Part I — A Case for Real Time Financial Information on Small to Medium Sized Businesses (SMEs)
We live in an organic economy where businesses expand and contract at an ever-increasing rate. Companies like Deliveroo grow to thousands of employees/partners in a matter of two or three years, while other businesses like the 50-year-old Monarch go into liquidation.
The average lifespan of a company listed on the S&P 500 has decreased from over 60 years in the 1960s to just under 20 years today. It’s projected to a staggering 14 years in the next 10 years. Volatility is now a fixture in our economy. Yet very little is known about 99% of businesses and 60%+ of our economy because they are private, and the information on them is not easily accessible or up to date. The need for real-time information on all private companies has never been more urgent and DueDil is going to fill this gap.
We often assume that the “people in charge” have some greater perspective on the economy and have access to much better information than the public does, but sadly this is broadly not the case. It often feels like politicians base much of their economic policy on conjecture and economic ideology not fact, especially with regards to economic policy that affects private businesses. Even banks, that have access to the transactional histories of these businesses, don’t have an understanding of them. No one can see the full picture, and this is scary.
The problem of lack of information on businesses is not going to self-correct, it is actually getting worse, and we need to fix it. The number of public companies in existence has contracted by 50% over the last 20 years. More companies are staying private for longer as well. We should reject the notion that economies are naturally efficient and linear and can therefore be governed by ideology and theory. Economies don’t fit into neat narratives and slogans. Rather, we should embrace the reality that economies are complex ecosystems that can only be fully understood and managed with real-time comprehensive information on the businesses that power them.
In order to correct the problems faced by SMEs as the result of lack of information, Government, Financial Services and Business Services, three of the key enablers of our economy, must first understand that this is a problem and take steps to actively embrace real-time data initiatives such as Open Banking.
Government
The result of a lack of information is fear and uncertainty. Politicians build walls and enact isolationist policies, banks limit lending and businesses take fewer risks. The risks they do take are with known quantities, the largest businesses. This creates a tremendously polarised economy and society. Policies are based on what can be articulated and proven. If we want to make a more inclusive economy and society we need to start by gathering the data on the unknown, the private businesses, the bulk of the economy.
What is not quantified is never valued.
How can we blame these politicians for making decisions that favour larger businesses when nearly all of them don’t have access to up to date information on the rest of the economy? Much of the data that these politicians use can be 18 months old. If you factor in the time that it takes to draft legislation and enact it, much of the economic policy for SMEs is based off what the economy looked like 5 years ago, anecdotal evidence or political ideology. Think of how much money is wasted on activities that are anecdotally impressive but statistically ineffective. If you think that this is exclusive to politicians at a national level, politicians at a local level have an even worse time. You wouldn’t run your business with such blinders, why should we run our economy this way? We must equip our politicians with better tools to understand this nuanced and ever-changing environment.
Financial Services
The inconvenient truth is that while banks have access to a large amount of information on private businesses, this information is siloed and incomplete. No bank has a clear picture of the complex interdependencies of our economies. At best they have a few pieces of the puzzle. Moreover, there hasn’t been much innovation in the way they think about risk. The risk scores they produce are pretty basic. They are based on laggy and oftentimes incorrect information. All of the players in the market use the same bad data and the same models to price risk. In lieu of proper risk scores based on real time data, creative business models are employed to transfer the risk to other assets or distribute them across a number of clients. A bank like Barclays might ask the Director of a business to guarantee the business loan based on their personal assets, whereas an alternative lending platform like Funding Circle will distribute this risk across a number of investors. Both of these solutions hide from the ultimate responsibility of pricing risk on SMEs. There are two technologies that are disrupting Financial Services businesses AI and Blockchain, yet the fundamental limiting factor to doing anything disruptive in financial services is information. The greatest information void is on private companies.
Banks and other financial services organisations need better tools to lend to smaller businesses. While banks and other financial institutions are looking for new ways to deploy their money, operationally it is too expensive to onboard and manage these loans. Banks would still rather take riskier bigger bets in other asset classes, these institutions need the tools to deploy more money efficiently to SMEs, the heart of our economic stability.
Business Services
We need to provide better tools and information to the businesses providing services and advice to private companies. The failure of 80–90% of businesses in the first 10 years, is symptomatic of business services (e.g.accountancy firms) not being able to effectively advise businesses off rich real-time data; and businesses themselves then not being able to measure and take calculated risks (particularly with regards to trade debt/cash flow), based on up to date information.
Volatile economies typically favour big risk takers and those that are agile. While most businesses can’t take big risks like venture backed businesses, they can be agile. Agile businesses are informed businesses, efficient and opportunistic. They don’t just wait for business to come to them, they are proactive about seeking new opportunities. Much of this involves seeking opportunities and doing business with private company counterparties — and this should not be the guessing game it is today.
By also equipping businesses with real-time data and tools to understand the complexity of their business environment (including the interdependencies of their counterparties), organisations can leverage the resulting intelligence to thrive in a volatile landscape.
Summary
Part 1 of this 4-part blog series has hopefully given broad overview of the ramifications of the company data gap and imperative for Governments, Financial Services and Business Services to actively embrace real-time data initiatives such as Open Banking. Part 2 will hone in on lending in particular and unpick the details and true scope of this problem. I would love to hear your thoughts.
@duediler.
#openbanking #psd2 #SMElending #SME
