What is open finance and what are its benefits for SMEs?

Apr 05, 2024

To democratize and establish a voice of speech in the finance world, banking industries open-heartedly accepted the open banking regulation. 

With an aim to enhance user experience, provide seamless services, and target the right audience, open technology is increasingly being emphasized.

Customers now identify and connect with a broad spectrum of financial services and offerings through APIs and third-party access to banking and financial data. 

With the advent and acceptance of open technology, open finance has also started spreading its roots in the finance world.

The growing acceptance of open finance platforms can revolutionize the way banks and financial institutions manage user data and lead to massive developments in financial services for both the customers and third-party providers. 

What is open finance?

Open finance is a practice where customers and SMEs allow third-party users who can or cannot be a bank to access their financial data and develop financial services and products based on extracted data. 

The range of your financial data could include loans, savings, pensions, insurance, mortgages, and credit score — in a grander sense, your entire financial blueprint could be visible to a trusted third party only if you set out the required permissions. 

Typically, through the open banking finance platform, banks and financial institutions act as data providers who pool and share user information through AI and APIs with third-party providers.

These third-party providers like fintech platforms access user data with prior permission and use it to develop products and services best suited for customer requirements. 

How does open finance differ from open banking?

With open finance, third-party users can access the customer’s complete financial footprint like credit history, shareholdings, insurance, and so on, but with customer knowledge and consent. 

In parallel, open banking already allows and shares customer financial data like banking transactions and payment histories with authorized and regulated products and services to enhance customer experience and provide a wide range of financial tools to cater to their needs. 

Through the open finance platform, companies can easily understand the forces driving consumer behavior and provide a tailor-made solution to all of them. 

They can comprehend the customer’s preferences and inclinations and develop pricing strategies and models that directly address their needs.

Open finance has been a complete game-changer for finance for businesses, as now they will be able to attract more customers, develop new product categories, and allow free playing of market forces. 

The only significant difference between open banking and open finance is that one has a regulatory framework and permissions while the other does not. 

Why should every business opt for open finance?

Businesses need to understand the importance of open finance in today’s technology-driven economy, where access to customer data gives you a competitive edge over competitors and allows you to pitch your products and services even better. 

Companies failing to adopt open finance into their business strategy are drifting away from the future of finance and inviting regulatory problems a few years later. 

Mentioned below are the reasons why companies need to grab hold of the open finance platform as early as possible:

Open finance will become a regulation for every business in the future

Considering the broad scope of open finance, countries have already started adopting this new technology which reads user data with their prior permission.

Because accessing customer data, also enables government bodies to govern better and formulate laws and regulations specific to customer behavior. 

Countries like the United Kingdom have already passed the General Data Protection Regulation (GDPR), considered the toughest law globally, which works on protecting user data and privacy, and violation of this law can result in penalties reaching tens of millions of euros. 

Therefore, later on, companies cannot rely on open banking, accessing user information without consent, as this practice will attract severe repercussions.

Open finance platforms will be in boom once all countries unite against data piracy.

Supports business decisions

High-dollar decisions directly affect your cash flow.

Before going ahead with any significant decision, it’s crucial to understand how the market reacts to your product and services.

Apart from this, companies opting for open finance also comprehend customers’ spending styles and habits, allowing them to trigger a pricing strategy accordingly. 

With a financial analysis of the customer data, companies can target well according to their niche industry display products and services that are bound to be purchased by the customer, irrespective of the price. 

Different industries get benefits from open finance

Ideally, companies believe the benefits of open finance are restricted to fintech based technologies and businesses; however, that’s not the case.

Even if you don’t happen to be a FinTech firm or tangentially related to the finance industry, open finance will still impact your business. 

Through consented customer data, companies can understand the purchasing power of their customers, which product or brand they are more likely to purchase, which features appeal to them, and what sort of improvements they can adopt in their development. 

Open finance can solve money management issues

The raw customer data obtained through third-party APIs is very messy and complicated.

But through the help of this data, companies can gauge how the customers organize and manage their finances. Which financial tools are their most prominent ones, the frequency of using them, the card companies with the most significant shares, and so on. 

Now that companies have a good knowledge base, they can develop products and services that solve issues related to money management.

They can trigger ads for financial tools like corporate cards, debit cards, credit cards, online banking, and so on. 

Benefits of open finance for SMEs

With the open banking regulation in place, customers believe access to their personal banking information will provide a seamless user experience.

Third parties APIs extracting data will be highly regulated and not considered data piracy. Small and medium enterprises can now target better and align their offerings with customers’ demands. 

Mentioned below are some of the reasons why open finance platforms are here to stay and why SMEs should cherish them:

1. Manage cash flow

Through open finance, companies can save a significant amount of costs by developing those products and services that generate good revenue and sales for the company.

They can comprehend which product features to spend more on, what budget needs to be allocated for marketing, and so on.

Hence, allowing the finance leaders to undertake better financial decisions.

2. More transparency

Goes without saying open finance promotes data transparency.

Users can manually select which aspect of their financial data can be accessed by third-party applications. 

3. Data accuracy

Previously, companies depended mainly on secondary data collected to understand consumer behavior.

Through this data obtained, companies comprehended the demand and supply of a particular product.

But now that companies have direct access to customers’ preferences and tastes, they can use the data to mold their production line and product categories accordingly.

4. Better finance management

With accurate and efficient data, companies can allocate resources most effectively without wasting any assets or existing infrastructure.

No wastage results in no unnecessary costs, leading to better financial performance

How does Volopay help you to manage the finances of your company?

Volopay is your lender of last resort for all your financial and accounting needs. 

With a robust and powerful system, Volopay resolves all your expense management needs through a single platform without you having to operate anything manually. 

Automation is at the core of Volopay’s software.

Through a completed automated software, fast processing, and seamless APIs, Volopay adheres to your daily accounting needs like invoice management, accounts receivable, accounts payable, vendor management, reimbursements, and corporate cards

With comprehensive accounting features like approval policy, submission policy, multi-level approval workflow, expense capturing through OCR technology, and auto-expense categorization you can track and record every incoming and outgoing expense without manually entering it into your general ledgers. 

To monitor your employee spending, we empower our corporate cards with built-in spend limits and approval policies that help you establish employee accountability at each stage of expenses. Thereby unloading your finance team and allowing them to focus more on pressing areas of the organization. 

To stay on the cutting edge of your business expenses, we provide real-time tracking to oversee and update all your accounting expenses, reimbursements, and claims. 

You can create budgets according to the departments, activities, or ongoing projects with intelligent budgeting allocation.

Grab control of the budget amount exhausted and the amount left unused. To monitor even better, we provide an expense overview of the transactions made under each budget. 

That’s not enough! If you are still curious about how we work and can help your business manage its expenses in a better way, come and talk to one of our specialists.

Streamline your expense management with smart corporate cards