New wisdom for lending: Capitalising on the open information economy

By Damian Kimmelman, CEO and co-founder of DueDil

No doubt the focus over the coming months here in the UK will be on our government as we begin to negotiate the terms of our departure from the EU. However, amid the political debates, we should spend one moment to consider how the millions of companies across the UK and Europe will continue to trade with each other.

Damian Kimmelman
Damian Kimmelman

Private companies are the lifeblood of the UK and European economy accounting for over 60 per cent of the European economy according to the European Commission and the World Economic Forum. Yet as countries become politically and culturally more insular in their mindset, the levels of inherent trust towards businesses from other countries will dwindle. Clearly trade must continue if we are to create thriving businesses and prosperous economies.

The question is, can opening-up private company information across Europe recast trust in cross-border trade in this new political and economic landscape?The idea of private company data becoming public seems somewhat counterintuitive. After all, isn’t the ability to conceal aspects of your business’s inner workings the whole point of a private company?

To be clear, private companies in this context refer to the concept of Limited Liability. It’s a commercial venture that protects its shareholders from bankruptcy. It’s arguably one of the greatest wealth creation inventions of all time. Limited liability was never intended to mean anonymous, as it’s come to have been interpreted.

It was a concession- something given by society for the common good. It allows people to have bold visions and sometimes fail at achieving them but not die by them. I am here to tell you that private company data will not be private for much longer. And that that’s OK.In fact, it’s a huge opportunity for creating cross-border prosperity – with the banking and finance sector at the heart of funding its growth.

The need for an open information economy

Today, it is relatively straightforward to discover, as well as trade with, publicly listed companies. By law they are required to disclose ownership, group structure and financial information. Businesses use this information to discover new trading partners as well as understand the risk of the companies they are doing business with.

For private companies, each country has its own register such as Companies House in the UK, each with different requirements for information. Until recently, access to this information has not been consistent across different countries, creating friction for businesses wishing to understand and trade with private companies. Without this information, companies are often pricing risk through conventional wisdom, yet without the confidence which can be delivered through context and information.

In the same way as not being able to find out on LinkedIn who we are about to walk into a room and meet, not having visibility of a company’s profile creates more hurdles to engaging them as a trading partner. It is my belief that an open information economy is fundamental to recasting trust in business post-Brexit and to driving financing in the right places.

The need for a new wisdom for business lending

Today, the banking sector simply isn’t lending because of stricter regulatory pressures. And when they are, they may be lending to the wrong businesses.

Access to finance continues to be a significant concern for small to medium sized enterprises (SMEs) compared with large enterprises. More SMEs experience issues with bank loan financing compared with corporates. This is worrying for two reasons. First, SMEs account for over 60 per cent of the EU’s GDP. Second is according to the European Banking Authority’s recent study, large companies – with the least loan rejection rates – can be riskier to lend to.

As expected, the smallest firms have the highest risk of default during an economic downturn. But most interesting is that the “M” in SMEs – the medium-sized firms – are consistently the best performers during a downturn. In fact, they are far less risky players compared with large firms.

Our view is that this is a problem involving information friction. There is not enough information about private companies to price risk effectively. This has created a trust bubble between finance providers and large companies, often publicly listed, that already have a wealth of publicly available information.

Open, frictionless information is key to recasting trust between finance providers, businesses, and trading partners.

If lenders had richer information on each of their customers around the competitive marketplace and ownership, this may encourage more lending to support their customers’ growth ambitions. For example, abank can now use adue diligence technology platform to better understand the risk and return of a company seeking financing to expand its operation after securing a significant contract with a new German customer. Businesses can equally use the technology to seek new trading partners and more efficiently market to new prospects beyond their borders.

The UK is leading the way

This is an issue which has been recognised by the European Union, who under its Horizon 2020 research innovation programme, highlighted the need for more open information access for private company information across Europe.

In many ways, the UK has been a great test bed for democratising information in this way. Companies House was amongst the first to open its datasets up through its API, allowing financial technology companies such as ourselves to map company information with other data sources such as credit ratings, to create comprehensive company profiles.

The good news is that we’re beginning to see other European countries including France, Germany, Benelux and the Nordic countries following suit. Together with the UK and Ireland, that’s 40 million business profiles that are being opened-up, making it easier for businesses to engage in new cross-border trade deals and to access liquidity.  We can expect to see more countries do the same in the coming year. It is a positive start, but what we need is more consistency and greater depth of information across different countries.

There are opportunities in any type of market, but the best opportunities can be found in a bearish market. However, for lenders and businesses to capitalise on the opportunities in front of them, they must do so confidently with their eyes wide open. In these times of uncertainty, an open information economy can bring together businesses through the common language of data, and recast trust across borders.