Open banking: Enabling SMEs to drive recovery in a post-Covid economy

The latest data from Bank of England projects a contraction of 14% of GDP on an annual basis with an astounding 25% contraction in Q2 alone. This could result in a loss of 15-20% - or up to a million - Small and Medium Enterprises. Needless to say, these are unprecedented and troubling figures.

The graph below is unique as it is based on open banking data and shows the relative variation of both cash inflows and outflows of UK SMEs in the first four months of 2020 compared to the first four months of 2019. This data reveals that at the beginning of March, concurrent with the onset of the Covid-19 outbreak in the UK, both cash inflows and outflows experienced a sharp downward trend. This trend was further compounded by the introduction of lockdown measures on 23 March (the orange dotted line), a watershed moment, as business activity started receding below 2019 levels, ultimately leading to a loss of 80% at the end of April 2020.

This graph illustrates the shock that the pandemic has delivered to the SME sector – a shock that has hit 5.9 million businesses that comprise 99.9% of private businesses in the UK.  As a result, it is likely that the economy will reopen with significantly fewer than the 5.9 million SMEs that were operating pre the pandemic.  How many SMEs will exist post the recovery is not yet known but it is accepted that these businesses, specifically the SMEs that remain viable, will be key to rebuilding a healthy economy.

And that is where a key challenge exists - how to distinguish healthy businesses from those that are struggling in the post-Covid economy.  As we prepare to reopen the economy, companies will need to adjust to new ways of running their businesses.  There will be immediate needs to develop new business relationships, establish new supply chain partnerships and forge new deals.  With these needs comes new risks and security issues that must be managed effectively to deliver the economic recovery.

Establishing business trust - both with consumers but, in this case, business-to-business – will be a cornerstone to the recovery.  A big lesson from the financial crisis of 2008 was that several firms, at some stage, lost confidence in each other.  A significant number that were in financial trouble and defaulted on payments for materials or services contributed to increased levels of uncertainty and enhanced risk for businesses. As a result, business behaviours changed.  Sales were often held in cash or advance payments were demanded as a means of mitigating the risks of non-payment.  The knock-on effect was the slowing down of the country’s economic recovery.

Luckily, we are in a new era of financial services following the introduction of open banking in 2017.   Open banking technology enables transaction data to be used, in real time, to quickly prove the health of a business by showing the liquidity level of a firm as well as its cash flows – as in the graph below. Consequently, a credit score made with open banking data will:

• create confidence and help speed up an SME’s recovery
• make financial institutions’ lending processes more reliable and faster
• help the Government to monitor the support measures in place. 

Open banking’s value cannot be underestimated; it is a vital tool in ensuring businesses can mitigate the risks created during these unprecedented times and efficiently and effectively deliver a robust economic recovery.