How can Open Banking Help SMEs?

Picture depicting how Open Banking can Help Small and Medium Businesses

Small to Medium-sized businesses, better known as SME’s are the backbone of all economies and account for about half of all commercial banking revenues. They represent about 90% of businesses and more than 50% of employment worldwide. Source: SMEs Finance, The World Bank. But how is it that SMEs, both the backbone of so many economies and massive revenue generators for financial services, report being chronically underserved?

Can Open Banking assist in solving some of the main issues they face? And more specifically what does this mean for Bahrain and the Middle East?

Overlooked by Banks and Financial Institutions

Traditionally, the SME segment has been often underserved by banks and other financial institutions. TheInternational Finance Corporation (IFC) estimates that globally, 65 million firms or 40% of formal micro, small and medium enterprises (MSMEs) in developing countries, have an unmet financing need of $5.2 trillion every year, which is equivalent to 1.4 times the current level of the global MSME lending. Source: SMEs Finance, The World Bank


Financial institutions are often looking for a few larger fish that are more profitable to serve rather than a lot of smaller fish. If the focus shifts to SME’s, a lot more effort would be required which will increase the cost.  Several roadblocks stand in the way of SME finance. One of which stems from the fact that SMEs typically are more “opaque” than large firms because they have less publicly available information. As a result, banks have more difficulties in assessing the creditworthiness of SMEs, which can discourage lending to these firms.

Additionally, SMEs have several unique needs and require greater value and efficiencies from financial service providers. Some of their top financial needs include the ability to balance cash flow, make faster payments easily, and have financial flexibility.

So, How Can Open Banking Help Banks and SMEs?

Silver lining– the gaps discussed earlier paved the way for SMEs to look elsewhere, and trust in alternative options. With Open Banking, it will be a total game-changer. With Bahrain kick-starting the Open Banking movement within the MENA region, what are the possible outcomes we can expect within the next coming years?

Here are some advantages that open banking creates for SMEs:

  • Through data analysis, banks will be able to provide customized tailoring of products and pricing to suit individual SME requirements.
  • Access to credit will be easier. Open Banking gives banks access to an enhanced aggregated view of all the SME’s accounts and credit history from multiple banks and other sources, allowing them to make better and less risky decisions in a shorter time and with minimal effort.
  • Encourage data-driven conversations between SMEs and Banks that would facilitate a smoother financial flow.
  • Integrated technology tools & automation. Some FinTechs have developed tools that can initiate payments based on data on behalf of SMEs between accounts to maximize returns and reduce funding costs.

Source: How Can Open Banking Help Banks to Serve the SME Market?

In conclusion, Open Banking can present a great opportunity to tackle this on-going issue that’s been looming for the past couple of decades. However having said that, while Bahrain is moving towards this direction…can we expect its neighboring countries to follow?

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