Open banking key to unlocking corporate credit for SMEs in Canada

Here’s a catch-22: when a small business in Canada applies for a corporate credit card, the bank typically looks at the owner’s business credit history to assess credit risk. But how do you build business credit in the first place? You guessed it – with a corporate credit card.

The consequences of this are significant. According to new research from Caary Capital, Xero, and the Canadian Lenders Association, 70% of SMEs in Canada are either continuing to rely on a personal credit card for business expenses or providing a personal guarantee to access corporate credit. This means two-thirds of SME owners in Canada are putting their personal and family finances at risk to fund their businesses.

But what if there was a better way of assessing the creditworthiness of a small business – one that didn’t rely on business credit history? That’s where open banking comes in.

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What is open banking?

Also known as consumer-directed finance, open banking allows you to securely connect your bank account with a third-party application with just a few clicks of your mouse or taps of your phone. Once connected, you can quickly and safely share the financial data of your choice without sharing your banking sign-in credentials or other sensitive account information.   

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How can open banking benefit small businesses?

As CEO of a Fintech, I’ve seen firsthand how open banking benefits SMEs. When we can get a clearer picture of your business’s financial position, we can look at cash flow and assets to determine credit worthiness instead of relying on credit history, which many small businesses don’t have. This means we can extend corporate credit to SMEs with no personal guarantees required, allowing Canadian entrepreneurs to build business credit while leaving their personal credit untouched.   

The benefits of open banking extend beyond credit and lending. Data sharing enables a wide variety of improved services for small businesses, from better accounting integrations to sophisticated spend insights and business intelligence.  

By choosing who to share their financial data with, SMEs can choose which financial products and services are most valuable to them. It’s about putting the power back in the hands of consumers and small business owners – and we’ve just begun to explore the possibilities.   

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Do we have open banking in Canada?

In progressive economies, including the UK, Australia, and the European Union, open banking is alive and well and supported by a regulatory regime. Canada is a bit behind, which means service providers must be technically savvy to bring the benefits of open banking to their customers. At Caary, we’re working with forward-thinking fintech companies – like Flinks and Finicity – that are safely simulating an open banking environment until a regime is in place in this country.  

Fortunately, we’re seeing the early signs of adoption. The federal government recently appointed Abraham Tachjian to develop a made-in-Canada approach to open banking. I’m hopeful that we’ll start seeing the necessary policy shifts to allow open banking to progress in Canada.  

Open banking will open the door for innovation in Canada’s financial sector. We’ll undoubtedly see new products and services emerge, allowing the underserved SME segment to access the financial tools they need and deserve. SMEs have been forced to innovate time and again to stay afloat in the wake of the COVID-19 pandemic – it’s time Canada’s financial industry met them halfway.  

John MacKinlay is a 25-year veteran of the investment, financial services and technology space. Prior to joining Caary, he held executive roles at PwC and IBM and served as an advisor to National Australia Bank and OMERS.