How Open Banking Can Be the Enabler Between Lenders and SMEs

New releases from the Bank of England have shown record numbers of businesses using government-backed loans to stay afloat. For smaller companies, however, the loan schemes continue to fall short of their needs.

Across the UK, lenders have approved nearly £27.5bn in government backed loans, through bounce back and business interruption loans, to more than 650,000 businesses affected by COVID-19.

This is an astronomical effort by all involved to keep businesses afloat, but it’s not been quick enough for many ailing businesses. The total amount of business loans available amounts to £330 billion, and businesses should be receiving these funds at a much faster pace then we currently are. Matt Cockayne, Chief Financial Officer at Yapily, explores how open banking may be the solution to these businesses’ issues.

It’s clear lending will be needed throughout the year to help these businesses stay afloat as they reopen. And while lenders could be a lifeline for SMEs over the coming months, it’s thought that many believe that future lending or loans are too high risk, or that they just can’t tell what the future holds to lend to businesses. This is likely to cause further frustration for business owners who, until coronavirus happened, ran successful, growing businesses.

This has created a conundrum for the UK business landscape. As we emerge from the initial COVID-19 fallout, businesses need financial support to stay open and to ensure the economy bounces back, but lenders are either too slow or too wary of lending too much to businesses who are facing huge pressures to avoid going bust. To solve this problem, we have to look at new ways of accessing and sharing financial information to make quicker and better decisions. And in open banking, I believe we have a solution that answers these problems and more.

Speed, security and agility

The initial backlash in response to the government’s three loan distribution schemes (BBL, CBIL and CLBIL) has centred around frustrations in the time it took to distribute essential funds. To keep up with this demand, lenders have to make faster decisions. But without the right information about the borrower they can’t make them consistently or fairly.

It is normally standard for lenders to request three months’ worth of financial statements, but through the CBILS scheme, lenders must now request six months. This can slow the process down for businesses, providing an added layer of friction in finding and sharing bank statements, and an added layer of delay with the lender having to review the statements manually. Through open banking, lenders can gain instant access to up-to-date financial information and can retrieve historical data in just seconds.

This means they can quickly onboard customers and determine lending limits, without needing to send documentation such as bank statements, ID or other documents back and forth as you would traditionally. By gaining instant access to bank statements and a secure verified source of income, lenders can quickly analyse credit decisions in real-time, and make better, more informed decisions, which is crucial as we begin to step into the new normal.

Lending in the new normal

Up until now, the government has relied on a panel of lenders – established banks and the likes of Funding Circle – to distribute the schemes. But as the crisis continues, more loans need to be disbursed, presenting an opportunity for smaller lenders to play their part to support SMEs too.

One of the biggest struggles of the schemes has been around lenders being unable to meet the demand for onboarding new customers. Some businesses have reported that it is taking longer than expected to open a new account and receive essential funds. However, if conducted through open banking, these processes could be sped up and enable more lenders to operate and offer their services to UK businesses.

One of the biggest struggles of the schemes has been around lenders being unable to meet the demand for onboarding new customers.

This isn’t just a benefit for lenders in terms of meeting soaring demand, it also means an added layer of trust and greater loan personalisation for customers. Lenders can make fairer and more accurate decisions, based on a customer’s financial picture.

Fueling the economy post-pandemic

With lenders able to grant more loans quickly and efficiently through open banking, businesses will have faster access to the much-needed cash required to stimulate the economy; keeping companies running, people in jobs and ensuring spending continues across the country. Lenders will also have the opportunity to monitor the borrowers finances after the loan has been granted, with the borrowers consent of course, to offer continued support and create future offerings if required.

As more businesses across the UK seek government support, the role of lenders will continue to grow in importance. But rather than shut up shop due to the risks at play, they should utilise open banking to make better, informed choices to ensure the economy recovers quickly.

Leave A Reply