ForwardAI: How Open Finance Will Transform the Financial Services Industry

Access to reliable and accurate data is becoming increasingly critical to the provision of financial services, with KYC being a powerful indicator in the decision-making process.

Nick Chandy, CEO and Co-founder of ForwardAI
Nick Chandy

Here in this another guest for the financial technology timesAnd nick chandi, CEO and Co-founder of straight ahead, discusses how open finance can be used to drive the delivery of financial services, and why having your data straight will prove to be extremely beneficial for business development.

After working in accounting for over a decade, I’ve seen how data is at the heart of the industry and will lead to change. The industry is ready for disruption, and we’re beginning to experience a transformation that is changing processes and workflows and putting the focus on open data. From consumer-oriented finance, PSD2, UK Open Banking, to the right to consumer data, countries around the world are beginning to regulate open access to critical data that enables a variety of new use cases and data-driven decisions. Open finance democratizes financial services.

Isn’t open financing the same as open banking?

The short answer is no. Open banking usually focuses on bank statements from different accounts but has evolved into open finance. Open finance is a broader concept that creates more opportunities for lenders, businesses, and consumers. Ultimately, by sharing data, users get more control over their finances.

Open finance is consent-based data sharing that includes data from accounting systems, mortgages, investments, insurance, and loans – essentially all data generated by a business that includes money and finance. This data is shared via third-party APIs with companies looking to provide data-driven and value-added services, including lenders and banks. APIs, such as ForwardAI’s Micro API, create a data stream between small businesses and their financial partners. This technology pushes the boundaries of open banking to include a broader range of data for open finance, expanding use cases and feasibility within markets.

With access to more data, banks are empowered to offer more products and services to businesses because they now have an inside look at the companies’ financial statements. Financial institutions want a full assessment of the financial strength of a business, which requires a review of invoices, customer and supplier relationships, to understand strategies and business models. The most effective way to access this information is through accounting data, and with client-authorized access, lenders can streamline processes and quickly underwrite.

During the pandemic, predicting the financial health of small businesses has been difficult for banks and fintech companies. For example, better data from accounting or employee records could have provided insight into a company’s operations.

This is where the use cases begin. An example is the research and development (R&D) tax credit for companies that develop, design, or improve products, processes, or programs. Banks and fintech companies can offer money in the amount of the research and development tax credit, but the only way to assess this credit is to analyze company data to determine the payroll allocated to employees who conduct research and development. Providing access to this data so that the company can borrow against the tax credit can improve the company’s liquidity as the money can instead be used in its operations or capital investments.

Open financing goes beyond helping a bank identify opportunities for obtaining tax credits. Businesses can build better solutions and automatically settle accounts any time the bill is paid with open financing. The impact in the payments world is significant that Account-to-Account (A2A) payments have the potential to eliminate third parties and the associated exchange fees.

Besides being cheaper, A2A can be fulfilled in real time, making it faster than most other payment methods. Through open financing, banks and fintech companies can access real-time payment data that will help create more flexible financial profiles for companies.

Open financing has the potential to simplify processes that range from paying bills to mitigating fraud risks. The information is often stored for ease of handling. For example, businesses no longer need to share credit card or account credentials with vendors or partners. This type of data sharing is reduced with open funding and as a result, fraud cases are reduced.

For lenders, context-rich data from accounting systems includes details that help them proactively identify their clients’ financing needs. Direct access to data eliminates friction for customers as they do not need to upload documents to their banking partners as part of their loan application workflow, or resubmit paperwork when additional financing is required.

Technology is an important part of the bottom line of any business, and those that do not benefit from modern technology risk being left behind. I’ve seen how accounting systems can create barriers when companies don’t provide direct access to their financial partners, as well as how opportunities are created when systems integrate and share data.

Today, companies want to transact smoothly, they want to deliver data and completed processes in real time. Open finance is a framework that helps banks, among other fintechs and companies, identify opportunities for businesses and help businesses manage their finances. For small businesses, it has the potential to unlock huge opportunities and help them compete with their larger peers.

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