In a post-Covid world, the last few years of data can no longer be relied upon to make lending decisions.
– Conrad Ford, Chief Product Officer at Allica Bank
Conrad says: “Banks and alternative lenders will need to adjust their business models.” Lenders will need a way to look at SMEs' finances that lets them distinguish between those whose performance has gone back to pre-pandemic levels, and those which are unlikely to recover. SMEs will therefore need to be more receptive to sharing data through open banking.
"We are going to see a business model pivot towards tools that get under the granular skin of a business’ receivables and other live trading data, so that lenders can see the very near-term indicators of performance and forward-looking revenues,"
Third parties can enrich the transaction history available via open banking. As an example, Sage cites "accounting systems [that] know whether a payment going out is a dividend, a loan repayment or an investment into new capital equipment – which changes the lending perspective."
The advent of variable recurring payments (VRPs) as part of open banking will allow businesses to change the way they manage and leverage their own financial data.
In particular, VRPs will transform cash forecasting by enabling a more accurate, real-time way to manage upcoming payments, as the almost instant settlement they provide will allow immediate access to cash. For invoice financing, vendors will be able to forecast based on their roster of outgoing invoices, knowing that each invoice will be paid as soon as it's billed (provided it's within the customer's VRP settings).
Additionally, the probability of default and affordability can be more accurately predicted by using open banking data on expected and guaranteed income.
"Borrowers will know what will be allocated to repay debt or run operations, so banks can refine their risk model and risk pricing. The real-time information makes a big difference for credit analysis,"
says Ghela Boskovich, Head of Europe at the Financial Data and Technology Association.
This article is based on Business Finance Predictions 2022, a Trade Ledger report, in which a range of industry experts share their insights into what lies ahead for 2022. In addition to digital transformation and tech partnerships, find out their views on:
Look out for more articles in this series, or download the report now.