Open banking for SME lending
From standardising data sharing to unlocking fairer access to credit, Open Banking and Commercial Credit Data Sharing (CCDS) are transforming how SMEs secure financial support. By levelling the playing field between big banks and new lenders, these schemes are giving smaller businesses the opportunities they need to grow.
Why open banking matters for SMEs
Small and medium-sized enterprises (SMEs) are the beating heart of the economy, accounting for 99.8% of the nation’s business population. But when it comes to securing financial support, these smaller businesses face a unique disadvantage. Often operating without an audited credit history, these businesses are traditionally underserved by lenders, and opportunities for growth are inhibited.
In a world without a reliable or consistent way to assess creditworthiness, Open Banking offers hope. The initiative opens the door for lenders to access real-time transactional data to move away from a reliance on formal audits and enable risk-based pricing – ultimately, to give SMEs a fairer chance of accessing credit.
CCDS explained: A model built for lending growth
What is CCDS? Commercial Credit Data Sharing is designed to fill information gaps about SMEs’ finances. The scheme helps to share businesses’ current account information and performance data on loans, cards and overdrafts with lenders to assess credit risk more accurately and fairly.
The government-led initiative covers businesses with a turnover up to £25 million. At the time of its launch in 2016, the initiative required nine designated banks to share their data with four Credit Reference Agencies, Dun & Bradstreet being one.
Giving new lenders access to the same data as big banks has given more SMEs the chance to be granted credit. It’s not just businesses that benefit, finance providers do too. In a recently published report with ESCP Business School, we shared how data made available through CCDS had boosted the ability to capture business failures by 15%.
Nowhere does the value of the data made available through CCDS feel more apparent than when using Dun & Bradstreet’s Unified Risk View.
“CCDS is delivering SMEs a fairer deal but there’s still work to do. For Open Banking to truly transform the credit market, policymakers must keep access and innovation top of mind.”
Government vs. market: Two paths to closing the SME lending gap
What is the best way to improve SMEs’ access to credit? Two options are often suggested: a government-mandated approach like the UK’s CCDS or a market-led model.
Government-led models
CCDS has standardised systems and provided clear and consistent rules for sharing data. For example, if a non-designated bank or alternative finance provider intends to use CCDS data they must share their own SME portfolio data within one year. The approach has built trust in lenders and, even more crucially, privacy-conscious business owners. Although the government has acted quickly, country-wide regulation tends to adapt more slowly than technological change.
Market-led models
‘Pay-to-play’ models may nurture innovation but the idea that well-funded fintechs or large banks hold an advantage undermines the promise of Open Banking. Market-led solutions give the big players a monopoly, the chance to hoard data and charge a premium to access it.
A system that works for SMEs, or 99% of the business population, needs to strike a balance of enabling innovation while ensuring a fair deal. For CCDS to reach its full potential, regulation and innovation must work together.
What’s next for CCDS? A UK lens on the future of SME lending
Open Banking is already transforming credit markets. And CCDS is an inspiring example of how to level the data-sharing playing field and better support small businesses. But how can the system improve?
In a recent report with ESCP Business School, we suggest the following:
Non-designated banks should be mandated to share their data with all four Credit Risk Agencies rather than the required one.
CCDS should be used outside of lending decisions, for example, when assessing suppliers, or in fraud and compliance use cases.
The ability to evolve and meet the changing needs of SMEs
For detailed insights on CCDS and building a better lending landscape for small businesses, see our latest report, co-authored with ESCP Business School, Designing Open Banking for SME Lending: Lessons from the UK Model.
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