Eddie Curran is the co-founder of Scottish fintech firm, Open Banking Reporting Limited (OBR) – a participant in the 2020 AG Elevate programme, which is a fast-track 10-month programme designed to accelerate selected FinTechs through the legal challenges faced by startup and fast-growing businesses.
One of my favourite quotes about statistical analysis is that “data will talk to you if you’re willing to listen”. However, the insight gained from that conversation is very much dependent on the accuracy and relevance of the data used.
Today, the majority of UK banks support business lending with static, slow-moving, or out-of-date data from Companies House and traditional bureau data. A more effective approach is to use real-time data provided by the businesses themselves directly from their accounting packages. Accurate and up-to-date data can be used by both start-ups, with less than 2 years trading, and established firms to gain access to essential capital and other financial support.
A data-driven and automated approach is needed now more than ever with bank lending to SMEs and large businesses reaching an all-time high, with an additional £50bn of lending facilities granted to date to businesses under various government Coronavirus support schemes. Given the current levels of economic uncertainty lenders need to have closer, more proactive monitoring around how businesses are performing, to manage their risk, as overall lending to UK SMEs surpasses the £200bn mark.
Recongnising the magnitude of this risk to us all (through government backed schemes), this is where real-time financial dashboards and deeper analysis of current business performance will help improve risk management, inform better decision making and drive greater efficiency.
It is wrong to assume that lenders currently have the information to-hand to monitor the risk of SMEs failing to repay loans. Branch closures on the high-street are also having an impact on historical relationships between the banks and SMEs, resulting in less meaningful conversations, reduced insight and touchpoints. As a result, many lenders have a decreasing number of relationship managers who are responsible for a greater number of SMEs – without the right data and insight, they do not have the capabilities to proactively monitor and predict risk accurately.
Take for example Carillion, the UK construction giant that went bust in 2018. The alarm bells should have been ringing for months – profit warnings, mounting debts, a pension deficit, and the short selling of Carillion stock painted a picture of a company in trouble. Despite this, lenders and SMEs were unprepared for Carillion’s collapse and the subsequent fallout across their own customer base.
The impact of Carillion’s demise would not have been as severe if it had been monitored using a data–driven and automated financial dashboard that flagged the need for appropriate action to be taken. Such a platform would have flagged the company as high-risk to creditors and allowed them to take appropriate action to better manage their risk, at the time.
In principle, SMEs are already agreeing to provide lenders with access to accounting information as part of the current lending process – it is just not automated today and requires skill and time both to collect and understand. With OpenRep, we have developed such a solution. OpenRep, is and automated, simple end-to-end process, which works with all market-leading cloud-based accounting packages, and is compliant with GDPR if an SME authorizes access to their core accounting information. Choosing to share data with firms they trust provides SMEs and their lenders considerable value – jointly being able to monitor business performance, easily identify debtor and creditor risks and to take appropriate action when needed.
Thankfully banks are starting to recognise this and I believe that this approach will become standard practice over the next few years for lenders – not just to support the decision to lend, but to better monitor business performance over time in order to more proactively help SMEs during both positive and adverse periods.
My hope is that lenders, investors and SMEs will seize the opportunity to create a smarter approach to lending, establishing better trust-