BIS report: Credit information regulations are key for SME lenders

Credit information regulations are key to accessible and affordable loans for small and medium-sized enterprises (SMEs), according to a report by the Bank for International Settlements (BIS). Faced with administrative roadblocks to traditional financing, some SMEs are turning to tech-savvy solutions for loans — but data-sharing regulations remain a barrier to entering the market.

“[We need a] collaboration between central banks, financial regulators and data privacy authorities to ensure adequate safeguards are in place,” said the BIS report, published on February 27.

SMEs often struggle with credit risk assessment through traditional banks and fail to meet strict lending criteria, including high credit score requirements, extensive documentation and a proven record of profitability. This has driven some SMEs to use tech companies that employ artificial intelligence (AI) to analyse transactional data and business metrics and offer personalised financing options.

“A key obstacle SMEs have faced in securing financing in recent years is the way banks approach lending to this segment, unlike other areas like mortgages,” said John Cronin, a banking expert at SeaPoint Insights.

“There are two main reasons for this. First, the risk weights are very high, so banks need to hold more capital. Second, there’s a lot of heavy lifting involved. The process is manual, and banks have to work closely with customers to understand their business. In contrast, for a commodity product like a mortgage, banks benefit from a lower cost to serve the customer due to a more streamlined straightforward underwriting process, thereby making it more profitable.”

Although tech-led lenders have overcome the challenges in risk assessment, data-sharing regulations continue to limit commercial access to credit data.

“The weight of the new tech-savvy lenders in the economy generally remains small. Fintech and big tech lending is still very limited compared with bank lending, as new fintech loans averaged only 0.03% of GDP and big tech loans 0.05% in emerging markets in 2019,” said the report.

“Policies can foster SME lending by improving credit risk assessment and creating the conditions for making lending to SMEs less risky. To foster digital lending, adjustments to data-sharing policies hold great promise.”

UK Credit Information Regulations

However, HM Treasury’s post implementation review in 2024 found a loophole in the regulations: only designated banks are required to provide their data to all four CRAs. As a result, most non-designated firms choose to provide data to just one CRA.

The loophole creates gaps in market data for non-designated firms, as they typically only access the database of the CRA to which they supply data. While these firms have incentives to voluntarily share data under the regulations, such as gaining access to broader market data, the decision to share data remains optional.

New bill for open banking

Despite new AI-powered analytical technologies, fintech lenders still heavily rely on traditional credit scoring techniques and, therefore, on ‘historical’ financial data.

Through the open banking network, SMEs will be able to link their business accounts directly to lenders, sharing real-time data on cash flow, revenue and financial health. The scope of open banking will make it easier for SMEs to share their bank transaction details with other banks.

Cronin explained: “This is where open banking can come in. Ideally, all the relevant information could be shared among a range of lenders, which would massively improve efficiency in the underwriting process. Open banking could make SME lending more efficient from an underwriting perspective, which would make it more attractive to lenders. It could even make lenders more willing to consider opportunities they might otherwise ignore, where they’d have to do all the groundwork without the open banking data.

“Open banking may not directly help with the capital requirements, but it can certainly help with the credit assessment process. It can reduce the heavy lifting involved, making the underwriting process more efficient. This could lower the cost of underwriting a loan, which would eventually bring the price down over time,” he added.

The Data (Use and Access) Bill introduced in October 2024 will also expand open banking into “smart data”, allowing the use of secure data-sharing principles to deliver efficiencies for the public good. The enhanced data will further accelerate lending decisions and provide more tailored repayment terms.

The Bill has passed through the House of Lords, and is now waiting for its third reading in the House of Commons.

The UK government also opened a call for evidence on the SME debt finance landscape on March 13, aiming to understand why demand for debt finance remains low. The strategy will be published later in 2025.