Report

Using the power of smart data to unlock business lending

30 August 2024

The Centre For Innovation and Technology (CFIT) and Open Banking Limited (OBL) recently published their report, Smart Data: improving SME lending to drive economic growth. The report, based on findings from the SME Finance Taskforce, highlighted how leveraging smart data could support business growth for the UK’s sole traders and SMEs.

Based on CFIT’s 2023 blueprint, which demonstrated how utilising public and private datasets could unlock decision-making on SME lending, the report is a timely reminder of the impact of reduced lending to the UK’s 5.5 million small businesses which face an estimated funding gap of more than £22bn.

The report sets out a comprehensive programme to help energise the UK economy by improving the lending process and experience for both SMEs and lenders.

This plan has the potential to support wider growth that could see more people employed by SMEs, rising SME GDP, and increased tax revenues from small and medium-sized businesses supporting further growth. It’s also why it’s important that the government passes the proposed smart data legislation promptly – it can support investment and help secure future economic success.

Importantly, it only requires limited public spending.

Short-term action plan
The taskforce, drawn from an industry-wide coalition of 40 banks, alternative lenders, and trade associations, proposed a 7-point action plan to unlock SME finance using smart data:

  1. Prioritise the Digital Information and Smart Data Bill
  2. Fund and support an SME “Smart Data Challenge”
  3. Review and improve HM Treasury’s Bank Referral and Commercial Credit Data Sharing (CCDS) schemes
  4. Accelerate reform of Companies House, in particular standardisation and verification of Company information such as directors’ names
  5. Unlock private sector data by providing information from HMRC e.g. digital receipt of VAT owed to match and verify cloud accounting data. In addition, allow greater access to HMRC data for approved organisations
  6. Develop and consult on proposals for an e-invoicing scheme for the UK to align with overseas markets
  7. Enable greater trust in using new specialist lenders e.g., through industry initiatives.

Promptly implementing the above action points could have a positive effect and unlock finance for small businesses. Existing data sources – public and private – can be expanded and verified. Business owners will save valuable time on preparing paperwork for lenders. Lenders, meanwhile, will have access to more, and more relevant, data, and can feel confident in its validity, helping to speed up, or even automate, the decision-making process.

Changes in loan appetite from some banks
It’s important to understand that business lending has stalled, not because of increased risk, but because many traditional lenders have moved into wholesale lending. Corporate lending is now largely provided by new specialist banks and lenders.

However, many businesses and sole traders are not aware of alternative ways for them to access finance, and, if they are declined, often fail to look elsewhere. Those new, alternative, lenders do not necessarily understand how that business operates, so are not always able to quickly access the information they need to understand risk, and to offer competitively priced loans.

Verifying data can help tackle fraud
Having verified and accurate data can also highlight fraudulent loan applications. Fake businesses or firms that deliberately submit misinformation in their applications cause financial losses and administrative problems for all banks and lenders. Smart data can help remedy this and provide more certainty to lenders about the organisations applying to them for loans.

Introducing a scheme or rulebook
Integral to the success of the taskforce’s action plan is better, more open access to data and ensuring that data is verifiable and reliable.

While the report makes specific recommendations that can be individually progressed, the bigger picture requires an entity to act as the catalyst to bring the various initiatives together. This includes providing the trust framework that sets the standards and data quality requirements, as well as enabling access to that data. This entity would play a similar role to that of OBL in the implementation of open banking.

Expanding access to business borrowing is just one of the use cases that smart data can help enable. The entity that operates SME finance standards can scale, and its rules and standards can apply to other sectors, such as utilities, insurance, travel, and logistics to name but a few. SME finance could be the first test case leading to an efficient, cost-effective and flourishing smart data ecosystem.

Nick Davey, OBL Senior Strategy and Policy Lead, and Secretary to the Taskforce

What comes next?
The government and others will need to decide what entity or entities are best placed to take this work forward. But let’s not get ahead of ourselves. Before any existing or future organisation can start work, several important building blocks need to be in place.

As the action plan highlights, swift passage of the Digital Information and Smart Data (DISD) Bill is essential, and OBL is continuing to engage with government, policymakers, parliamentarians and other key stakeholders to support this.

Standardising data and the supply chain
We also need to understand the nature of the public sector and private data that is useful to both SMEs and lenders, and how to standardise it. We also need to understand how the different parties in the data supply chain could act and how to set out the rules and contracts to deliver this. We also need to understand how centralised consent can work to unlock multiple data sources easily and efficiently for SMEs and lenders.

These are all possible and very credible things that can be done, and need to be done, if we are ever going to get real world smart data solutions off the ground.

Read the report