Many more small companies are borrowing and banks are increasingly using alternative data to make lending decisions. Ouida Taaffe talks to Paul Gordon of Lloyds Banking Group and Arjan van den Berkmortel of HSBC about how banks decide which data to use and the future relationship with bigtech.
The UK has a productivity problem.
According to the Bank of England, in June 2018, the small companies that were “surviving, but not yet thriving” accounted for between 80% to 90% of UK jobs.
Two years later, the coronavirus pandemic has made things even more challenging.
There may, however, be a silver lining to the crisis. Many more small companies are borrowing – thanks to the British Business Bank’s Business Support Scheme. And that means more credit and performance data.
As of 18 August 2020, 1.174m small and micro firms had borrowed a total of £35.4bn from the Bounce Back Loan Scheme. Over 60,000 ‘smaller’ businesses with a turnover of up to £45m have borrowed a total of around £13bn from the Coronavirus Business Interruption Loans Scheme.
That gives SMEs the wherewithal to continue trading. And it means that lending banks will now have access to a lot more data – including from firms that had not borrowed before.
How will more data help banks support SMEs?
Some of that data will be skewed by the crisis, and some of the firms will fail as they struggle with the challenges of the downturn and with debt.
However, over time, a fuller picture of how UK SMEs are doing should help banks support them better.
Paul Gordon is Managing Director, SME & Mid Corporates, Commercial Banking at Lloyds Banking Group. He says that bigdata, machine learning and the cloud are already starting to transform the way Lloyds uses data.
“Access to more real-time data means that relationship managers should be able to have more relevant, and timely, conversations with clients.”
Gordon expects banks to play a role in boosting overall economic productivity.
“In particular, they can help businesses close the skills gap,” he says.
“For example, Lloyds partners with Be the Business, which provides resources in the regions for small firms to focus on making strides in improving productivity. And we also have an extensive digital skills programme to support people, businesses and charities.”
How will banks use data post-Covid-19?
McKinsey expects banks to use data and analytics to “direct more attention to the financials and business models of individual households and companies,” post-crisis.
Their report, Managing and monitoring credit risk after the Covid-19, states, “Leading banks are accelerating digital transformation to enable real-time monitoring and effective mining of transaction data, while automating the feeding of results into decision making.”
But banks will still be banks, which means cautious and prudent.
Arjan van den Berkmortel is Head of Business Banking, London Region at HSBC.
“For new SME customers, we would rely on a track record to build a relationship score – rather than using ‘alternative’ data,” he says.
The only data that really gives direct insight into borrowing behaviour is a firm’s credit history. That means banks face the issue of deciding what data is relevant.
How will banks decide which data to use?
“There is so much data out there,” says van den Berkmortel.
“The question is whether it is the right data and has the right granularity. We are putting a lot of energy and investment into looking into that. We use credit decisioning models. And what we expect to see now is the models being enriched with more data and getting more complex in the future.”
Banks are unusual in having so much financial data, but as they use more ‘alternative’ data they will work more closely with bigtech companies.
Bigtechs are already showing a keen interest in financial services and have often been seen as a threat to banks.
How will banks work with bigtech?
Will banks become utilities behind the financing offers of big tech platforms?
“I think the way forward is for banks to do what they do really well, which, at its core, is to provide liquidity and payments,” says Gordon at Lloyds.
“And banks can build a network with fintech partners who can help them do that brilliantly.”
With luck, that co-operative network should be able to help boost the performance of SMEs.
“We use an aggregator that pulls together all the social media data related to a business,” says Gordon.
“When that is placed alongside further information – including financial accounts data, details of directorships, and details of the relationships that directors have with other businesses – that gives us extra insight into where they are focusing, what they are trying to drive in their businesses.”
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