Alessio Balduini, CEO Credit Data Research
While the news is littered with predictions and guestimates of how Brexit will impact UK business, there is a quiet revolution taking place that might well be a game-changer for British SMEs.
Ironically, this revolution is driven by European legislation and relates to the finance and banking sector. Called PSD2 (Payments Service Directive 2) it is set to shake up the way both consumers and businesses pay and get paid by increasing pan-European competition in the payments industry. ‘Open Banking’ is a direct result of PSD2 and for the first time, most small businesses will be able to share their banking data securely with trusted third parties via APIs (Application Programming Interfaces)that allows providers, other than their bank, to make payments from their account. Put simply; data is king and collaboration and sharing of information and services,the likes of which we have never seen before, will become the norm.
With European countries obliged to incorporate the new rules into national law by 13 January 2018, there is a scramble amongst fintech companies, financial institutions and banks to take advantage of the legislation; or in the case of some, bury their head in the sand or push back against the new requirements.
So why is this so important for small and medium sized businesses in the UK? There are four main reasons why Open Banking should be on the radar of all business owners:
1.New APIs will make payments faster and easier for SMEs because they are designed around the needs of today’s businesses – rather than an existing legacy banking system.
- Account aggregation will see third parties compiling information into a single place to make money management easier such as cash flow credit and supplier management.
- New data sharing will see an overhaul of the credit ratings system and availability of information that could potentially help businesses recruit new overseas clients, negotiate better supplier terms as well as access new streams of capital.
- Lenders and banks who grasp Open Banking as an opportunity could become more ‘business and SME friendly’.
The good news for the UK is that it is well ahead of the game in the implementation of Open Banking compared to its European peers.Already recognised as leaders in fintech, innovative UK companies are fizzing with creativity and energy in a bid to create the go-to tools and apps of the future to help small and medium sized businesses make the most of Open Banking. Many of these new innovations have been stimulated by a recent Nesta-ledinitiative called the Open Up Challenge. Selected by the CMA as one of a package of remedies aimed at shaking up banking, the Open Up Challenge is supporting 20 teams, including Credit Data Research, to develop game-changing solutions to some of the greatest challenges that SMEs currently face.
In this current environment, we believe one of the main problems SMEs encounter is the ability to access credit and negotiate better commercial terms by being able to demonstrate their creditworthiness.Existing credit scoring is no longer fit for purpose as data utilises submitted accounts that are inherently 15-18 months old. In addition, SME credit scoring typically doesn’t speak the language of the rating agencies and banks, meaning a lender’s SME loan portfolio cannot be securitised and used to unlock further capital. Currently, only 2% of the €400bn securitised transactions in Europe were backed by SME collateral compared to 62% consumer.
At Credit Data Research, we are addressing this challenge with an innovative tool that will not only help SMEs access capital and enter new markets, but will also provide lenders and banks with a new and effective rating API. Called the ‘Credit Passport’, it takes advantage of Open Banking by combining newly available banking data and financial scoring, using Moody’s Analytics, to generate a Basel II compliant credit rating for SMEs with real-time behavioural banking data at its core.
The Credit Passport is a significant development for those UK businesses that want to access new markets, seek out new clients or recruit new suppliers as they are now able to provide a real-time data report that follows banking regulatory standards. We have already found that SMEs, as well as using the Passport to improve their internal credit culture, have also started presenting it to suppliers to get better commercial conditions.
The Credit Passport has helped to liberate SMEs still caught in the down-draft of the 2007/8 crisis when they experienced a drastic reduction in their access to credit, and financial intermediaries suffered losses on their SME lending portfolios. Since then, existing risk assessment systems have reinforced rather than help to solve this situation. For the first time, Open Banking provides us with real-time access to credit information and third-party access to granular banking data. In turn, this enables us to create a credit score that is in real time rather than utilising out-of-date datasets. The Credit Passport can be accessed by the SME and combines their company’s data with bank account transaction data and credit registry data and then uses technology from Moody’s Analytics to generate a genuinely useful and insightful report. The information contained within the Credit Passport helps entrepreneurs to make and action really important business decisions- from being able to demonstrate how reliable they are when entering new markets to knowing whether or not they should engage with a potential partner or supplier.
This is a win-win scenario for both SMEs and the financial community. Banks and lenders gain better visibility and risk transparency that can subsequently fuel a greater propensity to lend to SMEs. If this plays out as we predict, then we could see greater liquidity develop in the market and a growing confidence in SME securities as a stronger and more viable investment option.
While countries and organisations are still grappling with the concept of PSD2 and the inevitability of Open Banking in January 2018, we are pushing ahead with the Credit Passport model. Initially tested in Italy, the largest and most complex SME market in Europe, the Credit Passport is fast becoming a pan-European product with subsequent expansion into the UK, Germany, France and Spain. It has been heralded as a great success by its users – a significant reason why Nesta awarded Credit Data Research a sought-after place in the Open Up Challenge. Besides cash prizes and expert support, an additional advantage of the Open Up Challenge is that all 20 teams are provided with access to anonymised SME banking transactions. This has provided participants with the opportunity to further test their systems and products, something that attracted us to the Challenge.
What’s clear is that trust and credibility are going to be significant in the coming years as fintech groups, banks and lenders fight it out in a bid to be the favourite of the SME sector. For organisations such as Credit Data Research, co-branding with Moody’s and the Nesta accolade will provide greater visibility and credibility, so expect to see more strategic tie-ups and partnerships in the near future.
While Theresa May negotiates our divorce from the EU, we will watch the birth of a new banking era with interest as the brave and the innovative battle it out to win the confidence of the millions of SMEs in both the UK and Europe.