Viable businesses in Britain will require more low-cost finance for investment if they are to survive the blows of the pandemic – and it must come in the form of a “major commitment from the financial services industry”, warned the Governor of the Bank of England Andrew Bailey in a speech this week.
Also this week, Bank of England chief economist and a member of the powerful monetary policy committee, Andy Haldane, talked up the potential of digital finance in the recovery.
“The crisis has already flicked a digital switch, accelerating pre-existing shifts in how companies and individuals work, save and spend,” Haldane said, citing how rates of adoption of digital technologies were four times faster during the first few months of 2020 than in the whole of 2019.
However, he added, SMEs need much improved access to credit that would likely come from new lenders. Currently, new lenders account for just ten per cent of the overall credit stock to SMEs, with the major banks providing the rest.
“Almost all of the Bounce-Back loans extended recently emanated from the major banks,” the chief economist said. The situation called for a new lending infrastructure built around much more easily available information for both parties.
First though, speaking to TheCityUK national conference, Bailey cited the importance of investment in the break-out from a year of sporadic lockdowns. In remarks that clearly open the door for a wider variety of funding options such as venture capital, crowdfunding, private equity, seed capital, fintech and traditional business lending, he pointed out that business investment in Britain has been weak since the global financial crisis compared with previous expansions. “And investing growth has been unusually weak relative to employment – it’s the story of weak productivity growth,” he said.
The governor also raised the possibility of freeing up other sources of finance such as defined-contribution pension funds and investment funds, but “without reducing the safety and soundness of banks and insurers, or policyholder protection.”
The debt must come at the right price. “We need to ensure that this [financing] is done without excessive leverage,” he warned. “While the current low level of interest rates supports the sustainability of UK corporate debt, higher leverage would make the corporate sector more vulnerable to interest-rate or earnings shocks.”
Meantime the Bank of England is working on solutions to boost lending to credit-starved SMEs, as Haldane said, that would open the door to a wide variety of new sources of debt. An open platform for information about SMEs could include not only data from banks, easily the dominant lenders to the sector, but also data from insurance and utilities companies, credit rating and social media data companies, and government sources such as the Passport Office, DVLA, HMRC and Companies House, he explained.
“The platform would run as a decentralised network of data providers using a standardised set of APIs,” he explained. “There would be no central data repository, physical credit file or central infrastructure.” Instead, like the internet, the platform would be built around standard protocols that would enable interoperability between decentralised data providers and data users, with business having control of this process.
And it would work at the touch of a button. The SME would provide permission for an API to call a handful of data providers to instantly share specified data fields with a third party, such as a lender. The data transfer would be close to real time and encrypted end-to-end, he said.
The benefits would be two-fold – better researched and faster credit for SMEs and, for lenders, lower supply-side barriers.
The system would also use digital identification and verification to reduce KYC and AML checks. “Customers could cheaply and quickly compile and share their credit files with different providers, or indeed create personal financial passports, thereby providing lenders with a richer and more timely basis for credit assessment,” he outlined.
Overall, Haldane outlined a win-win situation as business fights its way back from the pandemic. “The Open Platform could significantly reduce information frictions, lubricating the process of corporate debt workout and recovery in ways which would support companies, lenders and the economy as a whole,” he said.