Open Banking: making data sharing, meeting regulations and record keeping better for small businesses

by wrich
Editorial & Advertiser disclosure

By Richard McCall, CEO, Armalytix

Small businesses are notoriously susceptible to business failure – this can be for any number of reasons, but recent research conducted in the US has highlighted that cash flow management is probably the biggest challenge.

Richard McCall, CEO, Armalytix

The research identified that of the small businesses that fail: 

  • 82 percent had poor cash flow management skills or poor understanding of cash flow
  • 79 percent started out with too little money
  • 78 percent did not have a well-developed business plan, including insufficient research on the business before starting it
  • 73 percent were overly optimistic about sales, costs and the work needed for success

This is further exacerbated by the significant amount of time it takes smaller businesses to get paid for the work they do.  A 2020 report from SME Loans highlighted this issue:  

  • 78 percent of UK SMEs that are owed money are being forced to wait at least one month beyond their agreement terms before being paid
  • 40 percent of UK SMEs that are owed money claim that large businesses are the worst late-paying offenders

Combined, these two issues are the main reasons smaller UK businesses fail. A lack of information about what is needed to run a successful business and delays on money coming in are formidable barriers.

Any new business needs good advice on financial best practice and to quickly build up a financial buffer to avoid financial “feast and famine”.

Entrepreneurs are rarely accountants 

Most people do not start a small business because they are good at accounting.  The driving force behind entrepreneurs is that they have found a niche in the market where they can do something better, cheaper or more effectively.  Despite the wealth of information on business start-up available from banks and other financial institutions, the primary focus of the entrepreneur will be taking care of customers, suppliers and growth – not necessarily taking a close look at the numbers behind the business.

More than any other sector, smaller businesses will rely on the support of external consultants – such as accountants – to help better understand the financial environment their business is facing.  The combined membership of the five professional bodies that support accountants in the UK comes to 275,000 professionals.  Many of these will also be one-man bands or small businesses themselves, each looking after the needs of dozens of businesses.

Accountants are responsible for providing accurate, up-to-date financial information about a business. And this information could be seen as taking the pulse of a business.  A critical part of this process is being able to help small business owners understand and navigate issues on the horizon.

Clearly this is only possible with access to accurate and up-to-date financial information.  It is surprising therefor how many accountants struggle to get this.  

Take the example of Online Account Filing (OAF) – a London-based, premium accountancy firm, which provides accounting services to small businesses, professionals and freelancers. 

Online Account Filing aims to make processes seamless for its clients by taking the hard work off their hands. However, as Mohit Baheti, Director of Operations at Online Account Filing, outlines below, there are significant frustrations with financial data collection:

“When clients share an excel version of a bank statement, which is typically a csv file, we never know how authentic it is. They may have edited the file and tweaked the information prior to sharing. Sending bank statements via email attachments also comes with security risks, as email encryptions do not typically encrypt attached files, which can potentially put the clients’ data in danger. In situations like these we often have to re-request the data which prolongs the collection process and can delay other tasks such as data analysis”.

It is hardly surprising that there is a disconnect in this area between businesses and their accountants.  Business owners will be fully focussed on growing their businesses; administrative tasks such as sharing bank statements are fiddly and complex – in other words easy to put off.  Many small businesses may be reluctant to provide direct access to bank accounts to their accountants and even if they are prepared to do this, accountants are reluctant to be responsible in case anything goes wrong.  Yet access to financial data is exactly what accountants need to take the temperature of a business.  And the more up to date it is, the easier it is to identify and resolve issues quickly.

Enter Open Banking

One solution to this issue is through Open Banking.  

The Open Banking Implementation Entity was created by the UK’s Competition and Markets Authority to create software standards and industry guidelines that drive competition and innovation in UK retail banking.  The Open Banking standards launched in the UK in 2018 connect banks, third-parties and technical providers – giving each a simple and secure way to exchange data for customers’ benefit. It provides a trusted and reliable framework for the sharing of financial information.  Open Banking enables businesses to quickly and simply authorise apps to access and share very specific and relevant financial information in a safe and secure way.

Open banking has been designed with security at its core.  It uses rigorously tested software and security systems that mean users are never asked for bank logins or passwords other than by the bank itself.  Also, only apps and websites regulated by the FCA or European equivalent can enrol in Open Banking.  Access to financial data is only provided with the express permission of the data owner, who can limit the timespan of information or authorise for a single use.  Users of Open Banking are also protected by data protection laws and the Financial Ombudsman Service.

Despite the rigorous levels of security, Open Banking could not be simpler for businesses to use.  Authorisation can be provided by a few clicks on a computer mouse or through mobile apps. 

Simplicity and security for small businesses

Open Banking is now enabling accountants and small businesses to streamline the sharing of financial information.  Rather than sending a request to share information directly to a business owner, Open Banking allows advisors to do so within a secure app that directly requests access to specific financial information.  This can be requested by date or bank account and the data owner has full control over what is shared.  

For the business owner, authorising an accountant’s request to extract the relevant information can be as simple as a few swipes on a mobile phone. The process saves time and effort – in many cases days’ worth of chasing and longer still in either manually retyping the information or importing it into an accounting platform.  By reducing the manual input required it is also possible to eliminate human error. 

Mohit Baheti is one of a growing number of accountants using Open Banking apps to access information from his clients.  He uses the Armalytix app to securely request the information from clients who can approve the request wherever they are: “Clients who are not so tech-savvy often struggle with sending the correct data in secure and efficient ways, especially with the bank portals available today, many of which are not customer friendly. We have found that the Armalytix app bridges the gap between fast and convenient data collection with user-friendliness and security.”

Better information is better insight

While this simple process clearly reduces the levels of administration for accountants, its most significant benefit is to business owners.  Less than half of UK businesses are registered for VAT; those that are not only need to file a statement of accounts annually.  For accountants this could mean they only get sight of financial information too late to keep a close eye on business performance.

Faster access to accurate information can act as an early warning system for accountants to identify and highlight concerns to business owners.  This is an important role and one that business owners may only really value when the insight enables them to steer choppy financial waters.   Business hates uncertainty and business owners need accurate information to make the right decisions.  By offering clients financial information sharing via Open Banking, accountants can make life easier for themselves and help small businesses more effectively navigate cash flow and other business challenges. 

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