Open Finance and SMEs – Opportunity Knocks?

Cashflow, investment and financial stability. These are often the barriers which prevent SMEs from growing.

What if innovation could help change that? 

At the recent Innovate Finance Global Summit Bim Ofolami, Economic Secretary to the Treasury, announced the formation of an industry-led Open Finance Taskforce aimed at delivering Open Finance across the UK.

So how does Open Finance work, what does this mean for businesses across Wales, and what impact could it have on Welsh SMEs?

Going with the flow

The aim of Open Finance is to help SMEs access a broader range of financial products that can help them manage their finances more efficiently.

SMEs are the backbone of the local economy and are passionate to grow, innovate and develop new skills, but often struggle with cash flow, financial stability and finding investment. A 2020 report from the Development Bank of Wales revealed that 31% of Welsh SMEs saw cash flow as a barrier to growth. Given the impact of Covid and inflation on business confidence in the years since 2020, this situation is unlikely to have improved.

Credit where it’s due

Credit is often key to cash flow management and recent ONS data indicates that SMEs in Wales are accessing credit more than counterparts in the rest of the UK. This shows that Welsh businesses are looking to invest and creditors are willing to finance that investment.

The downside however is the kind of credit which SMEs across the country are accessing.

Credit cards and overdrafts are some of the most popular forms of credit being accessed by Welsh SMEs. Used in the right way, these forms of finance are important and powerful sources of short term working capital finance. Using short term financing such as credit cards or overdrafts to purchase fixed assets or as long term sources of financing however, is not sustainable.

So how could Open Finance help?

If businesses opt in to Open Finance their financial data would become available to an entire ecosystem of financial services businesses.

In theory, this means that the right borrowers and the right lenders can find each other more easily. Greater access to a broader range of financial products and services could allow Welsh SMEs to ditch the flexible friend and access sources of credit that better reflect their financial positions and growth potential.

Many SME owners across Wales will have had the experience of the computer saying ‘no’ to a business growth plan, and Open Finance could go some way towards alleviating this.

Time will tell on the impact of the Open Finance taskforce. In the meantime, there are still business banks out there – my own included – that take a holistic view of every business when it comes to lending decisions. Open finance could help scale this in the future, giving a greater number of Welsh SME owners more options when it comes to investing in growth.

This would be good news for SMEs and good news for the communities across Wales who rely on them.