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June 21, 2019

Bank of England to lead on SME finance data platform

The governor of the Bank of England, Mark Carney, has confirmed the bank would help lay 'groundwork' for an open SME lending platform.

By Christopher Marchant

In a speech given at Mansion House, governor of the Bank of England, Mark Carney, has confirmed the bank would help lay ‘groundwork’ for an open SME lending platform in an attempt to resolve the long-standing £22bn funding gap in the sector.

However Carney also confirmed the BoE would not build the platform entirely, as it ‘would not be the position of the institution to do so’.  Carney also stated that the Bank of England will be tagging open banking payments with a unique ID called a Legal Entity Identifier (LEI). This will be mandated for financial institutions and the bank will be considering how to extend this to corporate payments.

On the issue of open banking, Carney said: “An open platform for SME lending would enable open banking and empower SMEs. It would help avoid lock-in on existing platforms and enable providers of finance to compete for SME lending, helping to broaden the products available to companies and offer more competitive rates, making access to finance quick, easy and cost effective.”

Following the speech the Bank of England submitted a formal response on how to develop an open platform for competitive SME finance to the Smart Data Review referenced by the Chancellor Philip Hammond.

During the speech Carney also discussed various issues affecting SME finance including open banking, funding gaps and data points.

According to statistics laid out by Carney, SMEs account for 60% of all private sector employment and over half of all private business turnover. In addition, almost half of all SMEs don’t plan to use external finance, citing the hassle or time associated with applying. Of those that have approached their bank, two fifths have been rejected.

Of this issue, Carney said: “Part of the problem is that the assets that SMEs are seeking to borrow against are increasingly intangible, such as the value of a brand or user base, rather than physical assets like building or machinery. SMEs that have not borrowed lack the historic data required for credit scoring. Legal requirements to prevent money laundering and “Know Your Customer” make the process especially burdensome for a small business with limited resources.”

Carney stated that the Prudential Regulation Authority (PRA) will issue a Supervisory Statement in the autumn that sets out its supervisory approach. The Bank, together with the FCA, will also establish a forum to discuss the results of a survey that it has conducted on AI use in finance and determine an appropriate supervisory approach.

On the topic of technological advances in data collection, Carney said: “Just as the steam engine transformed manufacturing, AI and cloudbased technologies are transforming services. Accordingly, the second focus of the Bank’s initial response is how new general purpose technologies, like the Cloud and AI, can be used to strengthen the resilience of the system. Embracing these technologies could herald leaner, faster and more tailored financial services. Banking is already the second biggest global spender on AI systems after retail and the sector is expected to invest a further £4.75bn on AI this year.”

In April it was reported that banks are shifting towards less-risky wholesale business lending, with a 48% jump in lending to leasing providers in just the last year, according to data from the Bank of England (BoE).

Data from the BoE shows that lending to leasing providers increased from £32.7bn in December 2017 to £48.5bn in December 2018.

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