By Rolands Mesters, CEO and co-founder of Nordigen
These days are difficult for up-and-coming startups. Looking at the wider financial world today, global tech giants are feeling the pain of the most recent economic downturn. From January until May 2022, Apple, Amazon, Meta, and Google lost a combined 2.7 trillion dollars in value. The fintech industry has lost 460 billion dollars in estimated value. Buy now, pay later giant Klarna has seen its value depreciate from a high of 45.6 billion dollars in 2021 to a current low of 6 billion dollars in 2022. On top of all this, a “crypto winter” has arrived, with Bitcoin’s value falling nearly 60% and Ethereum’s more than 70% this year alone.
This signals a trying time for startups who already have the odds stacked against them. 90% of startups fail, a damning statistic that investors and founders are very aware of. For startups, this tech downturn means a tightening of the belt for the foreseeable future. Money is becoming scarce and investors are less likely to support any startup that is not immediately profitable or deemed too risky.
These challenging times, however, also provide opportunities to strategise and look internally to better develop products and streamline business operations. Open banking is a solution that can help many small businesses and startups. For fintech startups, the benefits of open banking are seemingly endless, providing a platform to build increasingly unique and useful services based on transaction data. For startups outside of the financial industry, open banking services provide integrated and up-to-date tools that help them better understand the flow of capital and enable a better customer experience.
Open banking: the introduction of a valuable ecosystem
In Europe, the Second Payment Services Directive (PSD2) came into force in 2019 and mandated free access to bank application programming interfaces (APIs). This has enabled customers to securely share their banking data with third parties, creating an open banking ecosystem that allows for new financial solutions to be developed. Businesses benefit from streamlined operations, and customers benefit by receiving better services.
A CB Insights study found that 38% of startups fail because they run out of capital and another 35% fail because of a lack of market need. A startup using open banking APIs can avoid making these mistakes by having a better understanding of the market through increased insights into cash flow and customer data. Access to in-depth client information can enable businesses to flag specific consumer pain points and find new ways to meet their user needs with the help of data analytics.
Access to data is key to startup survival. Open banking APIs provide access to account information, balances, transactions, beneficiaries, statement transactions, business details, income verification, and can be used for credit scoring. This increase in information can help startups understand if the product they offer is useful and what customers are using their services in order to maximise the opportunity to quickly and accurately pivot and adjust if necessary.
The benefits of incorporating open banking data
With the help of open banking, the onboarding and authentication of customers is accelerated through secure bank data that is able to verify and quickly send information. Historically, onboarding has been a tedious and time-consuming process that can cost a business up to 60% of its potential revenue due to long waiting times.
Another benefit of integrating open banking is that the customer receives more personalised services, strengthening the connection between the startup and the service it provides to the customer. This, in turn, can increase customer loyalty and provide much-needed stable revenue and support during an economic downturn.
Beyond developing a smooth experience for customers, open banking adds a layer of automation to startups and businesses, liberating strenuous tasks and ensuring accuracy of data and financial management. Account aggregation allows for centralised access, unifying information from several accounts and multiple banks in one location. API-enabled data collection and cleaning alleviates manual financial processes and creates space for added-value activities, which establishes a positive feedback loop where startups allocate more time to their customers and products.
Cash flow management, profit margins, and calculating overhead are other areas where open banking helps startups, making available an array of accounting services and financial management tools for startups that cannot afford traditional accounting services.
How to implement these benefits
To actualise the benefits of open banking, a startup must decide whether to build their own open banking integration or to partner with an established provider. The answer depends on the aim and budget; a startup with enough financial backing to offer a completely unique product that challenges other existing financial service providers may find it more beneficial to build open banking connections in-house. However, building open banking integrations takes time, is labour-intensive, and is legally complex, making it unattainable for most up-and-coming startups. A more universal and cost-effective option is to integrate and build on top of an existing open banking service provider. This is less time-consuming and more efficient, particularly in times of financial hardship.
No matter what level of integration a startup needs, there is a benefit to using open banking, especially in a time of financial turbulence, as it provides faster customer onboarding, a better customer experience, more opportunities for automation, and helps with cash flow management.
About the author
Rolands Mesters is the CEO and co-founder of Nordigen, the only freemium open banking API that connects to more than 2,300 banks making it the largest network of bank connections in Europe. Rolands is a sales and growth hacker who is passionate about fintech and alternative lending. Nordigen began as a data analytics company that builds solutions for categorising and analysing bank account data. In December 2020, the company launched Europe’s first free open banking account data API. Rolands has been featured in the Forbes Latvia 30 Under 30 list as well as being featured in TechCrunch, Sifted, and the Financial Times. Rolands regularly shares fintech insights and analysis on open banking at top international fintech events, and is considered one of the foremost experts on open banking worldwide.