Can open banking help my small business manage late payments?
Open banking is powering the future of banking for SMEs. But can it assist with the late payments crisis that is causing 50,000 insolvencies a year? These insolvencies are costing the UK economy £2.5 billion annually.
Uncertainty around late payments can be devastating for a small business. Open banking could be the answer, delivering alternative ways to pay, giving companies better control of their money and data.
Imagine a payment system that flips the established payment method on its head, where your business can initiate payments without relying on the payer to push the payment to your account. Direct account payments that are almost instant, meaning companies can undercut or eliminate fees. All of this is potential with open banking.
Challenging the late payment culture
17% of all payments to SMEs are made late, and 9% of those are eventually written off as bad debts. Uncertainty around payments and cash flow can have a detrimental impact on the ability to pay bills or make payroll. Ultimately it can be the difference between business as usual or eventually failing.
Open banking and FinTech can deliver actionable insights on late payments that can challenge the existing culture. Open banking technology can power solutions that mitigate the impact of late payments, bringing together products and services with actionable insights such as:
- Automated payment reminders
- Faster access to credit and other contextual financial products that can cover any dips in cash flow
- Overdraft early warning system
- Real-time cash flow analysis and projections
- Money management dashboards that unite financial operations in one place
Late payment solutions
Recouping late payments could be costing your business £9,000 each year. Open banking has the potential to deliver late payment solutions that boost your productivity, performance and profit.
Open banking also has the potential to simplify and streamline the way payments are made by:
- Risk scores: insights into fair dealing track records, payment patterns and CCJs
- Optimising payment methods using real-time cash flow data
- Transparency and reduced costs on Forex deals
- Scheduling payments with access to bridge funding
While making it easier to manage your money and gain faster access to credit, open banking solutions could also revolutionise the way your SME mitigates the risk of late payments.
The impact of open banking on late payments
Faster access to funds
- The UK’s Faster Payments Scheme allows funds to be transferred in real-time
- Funds are immediately accessible to be used for business needs
- No option for chargebacks to recall or dispute a payment
- Allows SMEs to manage cash flow issues and tight margins better
- Access to payments in seconds rather than 1-7 days for a card payment
Make customer payments easier
Late payments can mean invoices not being paid until an average of 64 days, over twice the requested payment term. Given the complexity of existing payment processes, it’s hardly surprising. A better customer payment experience and ease of transaction could change all of that.
Open banking eliminates the necessity to switch between multiple interfaces, allowing customers to initiate payments using the same platform through which the invoice was generated. Your business might request payment through text, email or a plugin to accounting software, making payment a simple matter of click and pay.
The new Request to Pay service is expected to give businesses more control over payments by initiating a better and more flexible customer payment experience.
Card payment security is a serious issue for banks. Breaches in data security are common, with losses on cards issued in the UK reaching over £671 million in 2018.
Where card issuers are forced into ever more complex and costly security routines, open banking can offer a genuinely frictionless payment experience. Account details are never revealed to the payee and pass only between the customer and their bank, creating greater security throughout the payment process.
The future for open banking and late payments
As traditional banks begin to see open banking as an opportunity, not just a compliance issue, new financing initiatives should start entering the marketplace targeted at SMEs. Challenger banks and FinTech are already delivering solutions that focus on proper cash flow management.
The ability to shop around for better and cheaper ways to handle payments and mitigate late payment issues and the desire to leverage open banking puts the onus firmly on solution providers to keep innovating in this space.