Open Banking Explained: What It Means for Your Small Business

Open banking has been part of the UK financial landscape since January 2018, yet the majority of sole traders and small business owners have never knowingly used it. If you have heard of it at all, you probably filed it under “something the banks are doing” and moved on. That would be a mistake. Open banking is quietly reshaping how businesses manage cash flow, accept payments, apply for finance, and handle their bookkeeping — and the businesses that understand it early stand to save real money.

Here is a plain-English guide to what open banking actually is, how it works, and — most importantly — what it can do for your business right now.

What Is Open Banking?

Open banking is a set of rules that requires the UK’s nine largest banks (and any other bank that opts in) to share your account data — with your explicit permission — through secure digital connections called APIs (Application Programming Interfaces).

It stems from the Revised Payment Services Directive (PSD2), an EU regulation that the UK adopted and has continued to develop post-Brexit under the oversight of the Financial Conduct Authority (FCA) and the Competition and Markets Authority (CMA). The original goal was simple: break the stranglehold that big banks had on your financial data and let authorised third parties build better products for consumers and businesses.

In practice, this means that when you give consent, a regulated fintech app or accounting tool can connect directly to your bank account and read your transaction data in real time. Some providers can also initiate payments on your behalf — sending money directly from your bank account without needing a card or a manual bank transfer.

How the Security Works

This is typically the first concern business owners raise, and rightly so. The key points are:

• FCA regulation — Any company accessing your data through open banking must be authorised by the FCA as either an Account Information Service Provider (AISP) or a Payment Initiation Service Provider (PISP). You can check the FCA register to verify any provider.
• Consent-based — No one can access your data without your explicit permission. You choose exactly which accounts to share, and you can revoke access at any time through your banking app.
• Read-only by default — Account information services can only read your data. They cannot move money, change your details, or make transactions unless you separately authorise payment initiation.
• No credential sharing — Unlike the old screen-scraping methods, open banking never requires you to hand over your online banking login details. Authentication happens through your bank’s own secure systems.
• Strong Customer Authentication (SCA) — Every connection requires multi-factor authentication, typically through your banking app.

In short, open banking is considerably more secure than emailing bank statements to your accountant or sharing login details with a bookkeeping service — both of which remain surprisingly common among small businesses.

Key Benefits for Small Businesses

Automatic Bookkeeping and Reconciliation

This is where most small businesses first encounter open banking, even if they do not realise it. When you connect your bank account to accounting software like FreeAgent, Xero, or QuickBooks, the software pulls in your transactions automatically through open banking feeds. No more downloading CSV files, no manual data entry, no waiting for monthly statements.

For a sole trader processing fifty or a hundred transactions a month, this alone can save several hours of admin time. Your bookkeeping stays current in real time, which means your tax position, cash flow forecasts, and profit figures are always up to date rather than weeks behind.

Faster, Cheaper Payments

Open banking enables a payment method often called “pay by bank” or “account-to-account” payments. Instead of your customer paying by card (where you pay 1.5% to 2.5% in processing fees), they authorise a payment directly from their bank account to yours. The funds typically arrive within seconds via Faster Payments.

The merchant fees for pay-by-bank transactions are significantly lower than card payments — often a flat fee of 20p to 50p per transaction rather than a percentage. For a business taking a high volume of payments or processing large invoices, the savings add up quickly. If you are currently paying 2% on card transactions and process ten thousand pounds a month, switching even half of those payments to pay-by-bank could save you over a hundred pounds monthly.

Providers like GoCardless, Volt, and Yapily are making it straightforward to add pay-by-bank options to invoices and online checkouts.

Better Access to Finance

When you apply for a business loan or line of credit, lenders need to assess your financial health. Traditionally, this meant digging out months of bank statements, printing PDFs, and waiting days for manual underwriting. Open banking changes this entirely.

With your consent, a lender can view your live transaction data — your income patterns, regular expenses, cash flow cycles, and overall financial behaviour. This means faster decisions (often within minutes rather than days), and in many cases, more favourable terms because the lender has a richer, more accurate picture of your business.

Providers like Iwoca, Funding Circle, and Tide use open banking data to make faster lending decisions for small businesses. If your business has strong, consistent cash flow but a thin credit file, open banking-powered lending can be a genuine alternative to being turned down by a high-street bank.

Account Aggregation

If you run business accounts across multiple banks — perhaps a current account with Starling, a savings account with a high-street bank, and a foreign currency account with Wise — open banking lets you view all of them in a single dashboard. Apps like Emma, Moneyhub, and many accounting platforms aggregate your balances and transactions into one place, giving you a complete picture of your business finances without logging in and out of separate banking apps.

Real Examples of Open Banking in Action

To make this concrete, here are some scenarios where open banking is already working for UK small businesses:

• A freelance graphic designer uses Xero connected to her Starling business account. Every payment from clients appears automatically, matched against invoices. Her quarterly VAT return takes twenty minutes instead of an entire afternoon.
• A sole trader electrician adds a “Pay by Bank” button to his online invoices through GoCardless. Customers pay instantly from their bank app, and he avoids the card processing fees that were eating into his margins on larger jobs.
• A small ecommerce business applies for a revenue-based loan through Iwoca. Instead of submitting six months of bank statements, the owner connects her account via open banking. She receives an offer within an hour.
• A property management company uses Moneyhub to aggregate twelve separate client accounts into a single view, making monthly reconciliation dramatically faster.

Payment Initiation: The Next Big Shift

While data sharing gets most of the attention, payment initiation is arguably the more transformative half of open banking. When a provider is authorised as a PISP, they can trigger a payment directly from your bank account (with your approval) without you needing to set up a bank transfer manually.

For businesses, this opens up several possibilities:

• Paying suppliers — Instead of logging into your banking app and manually entering payment details, your accounting software could initiate the payment directly once you approve an invoice.
• Collecting payments — Instead of taking card details or setting up direct debits, you send customers a link that lets them approve a bank transfer in a couple of taps.
• Payroll — Some payroll providers are beginning to use payment initiation to process salary payments more efficiently.

The experience for the payer is simple: they click a link, choose their bank, authenticate in their banking app, and the payment is done. No card numbers, no sort codes, no reference numbers to type in manually.

What Is Coming Next

Open banking in the UK is not standing still. Several developments are on the horizon that will matter for small businesses:

Variable Recurring Payments (VRPs)

Variable Recurring Payments are essentially a smarter, more flexible version of direct debits. Instead of a fixed amount being collected on a set date, VRPs allow variable amounts to be taken at variable intervals — all within limits that you set and control.

The first VRP use case (sweeping money between your own accounts) is already live. The next phase will extend VRPs to commercial payments: think subscription billing, regular supplier payments, and utility bills that flex with usage. For small businesses, VRPs promise lower costs than card-on-file payments and more control than traditional direct debits — with the added benefit of instant settlement.

Smart Direct Debits

Building on VRPs, providers are developing “smart” alternatives to the ageing Bacs direct debit system. These new instruments settle instantly (rather than taking three days), provide real-time confirmation, and give both the payer and the payee more visibility and control. For a small business that relies on direct debit collections — a gym, a membership organisation, a subscription box company — this could mean faster access to funds and fewer failed payments.

Open Finance

The UK government and the FCA are actively exploring extending open banking principles beyond current accounts to savings, mortgages, pensions, and insurance. This broader “open finance” framework would give businesses (and their advisors) a truly comprehensive view of their financial position, making everything from tax planning to retirement forecasting more accurate and more automated.

What You Should Do Now

If you are a sole trader or small business owner and you have not yet engaged with open banking, here is a practical starting point:

1. Connect your bank account to your accounting software. If you use FreeAgent, Xero, QuickBooks, or similar, enable the open banking feed. This is the single easiest way to save admin time.
2. Check if pay-by-bank makes sense for your invoicing. If you regularly process payments over fifty pounds or take a high volume of card payments, explore GoCardless or similar providers to see if the fee savings justify the switch.
3. Consider open banking when applying for finance. If you need a loan or credit line, look at lenders that use open banking data. The process is faster, and you may get better terms.
4. Review your consent dashboard. Log into your banking app and check which third parties have access to your data. Remove any you no longer use.

Open banking is not a futuristic concept. It is live infrastructure that is already saving UK businesses time and money. The question is not whether to engage with it, but how quickly you can start taking advantage.