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Lending, Open Banking

The rise of open banking: powering small business with access to capital

The United States is home to 32.5 million small businesses, which amounts to 99.9% of all businesses in the country. They employ just under half of the workforce, and are responsible for 44% of total GDP. Clearly, supporting the growth of small-to-midsize businesses is essential to the lifeblood of the economy. 

The important role of the small business in the economy isn’t always reflected by lending guidelines that work for the small business owner, however. Thirty percent of businesses that apply for credit through traditional lenders are denied, or only qualify for a portion of the funds they need. These numbers drop even further for minorities looking for the operating capital they need to grow their businesses. 

In an increasingly data-driven, digital economy, there’s room for additional choice. Innovative lending solutions can give every owner an equal opportunity to make their business dreams a reality. 

Open Banking is Giving Lenders and Small Business Owners More Choice

According to Mastercard’s Rise of Open Banking study, 74% of small-to-midsize business (SMB) owners would share business performance data if it meant that they could better demonstrate their ability to pay back a loan and have more choice in lending options. Black, hispanic and millennial owners are even more enthusiastic about sharing financial data, if sharing it means being presented with better loan terms and options. Over 80% responded positively to data sharing in each of those demographic categories. 

Owner-permissioned data through Mastercard’s open banking platform can power apps and services with up to 24 months of rich cash flow attributes. This can inform better, more accurate insights which lenders can use to make financial decisions. Approvals, credit increases, leases and other small business needs can be granted with reduced risk of bad debt. 

Data can be used to develop new lending models and underwrite new lending products. This opens up access to capital with terms and options that can be crafted to fit unique SMB needs. Funding is an ongoing issue for small business owners. Eighty-five percent are looking for faster, easier access to capital, and 62% have received a business loan. 

Whether it comes from public-facing consumer retail, ecommerce, professional services or seasonal businesses, owner-permissioned open banking data is the launchpad for a fast-growing ecosystem of effective financial tools that simply didn’t exist in the pre-digital era. 

Rather than basing lending decisions on metrics like personal credit scores, business credit scores and time in business, lenders are using open banking data points and analytics to unlock capital. Businesses that may have been impeded by traditional guidelines that aren’t aligned with the modern economy now have new options for funding. They’re benefiting from advances in open banking data technology, and they’re asking for the financial opportunities and insights that data can provide.

Small Business Owners Want to Grow With Tools and Allies

Despite the challenges of rising costs, talent acquisition, supply chain issues, cybersecurity and a host of other concerns, owners are optimistic and ready to grow. Forty-seven percent say they’re in growth mode, and looking for allies to help them scale up. 

Over 80% of owners say they want a partner to help them find access to capital and to loans that fit the needs of their specific business. This is where open banking solutions stand out, and where innovators are expanding the lending ecosystem with data-driven loan products, like:

In just a three-month period at the beginning of 2020, U.S.-based fintech Lendio helped over 100,000 small businesses connect to over $8 billion in U.S. Paycheck Protection Program loans, using owner-permissioned open banking data to analyze cash flow and other alternative lending metrics.

Small business specialists like Lendio have been a badly-needed lifeline during the pandemic and beyond. An open banking platform makes it possible to close the smaller loans that financial institutions don’t typically originate, and to do it more quickly. The manpower needed to run open banking-powered apps and services is less intensive than what is required to handle the traditional underwriting process at larger institutions. The amount of work that it takes to underwrite smaller loans has made them less appealing to some lenders in the past. 

This has caused some business owners to be left behind, particularly women and minorities seeking less capital to fund their enterprises. 

Open banking provides real-time data that helps lenders understand a small to mid-sized business’ creditworthiness, letting them more quickly and easily approve loans, no matter the size. With small business loans ranging from $5,000 to $1.2 million, it’s clear there is a wide range of opportunities to ally with owners by offering specialized lending products. 

Addressing a Growing Need in the Small Business Sector

There’s a growing list of lenders covering every need and every niche that the market is asking for, and demand has never been higher. According to the Mastercard study, eighty-seven percent of owners already use or would like to use open banking-powered fintech apps and services to secure funding for their businesses. 

Small businesses are still recovering from the effects of the pandemic, with the percentage of cash-strapped enterprises moving up slightly, from 15% to 18%. Innovators have an opportunity to create solutions that help owners who need reserves and operating capital, but who may have a short tenure in business, a thin credit file or low FICO scores. 

Owners want to secure and refinance loans. They want allies to help them make informed decisions. Ninety-six percent of them are linking their accounts and sharing their data. Alongside the desire for funding, 85% are looking for the customized financial recommendations that can come from sharing data with open banking apps and services. They want access to capital, and they want it quicker and smarter, to keep pace with an unpredictable consumer marketplace. 

In the next installment of the Rise of Open Banking series, we look at how open banking is transforming the payments experience for the SMB. Click here to download the full study.