Latest / Fintech Conversations with Fexingo: Banking, Payments, and Financial Software Companies / How Open Banking Is Reshaping Small Business Lending
Transcript
- Lucas: You know, I was digging into the latest numbers from the Federal Reserve's Small Business Credit Survey, and one stat jumped out at me: nearly half of small businesses that applied for a loan in 2025 got less than they asked for, or were turned down entirely. Luna: That's a massive credit gap. And it's not exactly new, but it feels like fintechs have been circling this problem for years without really cracking it. Lucas: Right, but I think we're finally seeing a real shift — and it's being driven by open banking. The idea that lenders can pull real-time transaction data directly from a business's bank account, with permission, instead of relying on outdated tax returns or FICO scores. Luna: So instead of asking 'what's your credit score?', they're asking 'show us how money moves through your account.' That feels fundamentally different. Lucas: Exactly. And there's a fintech lender called Novo — they're based in Miami — that built their whole underwriting model around open banking. They connect to a business's bank account via Plaid, and they analyze a rolling twelve months of cash flow: revenue patterns, expense volatility, recurring payments, even the time of day deposits hit. Luna: That's a lot more granular than a traditional bank looking at a balance sheet from six months ago. Lucas: Way more. And Novo claims that using this data has cut their default rate by about 30 percent compared to traditional credit-score-based models for the same risk profile. They're approving loans in under 24 hours, sometimes in minutes. Luna: Thirty percent fewer defaults — that's huge. But I wonder, does this approach actually reach businesses that traditional lenders ignore? Or is it just faster for the same pool of borrowers? Lucas: Great question. The data suggests it does expand the pool. A study from the Federal Reserve Bank of Philadelphia found that lenders using cash-flow data from open banking approved loans to minority-owned businesses at a 20 percent higher rate than traditional underwriting. The reason is simple: a lot of these businesses have strong cash flow but thin credit files. Luna: So the credit score is a bad proxy for their actual ability to repay. And open banking gives you the real thing. Lucas: Exactly. And that's not just a feel-good story — it's economically significant. There are roughly 50 million freelancers, sole proprietors, and microbusinesses in the US, many of whom are essentially invisible to the traditional credit system. Luna: I want to get into the mechanics for a second. How does the data actually flow? A business owner logs in, gives permission, and then... what? The lender sees every transaction? Lucas: Pretty much — but with some important guardrails. Through an aggregator like Plaid or Yodlee, the business owner authenticates directly with their bank. The lender then gets read-only access to transaction history, balances, and sometimes account metadata. They can't initiate payments or move money. And the aggregator tokenizes the connection so the lender doesn't store banking credentials. Luna: That's a lot like how you connect your bank to a budgeting app. Same infrastructure. Lucas: Right. But the underwriting models are getting more sophisticated. Some lenders now look at things like the volatility of daily cash balances — not just the average. A business with a steady but low balance might be safer than one that swings wildly between fifty thousand and zero. Luna: It sounds like this could also help seasonal businesses — a holiday pop-up or a landscaping company that makes most of its revenue in three months. Traditional banks would see that lumpy income as a red flag. Lucas: Exactly. And the open banking data lets the lender see the pattern over multiple seasons. If a business has survived two or three cycles, that's a strong signal. Some fintechs are even using machine learning on this data to predict future cash flow dips. Luna: Speaking of which — if these conversations are useful for what you're building or running, we want to keep them coming. And we keep the show ad-free, which means it's entirely listener-supported. If that adds value for you, you can find us at buy me a coffee dot com slash fexingo. Lucas: Yeah, and we really appreciate that — it's what lets us dive deep on topics like this without any sponsor constraints. So back to the underwriting models — the next frontier is probably real-time data. Not just historical cash flow, but what's happening in the account right now. Luna: Like if a big check clears this morning, the lender knows that afternoon. That could unlock dynamic credit lines that adjust daily. Lucas: Exactly. There's a UK fintech called Tide that does this for their small business customers — they offer a flexible overdraft that changes based on the past 90 days of inflows. It's not quite real-time, but it's close. And it's built on open banking rails that the UK has had since 2018. Luna: The US is playing catch-up, but the regulatory environment is shifting. The CFPB proposed a rule under Section 1033 of the Dodd-Frank Act that would require banks to share consumer data — including small business data — with authorized third parties. That rule is expected to finalize later this year. Lucas: Right, and that would be a game-changer. Right now, open banking in the US relies on screen scraping in many cases — where the aggregator logs in using the customer's credentials. The CFPB rule would mandate standardized APIs, which is more secure and reliable. Luna: But there's pushback from big banks, right? They argue about security and liability. Lucas: Absolutely. The Bank Policy Institute, which represents large banks, has raised concerns about data privacy and the cost of building and maintaining these APIs. They'd prefer a more controlled, permissioned model. But fintech advocates say that's just a way to slow down competition. Luna: It's a classic tension — incumbents with legacy systems versus insurgents with better data models. But the consumer is clearly benefiting from more access to credit. Lucas: And not just credit. Some fintechs are using open banking data for insurance underwriting, for expense management, even for personalized financial advice. The infrastructure is becoming a utility. Luna: Let's talk about a concrete example — Fundbox. They lend to small businesses using open banking data and claim they can underwrite a loan in about three minutes. Lucas: Yeah, Fundbox is a good example. Their model looks at things like the number of invoices a business issues per month, the average time to payment, and the consistency of deposits. They don't even ask for a credit score for some of their products. Luna: So they're essentially using bank data as a proxy for both creditworthiness and business health. If deposits start declining, the lender can flag that early. Lucas: Right. And that's where the real-time piece gets powerful — it enables proactive risk management, not just reactive. A lender could offer a temporary payment deferral if they see a dip, rather than waiting for the borrower to miss a payment. Luna: That's a huge improvement over the traditional model where the first sign of trouble is a missed payment. By then, the relationship is already strained. Lucas: Exactly. And that kind of data-driven empathy is something only fintechs can deliver at scale right now. Banks have the data, but they're not structured to act on it in real time. Luna: So where does this go in the next two or three years? Do we end up with a system where every small business has a dynamic credit line that adjusts with their cash flow? Lucas: I think that's the direction. We're already seeing it in the UK with Tide, and in Europe with BizFi. The question is how fast the US banks will be forced to open up their data. If the CFPB rule goes through, I'd expect a wave of innovation within 18 months. Luna: And what about the risk of over-reliance on this data? If a business has a bad month — say a client pays late — their credit line could shrink at the worst possible time. Lucas: That's a legitimate concern. Some critics call it 'algorithmic redlining' — where the model penalizes businesses for volatility that's actually normal. The key is transparency. If a lender is going to adjust credit in real time, they need to explain why and give the business a chance to appeal. Luna: And the data itself isn't perfect. Aggregators sometimes have trouble connecting to smaller banks or credit unions. There's also the issue of data freshness — some banks only update transaction data once a day. Lucas: Right, so the quality of the open banking connection varies. But the trend is toward better APIs and faster data. The Federal Reserve's FedNow service, which launched in 2023, could eventually enable instant payment data — so lenders would see money move in real time. Luna: That would be the holy grail: real-time underwriting based on real-time payments. You could approve a loan in the time it takes to drink a coffee. Lucas: Literally. And we're not there yet, but the pieces are falling into place. Open banking, instant payments, machine learning models — the combination is powerful. Luna: So for the small business owner listening, what's the takeaway? Should they be connecting their bank account to fintech lenders? Lucas: I'd say it's worth exploring if you need capital and have strong cash flow but maybe a thin credit file. But be careful about which data you're sharing and how it's used. Read the privacy policy. And consider using a service that lets you control access — some fintechs let you revoke permission at any time. Luna: That's good advice. And it's a reminder that open banking is ultimately about consent — the borrower controls the data, not the lender. Lucas: Exactly. And that's the philosophy behind the whole movement. It's your data, your bank account — you should be able to use it to your advantage. Luna: Well, I think we've only scratched the surface here. There's a lot more to unpack on how open banking will reshape small business finance. Lucas: Absolutely. And we'll keep tracking it as the regulatory environment evolves. For now, I think it's clear that the old way of lending to small businesses is on its way out.