Published by linker 5
Posted on November 5, 2020
7 min readLast updated: January 21, 2026
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By Rob Furness, marketing director of Ledgerflow, says that a rich data source that could help lenders fill the knowledge gap is already available.
The days when high street bank managers personally knew their small business clients and the challenges they faced are long gone. Yet while banks have scaled back their high street presence, the number of SMEs has grown fast. So where do banks source the information they need to really grasp small business’ issues and provide the lending products SMEs want?
SMEs have a combined turnover of £2.3 trillion, which is around half of the UK’s private sector turnover. The Federation of Small Business further estimates that 5.9 million SMEs in the UK were trading at the start of 2020, an increase of 113,000 firms on the previous year.
This, naturally, cannot be lost on the banking sector, especially if the current economic conditions act as a catalyst to accelerate this trend when the economic outlook is more certain.
Banking has of course changed to make the most of the benefits offered by the digital age, which cuts costs while pushing a more convenient and efficient service. However, a disconnect between banks and SMEs has resulted.
Even if banks wanted to move back to a more face-to-face approach, the pandemic has scuppered that option for now. Perhaps we’ve entered the Zoom Age, which cannot be fully reversed.
So how can banks fill in the SME knowledge gap and design and offer the right products, such as specialist loans and invoice factoring, if they do not truly understand small business needs? After all, banks cannot afford to develop products and then market them if they cannot be sure that they meet real and most importantly current needs.
Financial Conduct Authority (FCA) and open banking
The FCA is currently undertaking a report into open finance. It’s a welcome initiative from the industry regulator into defining what precisely we mean by open finance and in turn open banking, looking at its promise and the practicalities of putting it into operation in the financial services sector
But sometimes you have to ask the right questions to find the answers and while the FCAs open questions enable a wide scope of answers from the industry, they also risk missing the mark. The regulator is effectively looking down the wrong end of the telescope by viewing open finance as the starting point. It’s far too broad a term that encompasses too many points of interest.
Open Finance is wide ranging as it not only adds new lending and payment account sources such as mortgages and loan accounts (to those already available via open banking) but it also includes accounting sources and data sources from customer information at HMRC, Companies House and even utility companies.
For this appraisal, in amongst the excitement of aggregating all these data sources, it risks missing how we as an industry can solve the particular issue of how financial service providers can understand a SME’s particular circumstances. Furthermore, how they can be better served by accessing and analysing their financial data through open accounting.
Open accounting – a brief definition
It might worth stating a quick definition for open accounting.
Open accounting is the process by which the accounting records of business are purposefully shared with the consent of the business owner to allow a trusted third party (TTP) to better serve the business. For instance, open accounting may assist in providing data to underwrite a loan or to help a broker to source more attractive terms from the loan market.
Time to consider open accounting?
In order to manage the risks associated with lending, it is necessary to have information which gives insights into both a firm’s current and its future money flows. While useful, the data from bank transactions is limited in scope and Companies House or statutory accounts data is probably 12 months out of date.
The open accounting solution can provide the financial health of a small business through a full picture of last month’s Profit and Loss statement, together with more recent sales invoices, credit notes, purchase orders, aged debtors and aged creditors.
What is more, it is available as a live picture of a firm’s liquidity. Recent changes introduced by HMRC’s such as Real Time Information (RTI) and Making Tax Digital (MTD) necessitates that SMEs keep their digital records up-to-date. This has provided the perfect opportunity for small business accounts and open accounting to become a reliable source of business information.
There is the technical issue of extracting the accounting data from the various popular accounting platforms and it often relies on APIs (Application Programming Interfaces), but waiting for an industry-wide standard API is an unrealistic solution that is unlikely to be cheap or quick to develop. We need to let the market, using enterprising Fintech firms, develop the most effective solutions for financial institutions to gain ready access to this data. Could you imagine, for instance, mobile phone and laptop designs, technology, innovative features and the apps they use waiting for a full consensus across the industry?
The digital age has transformed the economy and countless industries through openness and sharing and in the same way open accounting solutions can help lenders and SMEs work together.
A word about data privacy before rounding-up
There is no conflict between open accounting and ensuring the privacy and protection afforded by GDPR is upheld.
Let’s take a key GDPR principle in respect to the above – the concept of data minimisation. This is based on the assumption that firms are holding on to data, without a sufficiently strong justification, after a particular enquiry or sale is completed.
The whole purpose of open finance, and in turn open accounting, is quite the reverse to the above example where a retailer retains personal data following a historic purchase. With open accounting the firm initiates the process of providing data to a TTP and voluntarily agrees to its data being accessed by the service provider or lender. It’s the opportunity to access the rich data and to understand the business needs better that gives SMEs and lenders a mutually beneficial outcome. The TTP would need to make a request to the business owner who would then need to grant permission for their data to be shared. Should an SME wish to stop this access, then the TTP would no longer have access to the data and would have to delete any old data.
Open accounting – a solution to think about
It is critical for lenders to understand and give the right support to smaller businesses. While many SMEs are unsophisticated, they can be quite specific in their needs and these wants will change over time.
Currently the HMRC does not share data and Companies House data is always 12-18 months old, however the need to understand current cash flow is critical and there is no better option at present than the rich data afforded through open accounting.
The FCA to its credit is open to the financial service industry’s feedback, but it’s a report that will bring together a vast amount of opinion. We can only hope, through our responses and others, that the opportunity to carefully consider open accounting is not lost to the FCA and by extension the banking and financial services industry.
SMEs will gain more benefit by sharing open accounting than aggregating accounting transactions associated with loans and mortgages and utility charges. More importantly the VAT, Corporation Tax and profit financial data held in accounting systems and available through open accounting, is much more current than what would be available from records at HMRC or Companies House.
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