What is Open Banking and why is it safe for small businesses?

The concept of Open Banking has been explored since the early 2000s, since then, technology has advanced and it has become more widely used.

Today, Open Banking offers both consumers and small businesses a secure and efficient way to share financial data. 10 million businesses and consumers in the UK already use Open Banking.

In this article, we'll explain how Open Banking works, address safety concerns, explain how it can be used and how it can be beneficial for your business. 

What is Open Banking?

The term "Open Banking" originated as part of a major UK regulatory push to increase competition and innovation in financial services. In 2018, the UK became one of the first countries to implement Open Banking standards, requiring banks to securely share financial data with customer consent. Since then, the concept has evolved, offering small businesses and consumers a powerful and secure way to access tailored financial services, manage cash flow, and improve efficiency.

In itself, Open Banking is a technology system that enables small businesses to securely share their financial data with authorised third-party providers. With Open Banking, small businesses can streamline their transactions, initiate payments, and access tailored financial solutions, making it easier to manage finances without relying solely on traditional banking methods.

Advantages and applications of Open Banking for small businesses

"Open Banking is central to our mission to help make business finance more open and transparent. Now is the time to open up to all our business owners to get faster and more accurate quotes for finance on Capitalise." - Ollie Maitland, Capitalise Co-Founder.

Open Banking provides small businesses with significant advantages, helping them access faster financing, manage their finances more efficiently, and leverage real-time data in a time-efficient, simple and secure way.

Here’s an exhaustive look at the benefits and practical applications:

• Faster access to financing: Open Banking enables lenders to access real-time financial data, streamlining loan assessments and approvals. This allows small businesses to skip the manual process of uploading bank statements, securing needed funds more quickly and with less paperwork.

• Simplified payment management: with Open Banking, small businesses can initiate payments directly through their accounting or financial management tools. This reduces the need to log into multiple bank accounts, saves time, and minimises the risk of manual errors.

• Direct debit options: by offering direct bank payments, businesses can avoid late payments and enjoy faster, more secure transactions.

• Enhanced cash flow management: integrating Open Banking with accounting software provides real-time transaction data, allowing businesses to track finances, manage budgets, and forecast cash flow more accurately, supporting improved financial planning and informed decision-making.

• Cash flow forecasting: real-time transaction data feeds directly into forecasting tools for businesses to make data-driven financial planning decisions based on reliable and up-to-date insights.

• Real-time accounting: Open Banking enables the integration of transaction data directly into accounting software. This automatic data flow keeps financial records accurate and up-to-date without manual entry, enhancing reporting and saving time.

• Automated invoice reconciliation: Open Banking can automatically match incoming payments with invoices, reducing errors and ensuring that payments are accurately recorded, saving time and improving accuracy.

• Expense management: by linking bank accounts to expense-tracking tools, Open Banking automatically categorises and tracks expenses, helping businesses control spending and manage budgets with minimal manual input.

• Identity and income verification: Open Banking allows instant verification of identities and income, reducing the need for additional documents and accelerating onboarding processes for partners, suppliers, or clients.

Companies like Xero, Monzo, Revolut, Vodafone, Truelayer or MoneyHub rely on Open Banking to deliver fast, secure services to their customers.

How does Open Banking work?

Open Banking operates using Application Programming Interfaces, known as APIs. These act as secure bridges that allow different financial software systems to communicate and share data with each other efficiently.
Here's a breakdown of how Open Banking works:

1. The user, you, consents to the data-exchange through a secure API, you can withdraw this permission at any time.

2. APIs link your bank with trusted third-party services, like accounting software or payment systems, allowing them to interact directly.

3. As a business owner, you control what financial data you share and who you share it with. You give explicit permission for these services to access specific parts of your financial information,

4. Open Banking uses strong security measures, including tough encryption, to ensure your financial data is always protected.

This technology gives you access to powerful financial tools and services, helping streamline your operations and make managing finances more straightforward.

Is Open Banking safe?

Open Banking is designed with security as a top priority. In the UK, the Financial Conduct Authority (FCA) oversees and regulates Open Banking, ensuring that only authorised entities can access sensitive financial data.

Here’s how security is maintained:

• Consent-based data sharing: businesses and individuals must explicitly give permission for their data to be accessed. This consent can be revoked anytime, and permission requests are renewed every 90 days for added control

• Authorisation checks: to confirm if a provider is authorised, you can check the FCA Register or the Open Banking Directory, which lists all certified Open Banking providers. 

If you want to know more about Open Banking safety, you can consult this article on why Open Bnaking is safe.

What information can be accessed through Open Banking?

Open Banking is designed to prioritise user security and data transparency. Importantly, it does not involve sharing any passwords or login details. Users allow the sharing of specific, read-only data related to their bank accounts.

The accessible information typically includes:

• Account type: details of business or personal accounts.

• Currency: the currency in which the account operates.

• Account opening date: when the account was established.

• Transaction details: information on transaction amounts, merchants, and dates.

Users have full control over what data to share, for how long, and with whom, helping them feel confident in managing their financial information securely.

Does Capitalise use Open Banking?

At Capitalise, we partner with 100+ UK business lenders, some of these lenders may require an Open Banking connection as part of their loan application process. This often simplifies the experience for you, as you won’t need to manually upload individual bank statements to apply for a loan—making the process faster and more efficient.

In addition, when you log into your Capitalise for Business account, you can see if you’ve been pre-selected for a business loan. If eligible, you can access our pre-approved loans flow, which quickly provides insight into your likelihood of qualifying for a loan, how much you could borrow, and the rates available to you. This helps you make informed decisions and proceed with a loan that fits your business needs seamlessly. Throughout this process, we enable customers to connect to Open Banking to access instant, pre-approved loan offers.

Importantly, Capitalise is regulated by the Financial Conduct Authority (FCA), ensuring that all Open Banking practices and partnerships are secure and compliant.