Competition in banking: improving access to SME credit data
A consultation on proposals to require banks to share information on their SME customers with other lenders through Credit Reference Agencies.
At Budget 2013 the government announced that it would investigate options for improving access to SME credit data to make it easier for newer lenders to assess applications for loans to smaller businesses. Since then we’ve been working with the Bank of England, the Office of Fair Trading, the Financial Conduct Authority, the Department for Business, Innovation and Skills, and industry to investigate options.
When assessing the creditworthiness of small businesses with a view to making a loan, an important source of information for the lender is a business’ past financial performance. This information is, however, often held by the bank that provides the business’ current account and is not widely shared. Challenger banks and alternative finance providers therefore do not have access to the same level of information as the bank with which the small business already has a relationship.
The problem of a lack of available credit data has been highlighted by a range of informed comment on SME access to finance. The Office of Fair Trading, the Competition Commission and the ‘Boosting Finance Options For Business’ Review, headed by Tim Breedon, have all highlighted a lack of information about the creditworthiness of SMEs as a potential barrier to competition in the SME banking market and SME lending in particular.
Following the statement at Budget 2013, the government announced at the Autumn Statement that it would consult on proposals to require banks to share information on their SME customers with other lenders through Credit Reference Agencies (CRA). The government then intends to legislate in the next session of Parliament. The proposals are intended to improve the ability of challenger banks and alternative finance providers to conduct accurate SME credit scoring and, by levelling the playing field between providers, make it easier for SMEs to seek a loan from a lender other than their bank. A better understanding of the SME sector should also stimulate competition and innovation in SME lending, improving the cost and quality of services offered.