A senior Bank of England official has made the case for the creation of a new shared utility using Open Banking APIs to improve the flow of credit to small and medium-sized businesses.
Speaking at a CityUK conference, the central bank's chief economist Andy Haldane expounded on the demand and supply-side frictions besetting the SME lending market.
Currently, more than 50% of SMEs consider only one provider when seeking a loan, with a clear bias towards incumbents. Moreover, SMEs seeking to switch lender face a 50% higher chance of being rejected for a loan than existing customers.
Says Haldane: "Breaking down those well-entrenched barriers calls for a new infrastructure, one which expands the scale and scope of Open Banking - an Open Data platform for SMEs."
Such a platform would provide a standardised means of permissioned sharing of data about businesses, he says. In addition to data held by banks, this could include data from insurance and utilities companies, credit rating and social media data companies, and Government sources such as the Passport Office, DVLA, HMRC and Companies House.
"The platform would run as a decentralised network of data providers using a standardised set of APIs," explains Haldane. "There would be no central data repository, physical credit file or central infrastructure. Instead, like the internet, the platform would be built around standard protocols that would enable interoperability between decentralised data providers and data users, with businesses having control of this process."
At a practical level this would mean an SME could, at the touch of a button, permission an API call to a handful of data providers to instantly share specified data fields with a third-party, such as a lender. The data transfer would be close to real time and encrypted end-to-end.
Digital identification and verification could also be handled through the platform, reducing KYC and AML checks, and thereby shortening and simplifying the on-boarding process for SMEs to banks.
Haldane says: "Customers could cheaply and quickly compile and share their credit files with different providers, or indeed create personal financial passports, thereby providing lenders with a richer and more timely basis for credit assessment."
While the case for such a platform was strong pre-Covid, the health crisis has materially strengthened the proposition, he says.
Moreover, such a platform could play an important role in the revitalisation of the economy in the post-Covid era.
TheCityUK is currently working up plans for the creation of new equity-based financing vehicles to support startup companies - considered vital to the revitalisation of the economy - in the Seed financing phase.
Says Haldane: "An open data platform could play an important supporting role, especially among new, high-growth companies whose credit file will, almost by definition, be thin."