How lenders can leverage open banking to close the SME finance gap

Written by Yapily · June 13th, 2022

Around 100,000 SMEs and £4bn worth of applications are rejected for finance every year. How can lenders leverage open banking to reimagine the business-lending process?

Securing finance remains the biggest challenge for SMEs as the cost of borrowing is expected to increase. Research reveals that small businesses spend 26 hours on average searching for a lender and submitting credit applications - despite facing a discouraging 80% rejection rate.

Although SMEs have a combined turnover of £2.6 trillion, lenders have been reluctant to grant them credit as they’re considered too high-risk. This reluctance has been embedded in a lending process that remains unchanged for decades - leaving lucrative opportunities on the table for lenders.

Multi-billion pound finance gap

SMEs' ability to fuel economic growth makes them one of the most profitable contributors to commercial lending revenue. Yet, the lending process many providers rely on still hasn't been attuned to SMEs' potential - rejecting almost 100,000 applications every year.

For hundreds of thousands of SMEs, a £22bn finance gap still exists that challenges their growth and survival. Lenders have an opportunity to bridge this gap and make access to credit fairer - starting with rethinking their business-lending model.

SMEs are by no means a uniform customer base but rather an eclectic mix of businesses with unique challenges. Treating SMEs like corporate customers or offering one-size-fits-all lending solutions means the multi-billion pound funding gap is only expected to widen.

Missed opportunities for the economy

Over five million SMEs exist in the UK, accounting for 61% of employment and 52% of turnover in the UK private sector. Unrestrained from outdated strategies and legacy systems, they are the true innovators rethinking entire industries.

Fairer access to SME finance would have a significant positive impact on the economy - both financially and socially. Small businesses, in particular, help local communities thrive. Whereas startups are fundamental to job creation and shaping a sustainable future.

The demand for accessible finance has given rise to fintechs entering the space with innovative lending models. These revolutionary lenders are taking a personalised approach, powered by the ultimate enabler in modern financial services: open banking.

Lending reimagined with open banking

Before open banking, lenders depended on paper documents such as bank statements, proof of identity, tax return statements, and business expenses to make risk assessments. Open banking has streamlined this process, making credit assessments more informed than ever before.

By leveraging open banking, lenders can access reliable financial information pulled directly from the SMEs bank account through a secure, single API. Considering 99% of SMEs use one bank provider, it's a rich source of data to quickly assess their true creditworthiness and personalise loans specifically to their circumstances.

Although, the potential for lenders using open banking doesn’t end there.

Access to SMEs financial data enables lenders to monitor the ongoing affordability of repayments, reducing the likelihood of nonperforming loans. Moreover, SMEs can initiate payments straight from their bank account by pre-populating account details and invoice reference numbers. This means less delay in receiving payments for lenders.

The future of SME lending is open

In essence, lenders who leverage open banking to reimagine their lending processes will increase profitability and decrease risk. In doing so, they’ll offer fairer and more accessible credit products for SMEs.

For SMEs themselves, it provides more prosperous businesses access to funding, inevitably strengthening the economy. Open banking enabled risk assessments also prevent businesses from borrowing funds they can’t afford to service, decreasing the number of non-performing loans and boosting lender profitability in the long run.

With Covid-19 putting immense pressure on businesses and forcing millions into difficult financial positions, sustainable and effective lending is needed to kickstart the economy. Open banking is the way forward.

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