Part 2 – Exploring potential improvements to the scheme
SME’s need different financing options dependant on their business circumstances. For example, a short term BNPL loan may be preferred to using a business credit card or invoice finance based on convenience and cost. In other circumstances invoice finance may be a better choice to help scale a business. The point is SMEs need to have the best options available to them and the commercial lending ecosystem needs to function in way which encourages innovation and competition.
To further illustrate this point, 65% innovative businesses use external finance compared to 58% of non-innovators. Underlining the point that the SME’s approved with the right finance options drive innovation.
The CCDS scheme has a key part to play in this space and there are 3 areas that should be under serious consideration to further enhance its benefits.
Membership & Designation
In 2013 the 9 designated banks for CCDS made up most of SME lending and were mandated to share across all CCRA’s, the non-designated banks (challengers) were not. At the point of implementation of CCDS in 2017, the growth of challenger banks had already begun. Fast forward to today and the challenger banks now contribute to over 55% of SME lending (ref: British Bank SME report - 1st of March 2023). On the face of it, this is positive outcome, as increasing SME lender choice is a desired outcome for policy makers. However, it brings with it an unintended consequence when it comes to data sharing.
The challengers are not under the same obligation to share their data across all CCRA’s in the same way as designated banks, and they will realistically default to reciprocating with the sole CCRA that provides their credit information. The unintended result is, up to 55% of all SME lending is no longer available across all CCRA’s. In a strange way this a regression back to 2013, as it creates a fragmented view of lending to SMEs across all CCRA’s.
The purpose for raising this is to neither favour traditional or challenger banks but to ensure there is sufficient market competition to benefit SME’s. Democratizing the underlying data for all lenders should be the common goal. However, the impact of this for the above, translates to specific detrimental outcomes to SMEs as well as lenders, as detailed below:
- Sub-optimal Decisions - All lenders will make poor decisions with lack of visibility of all credit, increasing their risk. Assessments around affordability will be compromised leading to customer detriment, through an inability to service debts.
- Lack of Transparency to SME’s - SME / business owners’ themselves will be unaware of what elements of their credit information have been used to in decision making across lenders.
- Disadvantaged New Entrants - The “new” challenger banks may be disproportionately impacted, as they will not have full visibility of the lending market. This will hinder innovation as well as stifle ongoing competition if new entrants are not able to gain a footing.
The potential options to consider to avoid the impact of these are, (i) encourage non-designated banks to share more broadly, (ii) consider a periodic reset of designated banks based on portfolio size or (iii) mandate sharing across all CCRA’s - similar to what is being considered within the consumer space (Market Study 2015) with has the aim of making data ubiquitous.
Scope & Inclusion
The scope was defined to target the SME market specifically, for businesses with a turnover of up to £25M. The only challenge to this is, would it be both beneficial and easier to include the entire lending landscape for SME’s as well as larger enterprises?
If there was a single source of all lending information with account performance, it could be an extremely useful source of information to understand the state of lending, not to mention the state of competition with the market. There could also be a “benefit” from a policy setting perspective with a trusted single source that can be tracked to understand the impact of policy decisions as well as other external factors.
Applying the £25M threshold also raises some questions. Firstly, it could be described as a rather arbitrary figure, but there are some more fundamental questions to raise. For example, what should be included if a business earns £24M in a year followed by £26M the following year? How should turnover be defined, from approved financials or purely from the turnover of the current account (assuming it’s the only current account they have). Given it is difficult to keep a consistent view, this criterion will likely be interpreted differently across lenders. It may be “easier” to include the entire base of customers to ensure consistency.
Having this view of the entire range businesses from small to large is the first part, the second is around what accounts should be shared. The original scope includes business loans, credit cards and current accounts. This is being expanded to include other products such as charge cards, invoice finance and other revolving debt. But there are other products that could be considered for inclusion, such as, deposit accounts, BNPL, merchant acquirers, leasing and potentially others.
Each product should be considered and included on its on merit where it is deemed relevant. For those that are included, it should provide a more complete view of lending and/or payments in all its forms. Understanding this across all businesses is critical to understanding the forms of lending that will drive the economy.
To push this further, there could be non-financial industries which could provide information that could also be useful to expand this core file. Examples include Telco, insurance or even the Manufacturing industry.
Evolution, Not Revolution
The benefits of data sharing are well understood from all parties, from lenders through to SMEs, however, creating a shift often requires mandating change rather than setting idealistic aspirations. It is therefore likely, that further primary legislation would be required to outline a framework to allow for a more proactive approach to support SMEs moving forward.
The points raised earlier are suggestions based potential gaps or opportunities. It would be far too simplistic to push forward with these suggestions with only a commercial or data perspective. There are broader considerations with several parties that should input into the direction the CCDS scheme, including regulatory areas. Policy makers will also benefit from visibility of improved lending not just the CCRAs or lenders.
Ideally, there needs to a mechanism to consider and co-ordinate changes, to ensure:
- The purpose itself can adapt to evolving needs of the market, whether that is driven by product innovation, technology, or regulatory needs (some of this is work in progress).
- The guidance is prescriptive so that all parties, CCRA’s and lenders can understand and implement changes to a high standard.
- Controls are in place to so that all parties adhere to the standards agreed and remediating action is taken when there is a breach.
Decisions on the scope of the CCDS scheme, the inclusion of more industries, businesses or product types should be reviewed by this governing body. However, there also a need for alignment with other data sharing schemes. With existing commercial/trade data sharing agreements it remains to be seen if they can be incorporated or remain distinct, however, in the case of Open Banking there is a clear argument to ensure there is alignment. CCDS has an advantage in that no consent is required for data to be provided, and for the moment this is significant, as SMEs are still relatively reluctant to provide consent for data sharing. However, Open Banking has its benefits with more up to date and granular information from lenders or accountancy software providers.
The overall goal is the same for both initiatives, to stimulate strong and diverse competition in the SME lending market and improve access to credit for SMEs. The CCDS scheme and Open Banking clearly complement each other, and it is therefore even more important to ensure the governance is in place to allow both to flourish.
Looking to make more confident lending decisions on SME businesses? Find out more about D&B Lending Intelligence today.