It’s been just over two years since Open Banking became a reality in the U.K. financial services marketplace.
Well, a reality of sorts. As envisaged by Britain’s Competition and Markets Authority as a means to open up competition in a banking ecosystem that was dominated by a handful of major incumbents while also paving the way for service innovation, Open Banking was launched in January 2018. And it did mark something of a revolution, with new software standards and architecture enabling approved financial services businesses to access third-party bank account information in real time. In theory at least, this was something of a gift for the new generation of fintech companies. Once approved by the regulator, providers could design new services around newly available bank account data.
But of course, revolutions don’t happen overnight and the launch of Open Banking was accompanied by much head-scratching. Yes, the new technology had the potential to bring innovation to the marketplace, but we were essentially looking at a blank sheet. It remained to be seen who would provide the new services and what would they look like?
Fast forward to March 2020 and I’m talking to Andrea Reynolds, co-founder and CEO of Swoop, a corporate finance platform that offers services to small and medium-sized businesses in the United Kingdom and the Republic of Ireland. Open Banking plays a crucial role in helping the platform’s customers access debt and other forms of finance.
A chartered accountant by profession, Reynolds began her career working for KPMG in Dublin and London before striking out on her own as a corporate finance consultant. Coming from an entrepreneurial family – she is the daughter of businessman and one-time Irish Prime Minister, Albert Reynolds – she was keen to help early-stage businesses access the finance they needed, But there was a problem.
“I came to realise, that the businesses I loved working with couldn’t afford my services,” she says.
One way to provide a service that was affordable to a wider range of businesses was through the creation of a data-driven platform. In collaboration with co-founder Ciaran Burke, Reynolds launched Swoop.
Essentially, Swoop offers means to search for debt, equity and grant finance sources. Open Banking has enabled the platform to factor in information from its user’s bank accounts. This facilitates analysis of their financial situation and allows the platform to recommend the sources of finance that are most likely to say “yes” to an application for funding. This is – as Reynolds explains – particularly useful in the case of debt funding. Every bank has its own set of lending criteria, with the perceived ability of a loan applicant to make the necessary repayments being a key metric. By mapping bank account information – and what it says about the financial circumstances of users – against the known decision drivers of lenders, Reynolds says Swoop improves lending outcomes. “We point people to the providers where they are most likely to be successful,” she says.
The system can also help businesses improve their financial management. Reynolds cites the example of a company that was paying £7,000 a year on charges related to international payments. Once this has been identified, the company used alternative providers and reduced its costs. This, in turn, freed up cash enabling the company to successfully demonstrate that it was in a position to take out a loan and make the monthly repayments.
But can Swoop really be confident that when it recommends a lender, a user of the platform will have a well above average chance of securing a loan. Fairly or otherwise, banks have had a certain reputation for making unpredictable decisions, particularly in the wake of the 2008 finance crisis. Many business owners can tell stories of times they applied for debt funding and spent weeks or months talking to enthusiastic bank officials only to see the deal fall through – often because it was vetoed at the final hurdle by an independent credit committee.
This still happens, but the market is changing. “Banks have introduced automated decision making,” Reynolds says.”It started with loans of £25,000, was increased to £100,000 and has been raised again to £500,000.” That means that is a company meets a lender’s criteria, funding should be available.
Swoop’s ability to make recommendations depends on knowing and understanding the lending criteria of banks and this has required a degree of cooperation. Building relationships hasn’t been as difficult as you might imagine. “We were one of three winners of NESTA’s Open Up Challenge,” she says, referring to a competition set up by Britain’s innovation agency to encourage the development of Open Banking-driven services. “Because we were a winner, major banks were mandated to work with us.”
And after issues of compliance were addressed, Reynolds says Swoop has established good working relationships, with banks. Some even licence Swoops technology.
Since May 2018, Swoop has facilitated finance deals worth £85. The platform itself – which earns money from commissions on successful deals, referrals and software licencing – is on course for revenues of £6 million this year.
Swoop is not the only game in town. Other providers of finance services to small and medium sized businesses, such as Iwoca and Funding Options, are also using customer bank account data to improve outcomes. And it’s not just about access to funding. For businesses with multiple bank accounts, Open Banking has the potential to provide a lot more visibility across cash going out and flowing in. The number of approved providers is growing, and according to a report by PWC, 71 percent of British SMEs will be taking advantage of a range of services by 2020.
Open Banking – although relatively new – is demonstrating its ability to help businesses (and consumers) manage their finances and access capital more effectively. It is also helping Fintech providers to make an impact in the financial services arena.