Open banking: an essential ally of Revenue-Based Financing

Welcome to the world of Open Banking
A look back at the “How Open Banking has facilitated an increase in BNPL and credit scoring use cases” round table run by the Finance Innovation cluster and La Place Fintech. Six experts, including Nima Karimi (CEO of Silvr), gathered to discuss new B2B and B2C financing opportunities such as RBF or BNPL through efficient credit scoring that reduces risk. We’ll explain it all here.

For several years now, Open Banking has been on everyone's lips. But what is behind this concept? What uses has this development made possible, in particular in terms of granting credit and split payments (“Buy Now Pay Later”)? In B2B, what are the benefits for companies? Six experts from the sector were in attendance to dissect the challenges of these new credit scoring techniques at a round table organized by the Finance Innovation cluster and La Place Fintech on 10 March. The title? “How Open Banking has facilitated an increase in BNPL and credit scoring use cases”. You can read the full report of this meeting here.

Open Banking: definition and scope

Emerging in Europe in January 2018, following the implementation of PSD2 (Payment Services Directive), Open Banking refers to a banking system, in which users, be they individuals or businesses, can grant financial actors (banks or other financial service providers) access to data about their assets and financial transactions

From a technical point of view, this is made possible by APIs (Application Programming Interfaces), which enable third-party software developers and computer systems to create applications and services related to financial institutions.

Many fintechs have built their value proposition on Open Banking: we are obviously thinking of bank account aggregators, but also of all the so-called “BaaS” (“Banking-as-a-Service”) players, which allow non-banking players to integrate comprehensive banking services into their products.

In the domain of credit scoring in particular, Open Banking has led to the emergence of interesting financing use cases, in B2C and B2B.

As Nima Karimi, CEO of Silvr, explained at the round table:”Open banking and the strong growth of use cases in BNPL and credit scoring

A new way of scoring risk

In B2C, with the aim of making consumer credit "more inclusive”

For Algoan, a French fintech that has developed a new credit scoring technique based on Open Banking, the analysis "offers revolutionary performance" in consumer credit. The figures support this: by taking the same risk as with a classic credit scoring method, credit is provided to 40% more consumers. And if you fix the number of people you want to give credit to, then you reduce the risk by 50% thanks to scoring techniques based on Open Banking.

There is obviously a drawback with this new type of service: the user's consent to grant access to his or her banking information. “Access to a service like Algoan's necessarily requires access to your information,” explains Mohsen Dajani, Head of Sales France & Belgium at Yapily.

A drawback that does not seem to be holding consumers back, judging by the enthusiasm observed on a European scale for these new scoring techniques. “In Europe, the volume of credit based on Open Banking is growing month by month, and the trend is doesn’t look like it’s going to stop any time soon,” said the Algoan CEO, for whom Open Banking is now a “must-have” in consumer credit issuing.

What about B2B? Has Open Banking become as much a part of corporate culture as it is for individuals? What new uses does it bring?

B2B sees emergence of a new type of financing

Questioned by panel moderator Frédéric Perrin, Senior Partner at Exton Consulting, Silvr CEO Nima Karimi pointed out that companies have historically had two main ways of financing themselves.

Through bank debt on the one hand, and raising equity on the other. Unfortunately, most digital companies have neither the track record nor the assets to borrow from banks – while raising equity is only for the elite.

As a result, “tens of thousands of entrepreneurs find themselves without access to the financing they need to accelerate their growth,” said Nima Karimi.

What does Open Banking have to do with it? These companies, whose customer acquisition and sales are done online, naturally produce data. It is precisely by using this data (including banking data) that a company like Silvr will score the performance of these start-ups in order to decide to grant them financing. This is known as Revenue-Based Financing (RBF), a new type of financing made possible by Open Banking.

Open Banking: a huge opportunity for B2B start-ups

Dynamic versus static financing

To score a company's performance and its ability to repay the financing granted, Silvr connects to the start-up's software and retrieves data from their entire techstack: from traffic on their website upstream, via Google Analytics, to banking data downstream, via sales data via their CMS, payment via PSPs (such as Stripe), or even data from advertising agencies.

All this data feeds our scoring platform, and allows us to decide within 24 to 48 hours whether or not to grant financing,” concluded the Silvr CEO. This is a major difference compared to traditional bank financing: there is no need to ask for guarantees. Revenue-Based Financing makes it possible to erase the traditional financing biases that can be observed in VC firms in particular. At Silvr, for example, 29% of the companies financed have been established by women.

Another important advantage of the RBF is that, due to the automation of the operations and continuous scoring adjustment, the refinancing of the company will be made possible automatically.

As Mohsen Dajani of Yapily pointed out, in the traditional banking system, the backer saw the company only once, when the credit was granted. If he saw it again, it was a bad sign. “With Open Banking, on the other hand, we are permanently connected to the start-up, as long as the financing lasts, which has multiple benefits: for example, the fact that we can adjust the ceilings or the repayment terms.”

Open Banking: a complement to traditional scoring techniques

For Florian Bardy, Senior Innovation Strategist at AREA 42, one of the problems encountered by credit organizations, particularly in the B2B sector, is that the banker's analysis of the company's financial statements corresponds to the company's situation 12 months earlier.

In this sense, Open Banking can be useful as a complement – but not as a replacement – for traditional scoring techniques. This is because Open Banking also has its limitations: in particular the lack of sufficient historical data (access to transactions over the last 90 days).

Thomas Nokin, founder of the cloud-based lending service platform Basikon, was also keen to chip in. As far as he was concerned, Open Banking would be an addition to a process that has existed for years, but it would help reassure the players who grant financing – be it in B2B or B2C.

In both B2C and B2B, it appears that users (consumers or companies) are much more inclined than we might think to share their banking data with third parties. It is precisely on this paradigm that Open Banking is flourishing. In exchange, the financing players (consumer credit, BNPL or RBF) promise them clear benefits. As Nima Karimi summed up, the 100% data-based approach makes it possible to both reduce risk and cut out the traditional biases prevalent in the issuing of credit. Another argument in favor of Open Banking?

- Published
January 23, 2023
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