One of the major challenges facing small businesses can be finding the financing necessary to get off the ground and achieve growth. The difficulty of establishing a solid credit history in the face of unpredictable cash flows can make traditional credit providers wary, particularly those burdened by clunky legacy systems and changes in regulation.
But the advent of innovative, alternative financing solutions over the past decade has meant that more options – offering greater flexibility, transparency and convenience – are becoming available.
Perhaps one of the most exciting of these is emerging from the Open Banking concept. Built around open data, open source technology and a collaborative approach to third-party development, Open Banking is essentially a means of decentralizing decision-making, using shared information and systems to find the most suitable financial solutions to meet a specific user’s needs.
This week alternative finance provider Liberis achieved an Open Banking milestone, using technology developed by OpenWrks to process a full funding application for the first time.
The Global Treasurer spoke to Liberis CEO Rob Straathof about the potential of Open Banking and how it could represent a break with the past.
How is Liberis different from traditional credit providers?
Traditional credit often takes weeks before you actually get it agreed – the underwriting and the amount of data necessary mean it can be a long, manual process. For Liberis, part of the Open Banking solution is to get all of the [client’s] data within 5-10 minutes, to get a near-instant decision on whether funding is possible. We can make a same-day decision on funding for up to £300,000.
If you go to your local bank or a traditional finance provider, you’ll be asked to bring your entire credit history over the past 10 years. We can analyse that data online using highly sophisticated algorithms looking at all the data points.
What are the benefits of Open Banking?
Open Banking has enabled us to have instant information on a clients’ current balance, income and outgoings, giving us an instant assessment of their financial probity. It cuts out a very manual process by linking up their data to our underwriters.
We fund on the basis of future card and online receivables. Where historically we’d have to ask people to send in their statements, we can now extract them from the data that Open Banking gives us. There’s no manual confirmation for revenues any more.
It cuts out a very manual process by linking up their data to our underwriters
What are the implications for treasurers?
Open Banking has enabled businesses to link in their financials confidentially through an online portal that is safe and secure, and instantly check their availability of funds. Let’s say in six months they need some funding – they don’t need to apply for it any more because we already have their data and we can instantly approve them. You will know by logging onto our website whether you are approved or not, rather than actually having to go through the application process.
Banks are retreating overdrafts, especially for retailers; what we’ve seen over the past five years is that banks have reduced overdrafts and loans for retail companies. Instead of having to apply for an overdraft facility from their bank, companies can now just check in with Liberis, provide us with their data through Open Banking, and in the background have almost the facility of an overdraft from us.
The best thing about our solution is that we automate repayments as a percentage of the day’s cash flows
Regular overdrafts are outstanding up until you have to repay them; and traditional loans you have to pay back in scheduled monthly repayments. The best thing about our solution is that we automate repayments as a percentage of the day’s cash flows. This ensures that payment is in line with your cash flows, and you’re not held to monthly fixed amounts. Or, as is the case with an overdraft, stuck with a continually outstanding balance.
Who is your target client base?
We excel in both serving young companies and companies with very seasonal businesses, and we have options for larger companies as well through solutions that can provide larger amounts and allow them to spread their repayments over several years.
What do you think the future holds for Open Banking?
I strongly believe that in the coming three to five years banks will keep retreating from business lending, for three reasons: regulation – Basel III comes into play next year, which will further affect the amount of capital that a bank needs to hold in order to lend to SMEs; legacy underwriting systems – these prohibit [traditional banks] from profitably lending to businesses under £100,000; and their customer experience is quite clunky.
Open Banking is enabling companies like Liberis to make use of the data that is actually owned by small businesses in order to provide the funding they need when banks can’t provide it. We can take over the functionality of banks in terms of small business loans and overdrafts through Open Banking. I call it ‘frictionless one-click lending’ – clients don’t even have to think about applying for a loan; we are just there for them.