without the need to log into an online business bank account, dramatically streamlining everyday payment processes.

While initially these capabilities will be quite simple, expect to see more sophisticated use cases supported over time.

For example, where such payments are ‘proposed’ by a financial controller, bookkeeper, or accountant, a separate approval step by the bank account holder may be the most appropriate governance model.

These tools and services directly support the growth of ‘virtual CFO’ outsourcing services for accountants wishing to do more for their clients.

Working capital at the right time

What is most important to many small businesses is understanding their current financial and cash flow position as well as knowing they can access credit or capital when it is needed.

Catalysed by Open banking, a general proliferation in the provision of APIs between banks, fintechs, and accounting software providers will allow much more sophisticated analysis of cash flow. It will also enable lenders to have access to richer business data so they can make thorough assessments of credit risk.

It is not new to see accountants offering advice and supporting applications for credit or funding, but new tools will empower accountants to predict when a business might need more working capital. Streamlined application processes and pre-approved credit products will greatly improve timely access to that capital.

It is likely we will see more providers in this area bringing more sophisticated offerings such as credit finance and trade finance to small businesses, enabled by digitisation and Open Banking.

The future today

Open banking is a digital wave that is transforming the industry, and at Xero, we are already seeing a glimpse into what the future holds for small businesses and their advisors.

The most forward-thinking accountancy firms, big and small, are finding ways to deliver great value and services to their growing client bases by embracing digital. Those that don’t sit up and take note will certainly miss out and may not survive.

Edward Berks is director of banking, fintech, and ecosystem at Xero.