SME Lending: Open Banking is no silver bullet
PSD2 & the UK Open Banking framework created to implement it are increasing financial services competition and therefore are undoubtedly an extremely positive thing for consumers and small businesses alike.
The UK small business lending landscape had already undergone significant transformation prior to the introduction of Open Banking, driven by lack of appetite for SME lending from the big banks but also the lack of innovation to enable convenient, easy to use and good value products.
The void was filled by dozens of fintechs some of whom have now scaled and been acquired or completed initial public offerings.
Benefits of Open Data
A very small number of these new lenders have implemented Open Banking integrations at the time of writing (screen scraping doesn’t count!). Ultimately, Open Banking privileges should enable SMEs to shop around more effectively when applying for credit but fintechs are already leveraging digital data sharing technology through accounting platform authorisation which provides slick user experiences.
This convenience means SMEs are less price sensitive because they often need to put the capital to work immediately and are not willing to wait for the better price from the bank.
What’s wrong with just Open Banking data?
Transactional Open Banking data is very valuable due to its immutability. However, it is still just a list of transactions relating to the authorised account only. It does not provide access to the rich contextual financial history and detailed accounts receivable and accounts payable ledgers available via a company’s accounting platform.
Small businesses keep accounts because they cannot keep track of all the information they need from just the bank statement. It’s foolish to assume that lenders would be able to understand them without this information.
Many small businesses will have more than one bank account, and many will have credit cards and non-CMA9 banking products. This complexity muddies the water when it comes to understanding creditworthiness of SMEs and ultimately means lenders will be increasing their risk if they are not looking at the full picture through the collection of accounting platform data.
Accounting platform data stretches far beyond the traditional collection of management accounts which typically involves the SME providing a P&L & Balance sheet snapshot and cashflow forecast (if you are lucky).
Going beyond bank accounts
Accounting platform data gives lenders access to a live feed of the SME’s performance and the frequency of data synchronisation can be set depending on the use case. The major SME accounting platforms (Xero, Sage, QuickBooks, FreeAgent, Kashflow etc.) have done a good job over the last few years of providing customers with the ability to feed their banking data into their accounting software.
This is a no-brainer for the SME as it means they can more easily reconcile transactional data with the AR and AP ledgers and the business can share their historical accounting and banking data (not restricted to CMA9 or current account information) via a simple authorisation process which can easily be embedded into a lending application form.
Collection of both contextual accounting data and immutable banking data should not only facilitate faster and less risky lending decisions for SMEs but also help create new products driven by data and built around the small business’s month-on-month credit requirements. Open data is the key to delivering positive outcomes for both borrowers and lenders, Open Banking is just one piece of the puzzle.