As of 24th January 2020, the UK government has provided over 1.4 million loans to businesses, costing a total of £44.7 billion. Although an astonishing feat, only a quarter of small business owners surveyed by MarketFinance believe their business will survive through 2021.
In this article, Jack Tenwick, Head of UK Sales at Yolt Technology Services (YTS), shares how open banking powered Account Information Services (AIS) can be used to help improve the governments Bounce Back Loan Scheme.
With SMEs accounting for 50% of the total revenue generated by UK businesses and 44% of the country’s labour force, that’s a pretty dispiriting statistic. And what’s even more disheartening is that the problem doesn’t seem to be the lack of funds, but the weak processes that are in place to issue much-needed loans to these businesses.
The good news, however, is that open banking-powered Account Information Services (AIS) can be used to improve these processes and provide more appropriate support. By enabling more efficient, secure and fast processes, lenders can use AIS to complete faster credit checks, reduce fraud and issue accurate loans, both quickly and easily.
Challenges facing businesses throughout Covid-19
Covid-19 has impacted businesses in a variety of ways, with the two most notable challenges being the loss of revenue and reliance on outside capital. The minute the government enforced lockdown, restaurants, cafes, gyms and event venues had to close, with revenue practically evaporating overnight. As a result, half of businesses have experienced a decrease in turnover, and 7% of businesses were forced to close temporarily or permanently in November of 2020.
With such a huge loss of revenue, the only source of support was outside capital through government grants and loans. According to a McKinsey survey, 50% of SMEs have taken or are planning to take advantage of the furlough programme and nearly a quarter have applied for business rate relief and tax payments.
But even though the government has provided billions of pounds in support, these loans will still need to eventually be paid off. Along with other tax payments, trade debts and rent arrears, the repayment defaults on outside loans will impact on business credit scores and will likely negatively affect their eligibility for loans and financial support in the future.
Problems with existing processes
With government support and loans being the only lifelines for many businesses, the processes in place to issue funds have come under a lot of pressure.
When the lockdown was first enforced in March, the first problem with delivery of government funds was slow credit decisions. According to the National Audit Office (NAO), lenders were fairly quick to approve loans for existing business customers (24 – 72 hours), but it could take between 4 and 12 weeks for new customers due to the time it takes to do manual credit checks and submit loan applications. For many businesses, those few weeks are the difference between survival and bankruptcy.
To address this issue swiftly, the government lowered the eligibility criteria so that credit checks were no longer necessary for loans of under £25,000. Although this temporarily solved the issue of speed, it caused another problem: fraud.
Due to the lack of credit checks and verification processes in place, issues arose such as duplicate applications, business impersonation, inaccurate self-certification and organised crime. In normal times, lenders are required to conduct their own investigations into anti-money laundering and identity verification on loan applications. But throughout the pandemic, lenders have had to forego certain checks.
This problem emerged because financial information is difficult to share and remains paper-based, which is why loan applications take so long to process: lenders still require 6 months of financial statements, paper signatures and online forms. According to the British Business Bank (BBB), the estimated potential losses from Covid-19 fraud and credit risk is between £15 and £26 billion, with an estimated 35% to 60% of borrowers defaulting on their bounce-back loan.
How could AIS improve the processes?
The very foundation of AIS is making financial data easily and securely shareable using APIs. With this technology, bank transactions and data can be viewed in real-time, making financial data sharing a lot easier and faster.
Instead of relying on outdated financial statements and self-certified information, lenders can connect directly with a business’ real-time transactions. This automates many manual bookkeeping practices, offers a more accurate way of calculating credit risk, and enables lenders to onboard new customers in a fraction of the time it usually takes.
Moreover, with the real-time data and identity verification provided by AIS, the risk of fraud drastically decreases. Lenders no longer have to rely on customers self-certifying, which reduces the risk of multiple applications or “enhanced” profits and losses. It also allows lenders to make faster and more accurate credit decisions, reducing credit risk and the likelihood of no repayment. By skipping manual verifications, lenders can also reduce costs, offer an instant credit decision, and make fewer human errors.
To say that AIS has the potential to save thousands of businesses throughout the UK would be an understatement. By making financial data sharing secure, real-time and reliable, businesses have faster and easier access to funding and therefore have a shot at making it through the Covid-19 pandemic. Lenders can also make faster and more accurate credit checks, reducing the level of fraud and overall administrative costs. This translates into a lower tax bill for the government, and ultimately for the taxpayer too.
