Lending Post Covid-19: New Data Sources and Technologies

The Covid-19 pandemic has profoundly impacted the finances of both UK consumers and companies, with millions struggling to pay their bills on time due to the associated economic lockdown.

This has dramatically altered the lending landscape, with a spike in borrowing as businesses turn to lenders to help them mitigate the effects of Covid-19. According to UK Finance, government schemes have seen massive demand: as at 18th August 2020, over 1.23 million businesses in the UK have now been supported by lenders through government-backed coronavirus lending schemes, including £13.7 billion worth of CBILS (Coronavirus Business Interruption Loan Scheme) loans.

SME lending is at a tipping point. Lenders are struggling to cope with demand and the approval rate for CBILS loans remains only around 50%. Some commentators say that these emergency lending schemes rely too heavily on old, cumbersome legacy technology and processes.

It’s impossible for lenders to continue business as usual whilst relying on traditional credit bureau data and processes. Now, more than ever, they need to embrace new data sources and technologies in order to analyse and understand borrower needs in this rapidly changing environment.

Using the wide scope of transaction data available thanks to Open Banking, for example, can help lenders to continue issuing loans in these unusual times and they’re better able to determine creditworthiness and affordability by interpreting changes in financial behaviour, detecting changes in income patterns, and getting a better grasp on non-traditional income patterns such as would be seen for freelance businesses.

Identifying New Priorities

Commentators believe that the UK government schemes will lead to a distortion of the lending market for some time to come, with the raft of government schemes appearing likely to replace existing lending for the foreseeable future.

In response, UK Finance has highlighted how forward-looking lenders are now shifting their priorities. Many are reconsidering their portfolio risk forecasting; past performance is no longer an indicator of future performance with so many new unknowns and with both consumer and business financial circumstances changing day-to-day. Lenders need a wider range of real-time transaction data to make the right decisions. UK Finance has also said that more lenders are looking to end-to-end digital, automated journeys that help them to cut costs and boost efficiency in terms of processing the avalanche of applications.

Ambitious lenders need to get their lending technology up to speed to ensure that they can cope with this demand and take their share of the new customer base. Data connectivity will play an ever-increasing role in enabling SME lending including use cases such as:

• Faster decisions – eliminating manual collection, keying and spreading of SME financial accounts.
• Stronger relationships – enables better informed and more advisory relationship management.
• Covenant monitoring – replaces repetitive data gathering with ongoing data synchronisation.