Clive Humby, a British mathematician and the Tesco marketing guru, declared that “Data were now the new oil” in 2006. Data has been the focus of much of the discussion. It is how marketers can use it, how companies can leverage them for decision-making, how consumers give it away for free, and how to protect it. Companies have seen significant losses due to how data is shared and how users can access their data.
Access to data is also essential for small-business owners. They must manage their business efficiently, from hiring staff to setting up staffing plans to ordering inventory. Small businesses also need data partners to help them grow and ensure their future. A vendor could look at a business’s history and recognize specific patterns–when they need a line of credit, acceleration of payment, or additional supplies–anticipating a business’s needs in advance.
Financial institutions must also be able to access more information when a small company applies for a loan. All businesses are different. Not even all companies in the same industry are alike. They have extra cash flows, seasonal sales cycles, and patterns. Every loan application will be different because every business is unique. Access to bank information and credit scores alone will not tell you the whole story about a company’s health, financial situation, or if it is in crisis.
Let’s say you have a local landscaping company in a warm climate. The business’s dependence on weather and seasons means it can only operate during specific months, such as spring through fall. Cash flow can be complex during colder months. The owner might need working capital to keep staff on payroll, pay for vehicle maintenance, or other operational costs. The owner may not be eligible for the loan if they apply during cold months when funds are unavailable, and vehicle maintenance is more straightforward. If customers pay their invoices regularly, the loan could be approved for more than it needs during warmer months.
Bank statements could show that revenue decreased as the temperature dropped. Underwriters may interpret this as poor business health since they might not be familiar with it. This could result in a denial that prevents the owner from accessing the capital they require when they need it. This could jeopardize the business, causing it to lose customers or close its doors.
This scenario could be prevented if you have access to more data than your application and bank statements. The IRS Accessibility API can be used by financial companies to better understand their customers, as I have previously mentioned. This API allows service providers to share any information the federal government may need. This API could give insight into tax returns from years past to verify information and aid in the decision-making process.
Open Banking, or Open Bank Data, is a financial practice that allows third-party financial service providers access to financial data. This includes data about consumer banking and financial data from financial institutions. Although this may change the banking industry, there is one certainty: It can give you more data when making lending decisions.
Open banking and other small-business data sharing methods will allow customers to search for solutions that best suit their capital needs. It will also create a more competitive marketplace for customers, which will result in more significant innovation, capital access, and better pricing.
Innovation is critical for the financial industry to best serve its present and future customers–precisely when it makes lending decisions. It is in everyone’s best interests to share the correct data, including financial institutions, merchants, and consumers. This will allow for better lending decisions and create a more attractive market. The ecosystem must facilitate data exchange between all parties in a manner that protects customer information and allows for scale to serve all market participants.
