From Open Banking to Open Accounting: A New Chapter for Commercial Lenders?

Across the board, lenders’ and clients’ practices and expectations have been turned upside down by the COVID crisis.

Selling and doing business now happens digitally, not physically. Digital systems have swept away paper-based processing, accelerating cloud-based technology into the mainstream. Attitudes around data-sharing have thawed, with many embracing increased transparency as necessary to getting business done in a world gone digital.

The ‘long-tail’ effects of many of these changes have yet to be seen. But one significant shift that has been accelerated by the crisis has been the emergence of Open Accounting, an evolution of the Open Banking concept.

This article explores the roots of Open Accounting and what it means for lenders, and is based on our discussions with Alex Cardona – co-founder and COO of data extraction experts Codat on the Dancerace podcast, The Ledger.

Talking terms

First things first: what is Open Accounting? 

Put simply, it’s the frictionless sharing of rich commercial data between multiple accounting platforms. Put another way: a golden opportunity for lenders to take technological leaps forward in their day-to-day business operations.

The movement has its roots in Open Banking.

Here in the UK, we’ve been able to seamlessly and securely share data between the top nine retail banks since January 2018, with the UK Government leading the field in promoting increased transparency and control for financial customers.

For consumers, this means switching bank accounts and tracking transactions is easier than ever before. For banks, it means having access to and learning from rich data to craft better products.

So far, so consumer-friendly. Today, the UK Financial Conduct Authority (FCA) has widened their focus to commercial business and is focused on extending these principles further to develop ‘Open Finance’. 

Open Finance aims to give customers and businesses even greater control over their financial data, with the FCA claiming the programme “has the potential to deliver transformative benefits for consumers and open finance participants alike”. 

Last December, the FCA reached out to firms for their views on how to implement the practice across businesses, which it says will encompass diverse services including savings, insurance, mortgages, investments, pensions and credit on the consumer and commercial side.

The missing piece of the puzzle? Accounting data. But not for long. 

The next chapter

Despite the hype, the rise of Open Banking was underwhelming for Britain’s small businesses. Arguably, it seemed to make hardly any difference at all. 

This is because no business operates or strategizes from its bank account. 

As any founder, freelancer or financier will tell you – at the heart of any small business’ operations is, instead, its accounting platform. Whether it’s FreeAgent, QuickBooks, Xero, Zoho Books, FreshBooks, Sage or something else … nearly all financial decisions will made with the accounting browser window open. 

Many of these platforms already connect to business bank accounts. But the integration process can be glitchy, manual, and few platforms are able to syncronise with other financial data services such as pensions, investments or credit facilities.

This lack of connectivity is a wide-open goal for technologists who can join the dots – and the reason that we believe Open Accounting is one of the most exciting growth areas in commercial finance right now.

Pieces of the puzzle

The foundations for Open Accounting are already laid.

In Autumn last year, Innovate Finance launched a competition, awarding £3.5 million of government funds for a solution to, “speed up the responsible adoption of artificial intelligence (AI) and data technologies and solutions in the accountancy, insurance and legal sectors by enabling better access to data”. In March, the government published a fresh report on “Making Tax Digital”, as part of the HMRC’s drive to become the most digitally advanced tax administrations in the world.  

While data sharing in accountancy is still in its earliest infancy, all signs are pointing to a rapid acceleration in artificial intelligence, automation, and data sharing. 

Research from FreeAgent shows that 66% of accountants believe that upcoming data sharing technology will have a positive impact on their work over the next five years. 100% of all the accountants surveyed think that at least some of their accountancy work today will be automated away over the same timeframe. 

Alex Cardona and Codat know this better than most. Specialising in providing data extraction services from banking and accounting platforms, the firm – who also supply data extraction services for our c3, e3 and f3 products – has seen a massive increase in demand for their data-sharing tools within the accountancy sector, as firms wake up to the power of sharing their financial data via APIs between cloud-based baking, insurance and other platforms.

This shift has already led to a wide range of financial benefits, which accounting firms are only now beginning to take full advantage of.

For example: authorisation using shared data. This can now be done much faster than previously, freeing up employees to focus their time on revenue-driving activities, such as customer service. 

The efficiencies offered by Open Accounting reflect how accountants’ roles have changed during lockdown. As automated, data-focused tools now take care of the tedious and highly manual tasks, many accountants have found themselves moving to a more consultative role, guiding clients through stressful times. According to FreeAgent, 70% of UK accountants believe that this will continue into the future. 

For B2B lenders, it should be a similar story. 

Golden opportunities

For lenders, access to prospects’ and clients’ accounting data will mean more efficient analysis, better lending decisions, more time for profit-making work and the insight to create more relevant products. That's why we've integrated Codat technology into our c3 backoffice and e3 client access systems, to allow lenders to automatically collect to their clients' online and offline accounting systems to access rich financial and management information on an ongoing basis.

This data extraction accounting integration is also integral to our f3 customer onboarding system. 

With f3, receivables lenders can connect to prospects’ accounting systems using data extraction, delivering up to seven years’ of financial data into a combined CRM/data dashboard. Coupled with credit scoring, AML and KYC tools, this gives lenders a firm basis for making initial lending decisions. Lenders aren’t forced to spend hours on the phone requesting financial data from prospects, fixing that data and then parsing the information to make a decision. The information comes directly from the prospects’ accounting system.

This is rich data – providing a full picture and context for lenders to truly understand the circumstances of the business applying for credit. And because businesses are less likely to tamper with the data in their accounting system than, say, a ledger upload file, lenders can depend on that data with greater confidence.

Higher quality data, delivered in minutes, cutting the risk of fraud. That’s only one example of how Open Accounting can empower lenders to improve their working processes and make better, faster, more profitable credit decisions. Isn’t it time you considered Open Accounting for your business and clients?

To find out more about f3, our customer onboarding platform, click here. To listen to our podcast conversation with Alex Cardona at Codat, visit The Ledger.