Bad data holding back lending to UK’s small businesses, fintech chief warns

High street banks are keen to lend more to small businesses but are being held back by poor data sharing, the head of a government-backed fintech hub has said.

Charlotte Crosswell, a City veteran who chairs the government-backed Centre for Finance, Innovation and Technology (CFIT), told City A.M. that big banks were “still turning down a huge amount of loans and putting them into the alternative finance sector”.

“Data unlocking and sharing is probably going to drive the next phase of financial innovation, and that’s what the rest of the world is looking at as well,” she said.

Crosswell argued that for small and medium-sized enterprises (SMEs), technology called open finance offers banks better information to make lending decisions. The term broadly refers to financial institutions sharing and using data to create new products and improve customer service.

“I feel that if nothing is done, the complexity of our data history for SMEs and consumers is going to get worse,” she added.

“We have to commit to open finance, because there’s a stack of data out there that at the moment is just flying around and not really being utilised at all.”

CFIT was launched in early 2023 on the recommendation of the government-backed Kalifa Review into UK fintech.

It convenes coalitions of experts from big banks, fintech, regulators, academia and more to research specific challenges and help develop “proofs of concept” for new systems.

In April, then City minister Bim Afolami put CFIT in charge of an SME finance taskforce to provide recommendations to the government on how financial data can be safely unlocked to improve SMEs’ access to credit.

Lending to UK SMEs has fallen by 20 per cent in real terms over the last decade, creating an estimated funding gap of more than £22bn.

Politicians and regulators have scrutinised high street banks over claims they have deliberately pulled back from the sector and implemented harsh lending practices. The majority of SME funding now comes from alternative providers.

But Crosswell said the firms involved in CFIT’s first coalition – including established giants HSBC and Lloyds, and digital challengers Revolut and Monzo – shared common goals.

“All of them recognised they want to lend more,” she said. “It’s not just as simple as are banks doing their job or not – it’s that complex data really isn’t being automated at all.”

She added: “What was quite shocking was how many SMEs, when they get turned down by a bank. Something like 50 per cent never bother going to an alternative finance provider… so they do put a lot of trust in the banks.”

Labour has pledged to put small business at the heart of its growth plans. Britain’s 5.5m SMEs employ roughly 60 per cent of the private sector’s workforce and delivers more than half of its turnover.

Asked whether CFIT’s role had changed under the new government, Crosswell noted “great cross-party interest” on its work prior to the general election and that it was “still early days” for Keir Starmer’s administration.

The SME finance taskforce’s first report in August recommended measures including improving the Treasury’s bank referral and commercial credit data sharing schemes, which require large banks to pass on small firms’ details for alternative finance.

“Everyone tells me it doesn’t work,” Croswell said on the referral scheme, designed for SMEs that banks reject. “If it’s not working on the high street for whatever reason, then we should still allow their data that they then hold and the history they’ve got on that SME to be ported with them.”

The taskforce also proposed better verification of details submitted to Companies House, greater access to HMRC data for approved organisations, and developing proposals for an e-invoicing scheme for the UK to align with other countries.

“Cloud accounting software providers can’t take that data and send it off to anyone else, and as soon as anyone did use that, that would probably lead them into financial regulation,” Crosswell said.

She added that artificial intelligence (AI) is poised to play a key role in efforts to improve access to finance. “I think eventually AI is going to transform everything,” Crosswell said.

“If you’re able to profile types of companies, sizes of companies, who they’re invoicing and everything else – and AI’s able to generate the likelihood of that invoice being paid or that SME repaying their loan.”

Still, she warned of potential “bias in the system” that needed to be reviewed closely to prevent unfair outcomes.

In June, CFIT announced a second coalition focused on fighting economic crime through enhanced verification.