The UK is on a path of economic recovery, but the recently elected Labour government faces the heavy task of providing the right parameters for small and medium-sized enterprises (SMEs) to revive their growth. 

How will this be accomplished? Charlotte Crosswell OBE, Chair of the Centre for Finance, Innovation & Technology (CFIT), believes that smart data may hold the key for SMEs to unearth newfound lending and funding opportunities, but stresses the need for government and industry collaboration.

Earlier this week, the Chancellor spelled out the fiscal constraints within which the new government will have to operate – while still seeking to deliver on its top priority of driving economic growth.

There is a clear tension between even tighter restrictions on public spending than initially expected and the need to re-energise the UK economy. This is leading the government to focus on growth initiatives that can be implemented without major up-front investment. Planning reforms that enable the private sector to deliver against reinstated housing targets are a good example. 

Another avenue is to provide the UK’s 5.5 million SMEs, which employ 60% of the country’s private-sector workforce and account for over 50% of economic turnover, with improved and prompt access to finance. 

How can the UK’s fintech/payments industry help?

Lending to UK SMEs has fallen by 20% over the past decade. Closing the resulting £22bn funding gap will allow founders, business owners and entrepreneurs to invest in their businesses, improve productivity, hire more people and maximise revenues – both their own and the Exchequer’s.

Fortunately, there is much that the financial services and fintech industries can do with the support of policy makers to accelerate SME lending and unlock growth, without requiring significant public spending. The key to achieving this lies in enabling the secure sharing of high-quality data with businesses’ consent across the financial services ecosystem to facilitate competition and faster lending decisions. 

That might not sound like a dramatic step, but its impact would be transformative. Better lending decisions, higher productivity, a boost to employment and stronger economic growth that benefits us all.

The government’s road map to recovery

A new report published yesterday by the SME Finance Taskforce, announced by HM Treasury in April and chaired by the CFIT, lays out the necessary next steps.

The Taskforce, which comprises leading banks, alternative lenders, fintechs, accountancy software providers, payment schemes, credit reference agencies and key industry bodies, makes the case for giving SMEs ownership of their data and allowing them to share it with third parties so that smarter decisions can be made over their ability to access credit.

This, in turn, will enable SMEs to receive funding and scale. It has set out a seven-step action plan, for both industry and government, that will ultimately boost economic growth by making the lending experience better for both SMEs and lenders.

Those recommendations that are in the gift of government and public bodies to implement include moving forward with the recently announced Digital Information and Smart Data Bill, which will provide for the establishment of new Open Banking-style ‘Smart Data Schemes’, as a legislative priority. 

Meanwhile, important public-sector data sources, such as HMRC and Companies House, can help to simplify the process for lenders to validate and augment the data they receive from SME loan applicants.

This will require careful coordination across the government. The issue of data-sharing and SME finance cuts across various departmental responsibilities. The government’s Smart Data team sits within the Department for Business & Trade; the new Digital Information and Smart Data Bill falls under the purview of the Department for Science, Innovation and Technology; while HM Treasury oversees financial regulation. 

This is an opportunity for the new government to demonstrate how it can facilitate growth by bringing together policy makers and stakeholders, leveraging the private sector to drive through change at pace with regulatory collaboration, and unblock entrenched barriers to innovation.

Why the key may be interoperability

There is still much that the industry can – and must – do for itself. Existing initiatives have been put in place over the last decade to help SMEs access finance, such as the Bank Referral Scheme and the Commercial Credit Data Scheme. These can be updated to reflect the evolution of the market, such as the emergence of alternative lenders as a major source of SME finance, starting with the participating organisations identifying known issues. 

There is also substantial data currently held privately, such as invoicing and VAT data processed by cloud accounting providers, or savings account and insurance data held by banks and insurers, that can be used to build a more detailed picture of the health of an SME. By developing technical standards that enable interoperability and commercial frameworks that incentivise data holders and brokers, the industry can unlock these datasets for lenders and intermediaries. 

The prize on offer for getting this right, and driving forward the Taskforce’s recommendations across both the private and public sectors, is enormous, and the industry stands ready to act. 

A world in which lenders can seamlessly and securely access the relevant data when assessing an SME’s financing application and quickly make the best-informed decision on whether and how much to lend. One in which companies can more easily access credit to fund their growth ambitions. 

And, most importantly, because our lenders and companies will be freed from the silos and fragmentation that act as a drag on economic activity, one where productivity is better, employment is higher and growth is stronger.