"Open Banking has been slow to get off the ground in the UK but the potential for third parties to access bank-held account data holds enormous potential for SME lending"
CR: Wiserfunding recently launched the first credit rating service specifically for SMEs – tell us a bit about the proposition and what it can offer to small businesses.
Small and medium sized businesses in the UK have long complained that credit is tough to access. But lack of available funds isn’t the issue. The problem is how funds are allocated. The current process for assessing credit risk makes it hard for small businesses to get the right funding because lenders can’t distinguish great investments from bad ones. Their models aren’t set up correctly and unlike ratings agencies, that serve large corporates, there aren’t any independent services to verify credit worthiness.
Wiserfunding has teamed up with European rating agency modefinance to change this with a rating service specifically designed for SMEs. Existing credit ratings are only available to less than 1 million companies per country in Europe, with SMEs excluded due to lack of historical financial information and the complexities of assessing risk. The SME credit rating means that over 25 million SMEs across Europe will now have access to the same services enjoyed by publicly-listed firms.
Lenders will now be able to use this service to accurately map the credit worthiness of an SME that has applied for funding, whilst advisers can help their clients obtain a credit rating to help in their funding process.
CR: What advice would you give to commercial brokers in the current political and economic environment?
The world of commercial financing has changed significantly in the last decade. Following the 2008 crisis, the big banks retreated from lending to small businesses leaving a gap which has been filled by over 360 other lenders, all carving out a niche in the market.
Today, the financing options available to SMEs have never been broader and although the Big Four still control 85% of the market, schemes such as the Banking Remedies Fund are making small businesses more aware of their options.
However, it is a risky time for lenders who are under pressure from their own investors to demonstrate they are growing their market share. Just recently, a number of prominent alternative lenders revised down the expected returns on their funds, predominantly caused by higher default rates.
To mitigate this difficulty in assessing SME creditworthiness and default probability, lenders need to look to technology solutions. Showing they have clear technology solutions in place to help grow their assets sustainably will prove to investors that these companies are serious about risk.
CR: How will technology continue to affect the SME market?
We hope it is only going to help more of the right kinds of SMEs secure the funding they deserve at the right pricing. SMEs have largely been neglected by traditional lenders because they are so difficult to assess, hence why so many new forms of commercial finance have emerged. Wiserfunding uses a mixture of quantitative analysis, based on the Z-Score models developed by my cofounder Edward Altman, and qualitative analysis powered by machine learning algorithms. It is thanks to this new technological element that SMEs can be more accurately assessed and, as a result, the SME lending market can grow.
CR: How do you think Open Banking will help revolutionise the sector and what else would you like to see implemented over the coming years?
Open Banking has been slow to get off the ground in the UK but the potential for third parties to access bank-held account data holds enormous potential for SME lending and the development of new products that the market needs.
The key benefit of accessible data for brokers is the ability to credit check business customers and to cross-sell other lending and accounting applications.
A second benefit which should materialise over the next few years is that, for SMEs, the ability to view data about their financial performance and access multiple products through simpler interfaces should increase their financial literacy and desire for products.
CR: If you could see one headline about the financial services industry in 2019, what would it be?
Wiserfunding’s goal is to help the best SMEs get the funding they deserve to grow into fantastic and profitable businesses, whilst at the same time helping lenders to sustainably grow their assets by investing in successful SMEs. The knock on effect of this is that the UK economy should be stronger and more efficient. So my dream headline would be: ‘2019 - the year SMEs powered strong growth in the UK economy’.
