Startup growth: Using open banking to your advantage

Many different verticals in the fintech landscape can benefit from open banking APIs – remittances, growth payments, and crypto. But the love story between open banking and startups is just beginning. 

Among the many benefits, open banking can scale startup processes and operations for onboarding, accounting, identity validation, and payments (by eliminating the delays and costly fees of credit cards). Startups operating in multiple countries can also quickly integrate with local banks through APIs and develop automated banking processes to reduce manual transfers and transactions and log into several bank accounts. 

Over the last 10 years in Latin America (LATAM), historically an underserved region, the advent of mobile communications provided a fertile field for financial and technical development. Consequently, the market potential for fintech projects and tech startups in the region has increased. 

Since open banking requires banks to make valuable financial data – about individuals or businesses – available via APIs for third-party service providers, this could benefit LATAM startups enormously with funding, loans, client onboarding, and financial management. Let’s dive in.

Client onboarding with open banking

Many traditional financial companies in LATAM prefer a manual process to validate the identity of their users. They register users manually, who then have to fill in many online application forms, followed by several days of waiting to get everything verified.

Through open banking, any startup can make their onboarding and verification process scalable, simple, and automated through a reimagined digital experience. They’ll be able to instantly verify account ownership to get the user’s account information straight from their banks. Customers will be able to provide all necessary information in a few clicks.

There are other digital alternatives similar to open banking for onboarding processes like Facebook, Gmail, and Google. They allow service providers to validate consumer information and identity through OAuth, an open-standard authorization protocol. Instead of sharing password data, OAuth approves one application interacting with another on a consumer’s behalf with authorization tokens.

However, the benefit of open banking is not just validating identity; it also accesses information that will be helpful to profile new customers, understand their behavior, and provide users a better experience. 

Startups accessing much-needed loans 

Financial data, held within the bank system, is comprehensive and says a lot about the financial behavior of a person or company. What are they using the money for? How much income do they have? How much are their expenses? Which banking products are they most likely to consider?

When a startup uses open banking – a digital, swift, automated way to access that information – the lending companies have the ability to access the data immediately and provide or deny credit within minutes.

That banking information is much more accurate than what you can expect from business statements, balances, or formal statements for tax purposes. And this can benefit fintech companies giving loans since they know the information they received is accurate and complete. 

In Europe, the US, and parts of Asia, people can get access to credit digitally or receive personalized recommendations on how to improve their credit scores. However, what currently happens to most startups in LATAM, is that they won’t have a bank account or enough data to receive credit from a bank. Over the next couple of years, many lending companies will start using open banking to view startups’ financials, provide loans, and secure favorable borrowing terms for startups too.

Better financial management 

Financial services have many different layers of complexity. And it is the lack of financial advice or recommendations that is one of those complexities stealing the future of LATAM startups. 

The first step towards financial inclusivity is building an API infrastructure to enable transparent and efficient exchanges with banks. Cash management assistance at the moment is more operative and related to helping companies have an automated, scalable process whenever they need to track cash-ins or make cashouts. 

After that, we can think about APIs analyzing transaction data to help SMBs and startups manage their cash flow. Startups paying services, employee salaries, or clients can use this feature to improve their internal cash-out processes and financial management.

Payment API is already radical for e-commerce in terms of payments from customers and identity verification: They can accept digital payments without the high fees and 15-30 day delays of payment after purchase. This is a penalty for e-commerce or SMBs, but open banking digitizes payments and removes any loss in terms of revenue. 

Many startups should leverage this “open pay” facilitator for their clients to automatize their processes, optimize the payment processing time, and improve the experience clients have while paying for a service or product.

Startups should keep an eye on rules and regulations

Open banking is still a nascent concept, and therefore some global consumers have concerns about its usage and level of privacy – but these are significant misunderstandings that could hamper its adoption. 

Europe only started implementing regulations six years ago, and Mexico was the first in LATAM in 2018. But countries are making fast progress. For example, Brazil’s regulations are now operative, and the country’s Central Bank has launched its API. Therefore, my advice for startups would be: Be aware of local regulations and check what is happening in each country and market.

However, open banking is so much bigger than regulation; it is an innovation trend. Global necessity is pushing this innovation forward faster than it can be regulated. Despite there not being regulation in many countries for open banking, the solutions that it poses for digital money transfers and better money management are real opportunities, not threats.

Open banking is a business solution for startups. But large e-commerce, financial companies, fintechs, and banks are also all looking for different ways to solve their problems with digital money transfers or automated payments between financial institutions. That’s where open banking presents a solution to remove complicated manual intervention and credit card fees or delays.