Open banking could be the late payment solution for businesses

The average small business spends £90,000 a year chasing overdue payments in lost time and manpower. And the late payment problem is getting worse. Open banking could provide frictionless, instant payments, says Nick Raper

 Open banking financial technology fintech concept on virtual screen.

Instant payment: open banking cuts out lengthy waits for invoices to be settled

It’s well publicised that late payments are crippling small and medium-sized businesses in the UK.

According to recent research by the Independent Chartered Accountants of England and Wales, 24pc of SMEs are reporting that late payments are a bigger issue than they were a year ago. The Federation of Small Business estimates that late payments contribute to 50,000 insolvencies annually, costing the economy £2.5bn.

See also: What open banking is going to mean for businesses

For both UK SME owners and the British economy, these stats are alarming and will likely have knock-on effects. Entrepreneurs could be deterred from taking the courageous step to establishing their own businesses and generating growth. In these times of economic uncertainty, we need the British economy to be at its strongest as we depart from the European Union, with or without a deal.

See also: Why open banking is the next frontier for financial innovation

Open banking to the rescue

In simple terms, open banking means that banks must – with customer consent – give third-party providers access to customer accounts. This gives businesses the ability to control their data and money in other environments, opening up a multitude of innovative opportunities and products. These include open banking-based payments.

Open banking-based payments are expected to have a marked impact on the way we pay, both in the online and physical world. In fact, they are likely to displace payments currently made using cards. It is estimated by analysts that open-banking payments will soon account for 29pc of all e-commerce spending.

How does open banking work in practice?

Well, imagine you’re a business who has opted to use open banking-based payments. Instead of sending a customer a traditional invoice, you instead send them a link to initiate the payment. The customer agrees to pay, clicks the link, and is taken to a page with your details and payment amount already filled out. In another click, the payment is authenticated by the customer’s bank and then the funds are sent directly from the payer’s account to your own. Whereas payments used to be the payer needing to go to their own internet banking portal to push money towards the recipient, open banking-based payments flip this model on its head.

Open banking-based payments are expected to become the new normal. But what implications do they have for SMEs’ late payments problems? Could they be the late payments solution? And what other benefits do they bring?

Late payments solution for UK SMEs

When it comes to late payments, it’s not just the cash flow issues they cause which can be damaging for SMEs. Although much less publicised, BACS estimate that the average UK business spends £9,000 recouping late payments.

SME owners want to be spending every minute possible growing their business, not hunting down sluggish customers

These costs, which often include staff time and interest in borrowing, are not recoverable, and instead deal businesses significant blows through no fault of their own. SME owners want to be spending every minute possible growing their business, not hunting down sluggish customers.

Faster access to funds

For UK SMEs, this is perhaps the most enticing reason to adopt open banking-based payments.

Open banking payments are sent direct from a payer’s account to the supplier’s account using the Faster Payment Scheme in the UK. Under this model, funds are transferred in real-time and typically arrive in the business owner’s bank account in a matter of seconds. The funds are freely accessible to the payee to be used to meet the business’ needs, and there is no option for chargebacks to recall/dispute the payment.

Compare this to card payments, which typically arrive between 1-7 days later depending on who your payment service provider is – and sometimes even later. It’s hard to see why SMEs, which are often managing tight margins and cash flow difficulties, would accept 1-7 days when they can receive those funds through open banking in as little as 1-7 seconds.

Make it easier for your customers to pay

Given the vast amount of payment methods available today, it seems absurd that payments take as long as they do. Xero recently reviewed over two million overdue 30-day invoice payments and found that the average late invoice was paid 64 days after issue, more than double the payment term. While much of this may be working capital optimisation from the payer, some is likely down to poor existing payment processes, with payers needing to switch between multiple interfaces, websites or portals to view an invoice and make a payment.

Another benefit of open banking payments is in the ease of transaction. Whereas traditionally the customer would receive an invoice through one channel, and then shift into their accounting software or internet banking to make a payment, with open banking the customer can initiate a payment wherever they receive the invoice. This could be via email, text message, or as a plug in to other portals, such as their accounting software or ERP systems. This makes it easier for customers to just click and pay. And, as open banking develops, the payer will soon be able to decide whether the funds should be sent immediately, or at a future date of their choosing in order to maximise their payment terms.

In addition, the upcoming “request to pay” functionality, which provides a messaging layer to support billers, helps business to get more control over their payments and lead the interactions with their payers. You can issue invoices and requests to your customers and send reminders to engage them in their channel of choice. Once a request for payment or reminder has been sent, the customer can easily initiate a payment using their preferred method (which could be open banking or direct debit or another form) and even choose to make a part payment or pay later.

Providing payment security

And, unlike card payments, open banking-based payments manage this with greater security for both the payer and the payee.

When a card payment is taken, details are captured and held. However, storing card numbers creates risk – criminals steal them on a regular basis. The Dedicated Card and Payment Crime Unit successfully prevented £95m worth of attempted fraud last year, according to UK Finance.

To mitigate this risk, card providers impose more and more security measures, such as PCI DSS, CVV, 3D Secure, tokenisation and so on. Each step increases the cost of accepting card payments and adds friction to the payer’s experience.

With open banking payments though, a customer’s account details and credentials are only ever passed securely between the customer and their bank, and never available to you as the payee, giving greater security and assurance to all involved in the transaction.

Open banking demand

We’ve spoken to merchants up and down the country and have witnessed first-hand the clear demand for open banking products. For instance, 89pc of merchants told us they were considering, or actively exploring leveraging open banking as a payment option within their organisation. This shows an imbalance between demand and supply of open banking based products, and the onus is now on solution providers to support these initiatives.

Of course, the late payments crisis extends well beyond the payment process itself. But by offering increased security, a smoother customer journey and ultimately faster payment methods, open banking may well be the saving grace for SMEs dealing with friction around payments.

With this in mind, small businesses should be calling on their providers to support them with open banking capabilities.

Nick Raper is head of UK at Nuapay, Sentenial’s leading account-to-account payment provider and a pioneer in open banking

Further reading

Banking the future for small to medium sized businesses

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