Why Open Banking May Be Key For Small Businesses In The Post-Pandemic Recovery

Edward Berks is the executive general manager of global partnerships at Xero and is based in London. 

As small businesses mark a full year of operating amid the pandemic, a surprising piece of data has emerged in the U.K.: Small businesses have been adopting open banking at a rate many times faster than the general population, and research shows they’re using open banking to leverage financial and accounting tools that may boost their odds of success in a challenging environment.

Let’s have a look at the numbers. Open banking’s rollout is further along in the U.K. than in any other country with an estimated 3 million users. While that number seems high, it represents just 4% of the nation’s population. Among small businesses, though, the penetration rate is much higher. A recent survey from Ipsos MORI suggests that 50% of small businesses are already using open banking-enabled services. Most of these businesses said they had adopted open banking since the start of the pandemic, with Covid-19 overwhelmingly cited as the driving force.

This is a promising development not just for small businesses (those with fewer than 49 employees) but for the broader U.K. Small businesses play an outsize role in the economy, comprising 99% of the business population and employing nearly half of all workers. Across developed nations, the figures are similar. It’s not a stretch to say that small businesses will play an essential role in both the U.K. and the global economic recovery. Tools that can further small business success should be welcomed, and open banking may be just such an instrument. 

When respondents to the Ipsos MORI survey were asked what open banking services they were using, three answers rose to the top of the list: cloud accounting (24%), cash forecasting (21%) and alternative lending (18%). Each of these can play a key role in supporting business health and are worth examining in turn.

Cloud Accounting

Cloud-based accounting software connects a small business’s accounting software with its business bank account. This means that banking transactions flow automatically from the bank to the books. This integration spares business owners’ hours of data entry, avoids manual errors and automates much of the reconciliation process. 

Importantly, this connection also gives businesses — and their accountant and bookkeeper — a view of their current financial position from any device. Knowing at a glance who owes the business money, which bills are due and how cash flow is looking gives business owners and their advisors information they need to navigate uncertain times. 

With open banking’s arrival, the number of U.K. banks whose customer transactions can be accessed by accounting software has jumped from roughly half a dozen to as many as 70 today – and the number is growing. As coverage expands, so does the appeal of cloud accounting.

Cash Forecasting

The second-most popular open banking service among surveyed small businesses was cash forecasting or financial forecasting. At Xero, we’ve seen that poor cash flow is among the top reasons that small businesses fail. Too many business owners are unaware of a looming liquidity crunch until it’s too late to respond.

Many different apps are springing up that leverage open banking’s data feeds to create a clearer picture of the financial path ahead. In concert with an accountant or bookkeeper, cloud accounting software can help produce three-way forecasts and build different scenarios to prepare for unpredictable operating environments.

Accessing Capital

One of the biggest challenges faced by many small businesses amid Covid-19 has been accessing capital. Government aid has been a critical resource in this respect, while alternative (non-bank) lenders are proving to be another. In both cases, applying for capital is easier thanks to open banking.

Documentation necessary to access loans and grants is portable under open banking. Banks can share it with the government with the customer’s approval, or customers can choose to share it with the government themselves from their cloud-based accounting software.

As government relief tapers off, many non-bank lenders are stepping up. Instead of requiring borrowers to put up their homes as collateral, lenders offer unsecured loans based purely on the strength of small businesses’ historical financials, shared via open banking or cloud accounting software. 

By relying on open banking data and proprietary algorithms, non-bank lenders are able to make lending decisions in hours rather than days or weeks. For small businesses facing a cash crunch, this speed can make all the difference. 


As banks share more customer data, they are faced with a choice: build new open-banking-powered services for small businesses, such as budgeting apps, or form partnerships with fintechs and third parties that already offer solutions.

“Those who do partner with these ecosystem players tend to acquire the necessary capabilities, launch a wider proposition tailored to market needs and deliver this proposition to their customers — all more quickly than going it alone,” according to an Accenture report from mid-2020. 

I’ve seen the power of partnering firsthand. Over 800 third-party apps integrate with Xero, handling tasks outside our core focus. The same principle may well hold true for financial services offered under open banking.

Global Rollout 

While this is just a snapshot of the U.K. landscape, it may provide a map of sorts for countries that are earlier in the open banking journey. Australia, for example, rolled out open banking at its biggest banks in mid-2020, and adoption is slowly growing. In the U.S., Canada and New Zealand, regulators are in early discussions about consumer data rights that could create frameworks for open banking.

In each of these cases, small businesses are a key constituent and worth keeping top of mind for regulators and central banks. Open banking’s ability to support cloud accounting, cash forecasting and alternative lending may play a key role in fueling small businesses’ recovery and, in turn, that of the broader economy.

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