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How Open Banking & BaaS Can Transform Marketplace Startups & SME Financing

If you think online marketplaces have come along way since the early ’90s, you’d be right. But the next decade could pale in comparison and prove to be the most transformational and impactful period yet.

The emergence of two digital business models, Open Banking and Banking-as-a-Service (BaaS), promise to deliver marketplaces unprecedented opportunities for value creation by providing targeted and customised financial services to SMEs at their point of need.

What is Open Banking?

The financial services industry has undergone seismic transformations over the last decade. New open banking initiatives that started with the European Union Payment Services Directive (PSD2) have quickly spread and are now in different adoption stages worldwide from Australia, Singapore, and Japan, to the US and Latin America.

BBVA Open banking regulation around the world

Although open banking regulations differ slightly from country to country, open banking can generally be understood to involve banks giving registered third-party providers access to their customers’ data through Application Programming Interfaces (APIs).

Whether another bank, an app developer, a fintech startup, or any other type of non-bank business, these third parties can use this account data to create insights and build their own financial products and services.

How marketplaces can leverage Open Banking

Open banking is poised to radically change how financial services are delivered and consumed and present exciting opportunities to unlock unprecedented value.

Marketplaces can leverage open banking data to develop unique financial products and services such as financial management and budgeting tools and payment initiation services that help SMEs optimise operations and grow their business.

What’s even more exciting is the potential to go beyond providing these simple financial services. With open banking, marketplaces can provide SMEs better access to higher-impact financial services like loans and trade finance, where they remain critically underserved.

Source: AT Kearney

Banks have continually shown they cannot serve SMEs with lending and trade finance products because of high complexity and risk levels. Providing these services also requires collecting and analysing lots of data, a challenging and costly exercise for banks.

Many SMEs face punishing manual and fragmented online and offline processes when applying for a loan. What’s more, due to a significant lack of data, banks often cannot accurately assess creditworthiness, resulting in a rejected loan application.

By leveraging combined insights from customer bank accounts and alternative data generated on a marketplace, it’s possible to overcome this data gap.

Many marketplaces are rich in information. They facilitate transactions and collect tons of high-quality business data and insights about SMEs that cannot be retrieved from a bank account. Everything from customer quality, client trust scores, and website ranking to an SME’s customer pipeline, weekly performance, outlook, and many other parameters.

This data is the perfect complement to account information made available by open banking, which provides data on income, cash flow, credit history, and more.

Together, these data sources make it possible to get a more comprehensive “360 view” of an SME, which helps underwriters better predict a borrower’s ability to pay back a loan. The longer an SME merchant is on a marketplace, the better the data gets, and the more an SME can be understood and serviced.

Marketplaces can build enhanced and digitally integrated credit risk scoring products that introduce significant efficiencies and cost reductions into the application process and dramatically increase the likelihood of a loan getting approved.

What is Banking-as-a-Service (BaaS)?

Open banking and Banking-as-a Service (BaaS) often get confused. Although both involve non-banks connecting to banks via API, BaaS has a slightly different purpose.

In a nutshell, open banking enables third parties to access existing bank customer data, while BaaS provides third parties access to bank functionality.

The data made available by open banking can be used by non-bank providers to build new financial applications and services. Alternatively, the access to bank functionality enables non-bank third parties to integrate existing “white label” bank services into their product or service such as:

  • Savings and checking accounts.
  • Debit and credit cards.
  • Online payment transfer systems.
  • Loans.
  • Insurance.
Source: 11FS BaaS Report

How marketplaces can leverage BaaS

BaaS enables marketplaces to integrate digital banking services into their own platform at a user’s primary point of need. Imagine, for example, that a marketplace wanted to strengthen loyalty or deepen relationships with its customers.

By leveraging the banking functionalities provided via a BaaS provider, a marketplace could offer SMEs a branded debit card that gives loyalty points whenever they pay with their card.

They could also enable an SME to open a business bank account and manage parts of their banking all within the marketplace itself, including for things like payroll, deposit services, and cash flow management.

Alternatively, a marketplace may want to provide access to a business loan or some type of insurance for buyers and sellers before purchasing or selling a product or service. These are just a few examples. Ultimately, there are many different ways marketplaces can leverage BaaS to provide added value to their customers.

It’s a win-win

Some of the world’s largest marketplaces are now offering financial services in one way or another. They are doing so because customer expectations for convenient and frictionless experiences are rapidly evolving, and competition is also heating up. The ability to deliver a superior customer experience has never been more critical.

Open banking and BaaS provide an excellent opportunity for marketplaces to create new revenue streams that drive profitability and next-generation experiences built on impactful value propositions that empower sellers to sell more and enable buyers to spend more.

But marketplaces are not the only winners. Perhaps more profoundly, the potential impact on SMEs could be massive. With increased access to high-impact financial services like loans and trade finance, we could be about to enter a new era of SME financing.

Anthony is the Chief Content Officer at Intrepid, a global marketplace community to buy and sell professional technology and creative services.

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Anthony Back

Interested in fintech, crypto, ecommerce, cybersecurity and the future of work.