Latest / Fintech Conversations with Fexingo: Banking, Payments, and Financial Software Companies / How Fintechs Are Using Open Banking for Small Business Lending
Transcript
- Lucas: If these conversations are useful for what you're building or running, I want to start with a story about a small business owner named Maria in Austin, Texas. She needed a $50,000 line of credit to buy inventory for her boutique, and she got it in under 24 hours — without a single conversation with a loan officer. Luna: That sounds like a dream compared to the weeks it used to take. What made it possible? Lucas: Open banking. Maria gave the fintech permission to pull her business bank account data directly via API. They saw her daily sales, her payroll deposits, her recurring expenses — and modeled her cash flow in real time. No tax returns, no personal guarantee beyond the business. The loan was approved based on what her account actually showed. Luna: And that's the core of this episode — how open banking is turning small business lending from a document-heavy, human-intensive process into something algorithmic and fast. Lucas: Exactly. And before we go deeper, a quick honest thing — a handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that's literally what funds making this many of these episodes possible. No ads, no sponsors, just listener support. If you get value from the show, that's where it lives. Luna: Yeah, it's a small but meaningful group. Keeps us independent. Now back to Maria — was this through a traditional bank or a fintech lender? Lucas: A fintech, specifically one that was acquired by a larger player. The poster child here is Kabbage — which American Express bought in 2020 for roughly $850 million. Kabbage was one of the first to use open banking-style data aggregation for small business lending at scale. Luna: Right, and Kabbage's model was entirely automated. They connected to the business's bank account, analyzed up to 12 months of transaction history, and could approve lines of credit up to $250,000 in minutes. Lucas: Exactly. The key innovation was using what they called 'cash flow insight' — they looked at things like average daily balance, frequency of deposits, and consistency of revenue. Traditional lenders relied heavily on the owner's personal credit score, but Kabbage found that cash flow data was actually a better predictor of repayment for small businesses. Luna: And that's a big deal because many small businesses have thin credit files. The owner might have a good personal score, but the business itself has no established credit. Or vice versa. Lucas: Precisely. The World Bank estimates the global SME funding gap at over $5 trillion. A lot of that is because traditional underwriting models don't work for businesses without collateral or long credit histories. Open banking offers a way to bridge that gap. Luna: Now, open banking isn't just a US phenomenon. The UK and EU have been pushing it through regulation — the UK's Open Banking Implementation Entity started in 2018, and the EU's PSD2 directive forced banks to open up APIs. Lucas: Right. As of early 2026, the UK reports over 7 million active open banking users. That's up from basically zero seven years ago. And small business lending is one of the most popular use cases. A company called Iwoca in the UK uses open banking to offer unsecured loans up to about $250,000, with decisions in under an hour. Luna: Let's talk about the mechanics. How does the API connection actually work? The business owner logs in, gives consent, and the fintech pulls data — but what exactly are they seeing? Lucas: Typically, they get access to transaction-level data: deposits, withdrawals, fees, chargebacks. They can see seasonality — maybe a landscaping business makes 80% of its revenue in summer. They can spot risks, like a customer concentration issue where 60% of revenue comes from one client. All of that informs the lending decision. Luna: And the fintech can also monitor the account in real time after the loan is made. If the business's cash flow starts deteriorating, they can reduce the credit line or flag it early. Lucas: Exactly. That's a huge advantage over traditional lenders who might not know the business is struggling until they miss a payment. With open banking, the lender sees the warning signs — declining deposits, increasing overdrafts — and can act proactively. Luna: But there are challenges. Data quality varies across banks. Some APIs are more robust than others. And there's the question of consent — the business owner has to agree to share data, and the relationship has to be trustworthy. Lucas: Absolutely. And regulators are watching. In the US, the Consumer Financial Protection Bureau has proposed rules under Section 1033 of the Dodd-Frank Act that would require banks to share data with authorized third parties. That could accelerate open banking in the US, which has lagged behind the UK and EU. Luna: So what does this mean for the typical small business owner? If you need a loan today, what are your options if you want to use open banking? Lucas: In the US, you've got fintechs like BlueVine, OnDeck, and Kabbage — now part of Amex. They all use some form of data aggregation. You can also go through a marketplace like Lendio, which matches you with lenders based on your business data. The key is that you grant permission via Plaid or another data aggregator, and the process is almost entirely digital. Luna: And the interest rates? They're typically higher than a traditional bank loan — maybe 10 to 30 percent APR — but lower than merchant cash advances or credit cards. It's a middle ground for businesses that need speed and don't have perfect credit. Lucas: Right. The trade-off is speed versus cost. But for a business that needs inventory for a seasonal spike, getting funded in 24 hours can be worth the premium. And as the data models improve, rates are coming down. Luna: One interesting angle is how open banking could also enable revenue-based financing, where repayment is tied to a percentage of daily sales. That's already happening with companies like Square and PayPal. Lucas: Good point. Square's business loans are essentially based on payment processing volume. They see your daily sales, so they know exactly how much you can afford to repay. That's open banking in a narrow sense — using transaction data from your own platform. The broader open banking movement extends that to any bank account. Luna: Let's look ahead. Where is this going in the next two to three years? Lucas: I think we'll see more integration with accounting software. Imagine a fintech that connects to your QuickBooks or Xero account, pulls not just bank transactions but also invoices and bills, and offers a credit line that adjusts automatically based on your accounts receivable. Some startups are already doing this. Luna: And on the regulatory side, the US is likely to catch up. If the CFPB's rule goes into effect, it could force all major banks to offer standardized APIs, which would dramatically lower the barrier for fintechs. Lucas: Exactly. The UK's model shows that regulation can be a catalyst. seven million users in seven years — that's not slow. And small business lending is one of the most compelling use cases because it directly impacts economic growth. Luna: So for anyone building or running a business, the takeaway is: if you need capital, look for lenders that use your real transaction data, not just your credit score. You might get a better deal and a faster decision. Lucas: And if you're a builder, think about how you can use open banking data to underwrite loans that traditional models miss. The market is huge — over five trillion dollars in unmet demand globally. That's not a niche. Luna: Good episode. Next week we'll look at how fintechs are using open banking for personal finance management — things like budgeting apps that actually work. Lucas: Looking forward to it. Until then, thanks for listening.