The Role of Open Banking in SME Lending: Benefits, Risks, and Challenges

Share on facebook
Share on twitter
Share on email
Share on linkedin
Share on whatsapp
Share on skype

Add Your Heading Text Here

Open banking: a lifeline for SMEs, or turning into something more?

Small and medium-sized businesses (SMEs) are critical to the global economy, accounting for a large portion of job creation and economic growth. Access to financing, however, continues to be a major challenge for many SMEs, especially in developing countries.

Open banking is a new approach to financial services that entails the sharing of financial data among various parties, such as banks, financial organizations, and third-party providers.

This data can include transactional information, account information, and other financial information that can be used to create a more complete picture of a customer’s financial position.

The Advantages of Open Banking in SME Lending

By improving access to finance and making it simpler to obtain funding, open banking has the potential to provide numerous benefits to SMEs. Here are some of the most important advantages of open banking in SME lending:

Credit Score Enhancement

Open banking can help SMEs improve their credit scores by giving a more complete picture of their financial situation. Lenders can create a more accurate image of an SME’s creditworthiness by leveraging transactional data and other financial data, which can help to reduce the risk of default and increase access to financing.

Quicker Loan Processing

By giving lenders real-time access to an SME’s financial data, open banking can also help to streamline the credit application process. This can help to reduce the time and expense of loan processing, making it easier and more affordable for SMEs to acquire financing.

Enhanced Competition

By making it easier for new players to join the SME lending market, open banking can help to increase competition. Third-party providers can develop new financial products and services that compete with traditional lenders by leveraging APIs and financial data, which can help to lower borrowing costs and better access to financing for SMEs.

Open Banking Risks in SME Lending

Data Safety

Open banking necessitates the exchange of private financial data, which can pose a significant risk to SMEs if not properly secured. To safeguard SMEs’ financial data from unauthorized access and cyber-attacks, banks and third-party providers must adopt robust data security measures.

Compliance with Regulations

Open banking is a comparatively new approach to financial services, with few regulatory frameworks in place to govern it. This can make navigating the regulatory environment and ensuring compliance with existing laws and regulations difficult for SMEs and lenders.

02 (1)

Aside from the risks involved with open banking in SME lending, there are several challenges to consider.

Legacy System Integration

Many financial organizations continue to use legacy systems that are incompatible with modern APIs. As a result, it may be difficult for these institutions to embrace open banking and use APIs to share financial data with third-party providers.


Open banking is still a relatively new approach to financial services, and there are presently few industry standards in place. This can make it difficult for third-party providers to create apps and services that integrate smoothly with the APIs of various banks.

Business Plan

Open banking necessitates a new business strategy based on the sharing of financial data and the development of new financial products and services. This can be difficult for banks and financial institutions that are accustomed to conventional business models and are hesitant to adopt new approaches.


By leveraging technology to better access finance, open banking has the potential to revolutionize SME lending. Open banking can provide lenders with a more complete view of an SME’s financial situation by sharing financial data between different parties, which can help to reduce the risk of default and increase access to financing.

Published on 22/05/2023

by Michael S.