But lenders operating in, or wishing to enter, the unsecured SME lending space should not get complacent. A growth in bank to business lending is expected in 2024, making this the perfect year to lay the groundwork and make the most of the opportunity when it arises.
And banks need to remember that relying solely on credit bureau data for determining credit risk has become inadequate in our post-pandemic world. The UK government's COVID-19 driven lending initiatives, for instance, are not consistently documented by traditional credit bureaus. This may lead to improper evaluation of loan limits and repayment obligations. In addition, when credit default events occur within government programmes, they are not reported to private credit bureaus.
To add to this, private sector lending schemes, encompassing both consumer and commercial loans, are not consistently disclosing information on capital repayment holidays, arrears, or defaults. This lack of data consistency results in the understatement of impairments under the IFRS9 framework.
It’s therefore vital that banks and lending institutions diversify and strengthen their data sources when evaluating the credit risk related to loan approvals. This calls for a progressive approach which merges identity verification, credit bureaus, and data obtained via Open Banking.
To effectively assess risk, it is crucial to place greater emphasis on the value of Open Banking data, which is updated daily. The key factors that should guide decision-making include:
- Uncovering evidence of loan stacking, encompassing CBILS/BBLS and other non-government guaranteed loans
- Evidence of a significant reduction of income as a result of lockdowns
- Evidence for a reduction in unique sources of income, such as increasing concentration risk.
Identifying potential default risks has become crucial, necessitating the integration of diverse data sources to provide timely alerts.
On the flip side, Open Banking and sophisticated SME lending technology empower financial institutions to broaden their horizons beyond prime credit consumers. By harnessing real-time transaction data during the credit evaluation process, these institutions can lend more efficiently and profitably to even very low ranked risk buckets with the right pricing to ensure risk compensation.
How commercial lending platforms can help banks leverage open banking
Commercial lending platforms can help banks leverage open banking data and credit monitoring in several ways. For one thing, they allow banks to enter the small and medium-sized business (SMB) lending arena with more ease than ever before. By coupling open banking data with these lending platforms, financial institutions can provide companies with the best possible offer based on their creditworthiness and financial history.
Open banking facilitates the sharing of valuable data that can help financial institutions make informed decisions by providing a complete, real-time picture of a customer's financial situation. The platforms allow banks to analyse data from several sources and make reliable lending decisions rapidly. This big-data approach to lending can help banks mitigate risk and increase profits, while also providing SMBs easy and convenient access to financing.
A commercial lending platform with open banking integrations allows banks to offer SMBs more extensive loan products and more competitive rates. Through this integration, businesses can gain instant access to credit and flexible repayment terms. Through the use of open banking data and commercial lending platforms, financial institutions can leverage innovation to meet the growing demands of their current and potential customers.
Integrate Open Banking in days
Integrating Open Banking into existing customer processes doesn't have to be an extensive technological overhaul that spans months. Instead, automated lending platforms can enable new lenders to be operational within just a few days.
Ezbob's credit monitoring features allow you to evaluate credit risks more effectively and reveal untapped opportunities, converting marginal declines to acceptances thanks to the additional insights available.
Get in touch today to find out more about how our lending solutions can help you to access Open Banking data to provide faster loan decisions to a wider range of applicants.
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