The CDR is a great first step, but Australian small businesses need more

The Consumer Data Right, first introduced by the Australian Government in 2017, seeks to promote innovation and competition by giving “consumers greater access to and control over their data”. The roll out, which is being implemented in stages, began with the banking sector in July 2019 with the requirement for Australia’s four major banks to make “standardised, general information” publicly available and extending to other types of banking data and non-major banks by July 2021.

What about SMEs?

In principle, businesses, alongside consumers, should be able to take advantage of CDR to, for example, apply for financing, reconcile their accounts, or manage their cash flow. 

However, there are a number of limitations at play that restrict its serviceability for SMEs. Firstly, the last phase in the government’s roll out extended the initiative to include information relevant for businesses but is yet to see widespread adoption among major banks in Australia. 

In addition, current rules stipulate that all joint accounts (including those commonly used by business owners) require all account holders to explicitly consent to CDR. Take for instance a business partnership applying for a loan. This requirement introduces additional friction into the loan application cycle by halting progress until all account holders have completed the multifactor authentication process. This effectively hinders an SME’s ability to reap the full rewards of open banking and is not set to change until April 2022, demonstrating the initiative’s prioritisation of the needs of consumers over businesses. 

As the backbone of the Australian economy, it’s crucial that the needs of small and medium-sized businesses are not overlooked. SMEs will play a crucial role in national economic recovery over the coming months. After all, they account for almost half of employment and contribute almost $418 billion to Gross Domestic Product (GDP) in 2018-19, equivalent to over 32 per cent of Australia’s total economy.

CDR vs. PSD2

The CDR is often lauded as more progressive than the European alternative owing to its ambition to become an economy-wide data-sharing regime, beginning with expansion into the energy and telecommunications sectors. For the millions of consumers that have notoriously been excluded from financial services due to rigid frameworks for examining creditworthiness, this is a welcome development. Rather than relying solely on accounts for credit cards and mortgages to determine credit scores, other data such as phone and electricity bills can be taken into consideration when assessing a consumer’s likelihood of default.

However, there are currently no plans to extend CDR to include alternative data sources that would directly benefit SMEs, such as accounting and payroll software, eCommerce, payments, and point of sale (POS) systems. 

Why is alternative data important? 

Put simply, while a bank account is a useful source of information, it is not the central hub for a business’s most important financial data. It is now well documented that the average small business uses well over 40 different applications. This network of systems is made up of applications that often do one job, such as inventory management or cash flow forecasting, with the accounting system at the centre bringing these elements together as a single source of truth for business data. 

Banking data alone lacks crucial context, due to the fact that it only recognises transactions as and when there has been a cash movement. Accounting systems, on the other hand, act as an aggregated platform for all business transactions. The frequency with which data is shared between accounting platforms, other systems, and external providers is more than daily, making the value of open, programmatic data sharing extremely high. 

Due to the rapid growth of businesses taking digital payments, an incredible amount of data is now being produced by eCommerce, point of sales, and online payment systems. This data is a unique and useful mine of information that can be used to paint a detailed picture of a business’s past, present, and future financial health. For instance, by drilling into the details of an SMB’s chargeback rates and product information, payments and commerce platforms can develop a comprehensive understanding of a business’s likelihood of default, enabling them to offer larger limits without increasing their exposure to risk. 

Why now?

It is important to recognise that CDR is still in its infancy and further iterations will follow. It’s essential that the needs of small businesses inform how these next iterations are planned and prioritised. 

One positive yet perhaps unexpected outcome of the pandemic has been an increase in the number of registered businesses, according to the Australian Bureau of Statistics. These new businesses will undoubtedly face a challenging time ahead as they navigate this ongoing period of economic uncertainty. It’s therefore crucial that the Consumer Data Right is extended to include the full breadth of SME data sources available, in order to provide real value to businesses in their time of need.