Future of Finance Series, episode 3: How the Bank of England envisages portable data and an SME finance platform creating “Open Finance”
One of the nine core themes of the Future of Finance report is “Supporting the data economy through standards and protocols”. A key recommendation for how to achieve this is for the Bank to “support better credit files for SMEs”. We examine the Bank’s response, in particular its eye-catching proposal for a national SME financing platform, and consider some of the regulatory and legal issues.
This is the third instalment in our Future of Finance Series, which looks at Huw van Steenis’ Future of Finance Report, the Bank’s response to it and Mark Carney’s supporting Mansion House speech. All quotes in this post are from these sources.
“New Finance” involves “Open Finance” for SMEs
The key thrust of the FoF report is the need for a “new finance” and a “new Bank” to enable a “new economy”. This vision of “new finance” in a digital economy is of a financial system which is “more efficient, fair and accessible”.
The FoF report develops a theme around the role of “data standards and protocols” in enabling innovation, opening-up markets to boost the efficiency and effectiveness of finance in this new economy and addressing existing challenges such as the £22 billion SME financing gap.
As pointed out by Mark Carney in his speech, this funding gap has arisen because SMEs face a number of barriers in raising finance, including borrowing against intangible assets, a lack of historic data for credit scoring and the burdensome nature of Anti-Money Laundering and Know Your Customer Checks. In the world of Big Data the solution to reducing these barriers lies in better leveraging of customer data.
What is “Open Finance”?
In its response to the FoF’s recommendation to “support better credit files for SMEs”, the Bank develops the theme of data standards and protocols within the concept of “Open Finance”. This essentially envisages the extension of the existing policy of data sharing through open banking – the pro-competition focused requirement for banks to share certain customer data – to much wider data sets.
In examining how Open Finance might be delivered the Bank focuses on two key aspects:
- creating richer customer data sets (capturing data held at utilities companies, search, rating and social media data, and data from public sources, such as the Passport Office, DVLA, HMRC and Companies House) which can be easily shared with a broader array of potential finance providers through portable credit files, Legal Entity Identifiers and API technology; and
- ensuring greater access to finance for small businesses and individuals through a dedicated finance platform for SME financing.
What is the open platform?
A priority area for action
The Bank’s most eye-catching commitment, and one of its 5 priority areas for action, is its proposal to support the development of an “open platform” to deliver better access to finance. It aims to do this by bringing together a global identify standards and safe, secure and permissioned method of sharing information; this open platform could harness novel data sources and advanced analytics to provide SMEs with more choice and better access to productive finance.”
Role of the Bank
Given its role at the heart of the UK payments system the Bank sees itself as the facilitator of change – using its “levers” to promote data standards and improved digital identification. Whilst Mark Carney suggests that "It’s not for the Bank of England to build this platform but we can help lay some of the groundwork” and the Bank suggests it is a job for “Government and business”, it’s not clear who the likeliest candidates will be to construct the “Open Platform” or whether the initiative will be led by industry or government. In terms of data sharing it is also not clear exactly how the significant challenge of “linking public sources” of data could be achieved in practice.
Examples of finance platforms in action
The FoF report points to China as an example of how data and technology can be leveraged by platforms to provide access to finance and also cites specific examples of finance platforms in action, including:
- Ant Financial using an array of data sourced from related social media and marketplace platforms to offer credit to those that have been previously underserved by finance.
- Amazon extending trade credit to businesses selling on its marketplace.
- PayPal is extending credit to online customers at the point of sale.
Regulatory and legal issues
The Bank notes that the policy of open banking “is already beginning to change how the UK financial system uses data” and “has demonstrated the potential for sharing data security around the financial system in a standardised way through an API”. However, the original policy of open banking was championed by the Competition and Markets Authority and mandated by regulation, so it seems reasonable to question whether the open platform will require something similar to be successful? It is perhaps instructive that the examples provided in the FoF report relate to platforms created by single private actors rather than on a broader industry basis.
Irrespective of how the open platform is put together, drawing on our experience of working with finance platforms, we suggest that there will be a range of legal issues to navigate, from the commercial arrangements and ownership structure, to considerations around data-sharing, data-security, competition, regulatory licensing and apportioning liability.