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Following an initial backlash in response to the Treasury’s distribution of its support package from the SME community, the government has since expanded its Coronavirus Business Interruption Loans Scheme (CBILS) and Bounce Back Loan Scheme (BBLS) to accredit more lenders to support British businesses. It’s great to see some alternative lenders too being given the opportunity to be part of the CBILS to help those businesses desperate for vital funding. However, the execution of these state schemes still excludes key players from the SME lending sector.
In the face of the current health crisis, now a full-blown world economic crisis, access to finance is vital for the survival of many businesses. Research shows one in three small businesses will close forever due to the impact of the pandemic. This means reducing the time it takes to go from application to drawdown is of paramount importance. For these businesses, every day matters. There is a real challenge of matching demand with supply, especially given some lenders have stripped back lending or stopped altogether. Since March, Funding Options has seen £1.7bn worth of loan applications.
The government is relying heavily on the CMA9 banks to distribute loans through the state-backed schemes. Nearly all are lending only to existing customers to manage their internal risk and reduce processing times, citing a lack of access to financial transaction information as the reason why they aren’t able to assist new-to-bank customers. This means those who do not have a qualifying relationship with an accredited bank are immediately penalised. This imbalance is exactly the problem Open Banking was introduced to solve. The Payment Services Directive (PSD2) was designed to level the playing field between banks and third-parties to offer more choice to the customer. In the current circumstances, having certain lenders excluded from the government’s support framework means business owners are missing out on a number of key finance options.
By mid-May only 36,000 businesses had been approved and received funds through the Coronavirus Business Interruption Loan Scheme (CBILS). Banks and other lenders that were accredited to the original scheme (which became the CBILS) continue to do their best to process loans. Meanwhile, numerous fintech lenders with leading-edge infrastructure designed for this very purpose are left to watch from the sidelines largely unable to provide their support. To put it into context, these alternative lenders have the ability to distribute hundreds of thousands of loans every month.
We are living in unique times and so we need to challenge the status quo. Open Banking has the power to support companies during testing times such as these, but it hasn’t yet had the wider adoption it deserves. To date, around 200 UK finance providers are enrolled in the UK’s Open Banking scheme, meaning the potential for expansion is huge. Open Banking has the potential to transform the business lending landscape, improving the experience for the customer while also improving security and response times for lenders.
While there are credible resources such as Which?, Money Saving Expert and Open Banking Org explaining the purpose of open banking to consumers, it is typically not well understood by the general public.
In simple terms, Open Banking lets financial providers access a business’ financial information in a safe and secure way. Businesses applying for finance will see their application time reduced from days or hours, to just minutes as they will no longer need to source original bank statements. Instead, thanks to Open Banking APIs, transaction history can be made available to lenders. By unlocking and sharing this data, it streamlines access to finance and extends the choice of providers for SMEs, meaning they can shop around quickly and effectively. The open APIs also allow SMEs to better forecast, chase payments, and see accounts. In the current health crisis, this will be of the utmost importance.
For lenders, it enables decisions to be made much faster based on the standardised data, rather than using traditional methods. For example, a broker can run transaction history through Optical Character Recognition technology already presented in a set format to expedite decisions. Instead of taking a day to analyse three months of bank statements, it can be done in seconds. It will also move the financial services industry towards being able to pre-approve businesses for loans based on real-time data.
However, like any new, revolutionary piece of technology, would-be adopters have concerns about Open Banking. This uncertainty and how it applies to the business owner, coupled with trepidation around data security have put a spanner in adoption levels. It’s important to recognise that sharing and opening the data, is not compromising the security of that data. Open Banking is overseen by the FCA, and for a third-party provider to access Open Banking APIs, they must undergo a comprehensive independent review to ensure that all processes, systems and security controls conform to the FCA’s rigorous standards, followed by regular security checks and FCA auditing.
Having said this, one of the biggest concerns regarding security is down to phishing and the fear of clicking on a link to share personal and financial data. With this in mind, the industry needs to adopt a hand-holding approach with business owners which avoids solely relying on email - something that could easily be mistaken as a phishing attempt. Research shows that customers want to speak to someone on the phone, especially when making a high-value purchase such as raising finance. Therefore, it's important that business owners have the option to speak on the phone to a banking specialist to discuss data usage, the security measures in place, and consent of data access so they can understand the value.
Covid-19 has shone a spotlight on the entire SME lending ecosystem and its thriving fintech sector, admired across the world for its innovation and its depth of integration and acceptance among the establishment. While the recent improvement in the distribution of loans through the CBILS and BBLS has been very positive, it is clear the government neither understands nor trusts the alternative lending community as a whole, preferring to turn immediately to the traditional high street banks to see us through the crisis.
It is imperative that the cracks in the ecosystem which have been exposed by the pandemic, are both acknowledged and repaired. The alternative lenders have been supporting SMEs since the global financial crisis and they have a significant role to play in supporting SMEs now and in the months and years ahead. To continue to sideline the fintech players will have detrimental consequences for the economy and for competition, meaning independent businesses may not have the same depth of choice when sourcing vital funding in the future. As a focal point for all participants to rally around, Open Banking can play a critical role in mending the cracks and bringing the industry together at a time when businesses need it to be united.