Along with innovations like AI and big data analysis, open banking is slated to be one of the most significant developments in finance over the next decade.
Many banks – including big names like Wells Fargo and J.P. Morgan – have already adopted the technology, and research shows younger generations and wealthier individuals are on board with it. Already widespread in Europe and the UK, open banking is just starting to gain traction in the US. It’s mainly fintechs and startups that are leading the charge.
Open banking provides many benefits, cash flow transparency among them. For startups that often have short cash runways and high cash burn rates, this is a critical use case. Before we get into why high-tech companies and startups like CrowdStrike and Eventbrite are turning to open banking in droves, let’s take a quick look at what open banking actually is.
Open Banking Explained
Open banking means the holder of a bank account has control over their data and can choose to share it with third-party platforms. Communication between these third-party platforms (usually fintechs) and banks is facilitated by APIs.
Using APIs, fintechs allow clients to streamline and customize their banking experience. For example, third-party platforms might enable companies to aggregate large amounts of separate bank accounts and view all transaction data from one, centralized platform. They can provide insights into customer spending habits, or even personal budgeting advice.
Think of open banking as a pact between fintechs and traditional banks: rather than competing, APIs bring them together. When banks no longer have a monopoly on the space, they’re forced to adapt to the needs of everyday customers and corporate clients alike.
How Startups Benefit from Open Banking
Improve Cash Flow Management
The most obvious way open banking benefits startups is by providing clear insight into cash flow. After all, a successful startup isn’t just about finding a great product-market fit – it’s about successfully managing cash.
Successfully managing cash means knowing when to make hires, when to cut back expenses, and when to pursue that next round of funding. It means ensuring your cash runway is exactly as long as it needs to be, depending on the circumstances, and planning for scenarios that could possibly alter your cash flow.
Through data-rich insights, automated forecasts, and scenario planning, third-party open banking platforms help you create an optimized financial roadmap that keeps operating cash flow at sufficient levels.
Since running out of cash is the number one reason startups fail, this is paramount. A clear cash flow management plan helps your startup survive long enough to deliver your product and start driving revenue.
Gain a Clear Insight Into Cash Runway and Cash Burn Rate
Cash runway is the amount of time a startup has before it runs out of liquidity. It’s directly related to cash burn rate, the amount of money a company spends each month.
Seed stage and series A startups should have at least 18 months of funding, and preferably more. In fact, before a downturn, when it can be difficult to secure funding, a cash runway should be a bit longer. Many VCs are currently advising portfolio companies to lengthen their runways.
To calculate cash runway, divide your current liquidity by your cash burn rate:
Cash runway = current liquidity/burn rate
Open banking helps startups clearly establish the length of their cash runway by seeing the exact amount of liquidity they have on hand at any time and an easy-to-understand view of all expenses. Deep analysis shows where unnecessary cash burn occurs so you can make efficient spending cuts and lengthen your runway.
When coupled with your financial operating plan, a transparent view of your cash runway and burn rate helps you make the right decisions at the right times.
Streamline Data Management
Most – if not all – treasurers have worked with Excel at some point. If you have, you’ll know just how hectic cash flow management can be: you run from bank portal to bank portal and then record transaction details in spreadsheets.
Then, you have to collate information from all these spreadsheets and create your own cash flow forecasts based on this (hopefully error-free) data.
Open banking eliminates the need to rely on bank portals and spreadsheets. There’s no need to log into bank portals – not even for making payments – and data is recorded automatically in a normalized format.
Of course, data is only useful if it’s accurate – according to IBM, 88% of spreadsheets contain at least one error. This could cause huge problems on its own but, even when not, it means wasted time trying to reconcile the error.
Automation ensures data is error-free and recorded instantly, freeing up limited human resources. Treasury teams can make the leap from data gathering to data analysis – a much more efficient use of time, one that can have a huge effect on the company’s bottom line.
Simplify Data Analysis
Having all the data in front of you is convenient, but you also need to be able to turn what you see into actionable steps. This is another area where open banking can make all the difference.
For example, through machine learning (ML) algorithms, open banking software can generate cash flow forecasts automatically. These forecasts become more accurate over time as the algorithms grow to understand your startup’s unique trends through current and historical data.
They can also be used for variance analysis, to create unique scenario plans based on user-defined variables such as reduced sales or disruptions to specific supply lines. If you have excess capital, an accurate, ML-supported cash flow forecast helps you determine where you should put that money for optimal effect.
Furthermore, all transactions are contextualized with rich metadata, which can be used to search for specific items. In other words, you can narrow your entire transaction history down to things like accounts receivable or outgoing wires. This enhanced visibility gives you a clearer idea of what’s affecting your cash flow.
Achieve Real-Time Cash Visibility
Another problem with using spreadsheets is that they don’t provide a real-time view of your cash position. Since it takes time to manually record transactions, by the time all information is in front of the treasury team, it’s outdated.
For fast-moving tech startups, old data just doesn’t cut it.
APIs, on the other hand, show you your precise cash position from day-to-day. This is useful in and of itself but can also help you act quickly in crises. While it’s best to prepare for a crisis before it occurs, this isn’t always possible – few could have predicted the massive economic impact brought by the pandemic, for instance.
Many businesses didn’t have real-time insight into their cash flow, so they were not able to act quickly enough to avoid disaster.
With uncertain economic times ahead, the importance of the ability to react quickly to market changes – from a clear, data-fortified position – can’t be overstated.
“While you can build reports in many legacy treasury management systems, it’s not as user-friendly as Trovata [built on open banking]. The daily API with transaction details makes reconciliations in Trovata much easier compared to our previous TMS.“– Niall Burke, Global Treasury Manager, Eventbrite
Save Time and Money
Whereas integrating with legacy TMS can take months, integration through APIs is fast and smooth. Bank information is all already “there,” after all – APIs make it as easy to gather and view as possible.
With startups, every bit of liquidity counts. While legacy TMS can come with plenty of features, you probably don’t need them – better to have a specific, targeted open banking software that’s the best at what it does.
Third-party apps that try to go around banks – in other words, those that don’t use APIs – often charge fees to make payments. Not only does open banking help you avoid these fees, but it can also help you save money on bank payments.
Bulk payments, available exclusively via Trovata, are an excellent option for bundled payments like payroll. All payments are submitted to the open banking app together but, since each ACH payment is made individually, you don’t have to pay as you would with traditional batch payments.
Real-time payments (RTP) are the newest US payments rail. They fulfill the same purpose as wire transfers but are much faster, not to mention cheaper. Open banking fintechs are leading the way to mass adoption of RTP. For J.P. Morgan customers, for example, real-time payments can currently only be accessed through APIs.
Scale Without the Growing Pains
It’s no secret that spreadsheets don’t scale well and, for startups aiming to grow rapidly, this is a problem.
Look no further than CrowdStrike. CrowdStrike’s revenue grew massively in volume over a four-year period from $88 million to $2.2 billion. It should come as no surprise, then, that it took their treasury team about 40 hours each month to manually aggregate all this information!
CrowdStrike understood that the best way forward was to digitize. But to integrate a TMS across their entire banking infrastructure would’ve taken months. Since their IT team was already overwhelmed, they wouldn’t be able to begin this integration right away.
The treasury team couldn’t afford to wait and realized they had to think outside the box. Arguing that, through open banking APIs, they could acquire a clear view of their cash position almost immediately, without any involvement from IT, they were able to convince the CFO that open banking was the right choice.
Over the next four weeks – lightning speed compared to the 9 months on average required to integrate legacy TMS – CrowdStrike gained a real-time view of their entire $2.2 billion cash flow.
That’s a tangible, tactical advantage for their business over their competitors.
Open Banking – The Key to Seamless Digitization
Digitization is necessary for startups that want to scale rapidly, but – as CrowdStrike quickly learned – legacy systems take a lot of time and cost a lot of money to implement.
CrowdStrike – an innovative startup in its own right – realized there’s no need to adopt legacy systems “just because.”
Technology is changing all the time, and open banking allows founders to find software that fits exactly to their plan and needs, rather than try to force a bulky, older TMS into place simply because it’s considered “standard.”
On the road from paper-based general ledgers, to Excel, to TMS, we’ve finally arrived at open banking through APIs.
Trovata Helps Fortify Your Cash Flow Management
Open banking is one of the next big things in finance. But this isn’t just hot air – the stories of incredibly successful startups who got a tight hold on their cash flow are underlain by open banking innovations.
Successful cash flow management will truly be the foundation of your startup, and open banking takes what was formerly a cumbersome process and smooths it out. It’s intuitive and will quickly become a critical part of your operations.
By providing you with clear insight, Trovata helps your startup make it to the next step. Whether it’s convincing investors to provide funding with a clear record of profitability, or simply making it through a turbulent period with a solid, paved cash runway, open banking makes it easier. Curious to see it in action? Schedule a personalized demo today.