In a shaky market for SMEs, there’s an urgent need among lenders to understand borrower performance in real time. One key enabler for succeeding in this environment is access to Open Finance data.

*Originally published in *Nordic Fintech Magazine - Fall Edition (2023) (p.62)

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Across the Nordics, small-and medium-sized businesses (SMEs) are in survival mode. In Sweden, Finland as well as Denmark, bankruptcy rates have recently hit historical peaks.

Lenders targeting the SME segment are faced with challenging waters. Whether it's legacy banks, fintechs or niche players, most lenders are evaluating their books more critically to avoid excess risk. A larger share of financing applications are rejected.

“In good times, lenders are generally keen to expand loan volumes. Now, the priority is to maintain a healthy loan book,” says Leonard Schreij, CEO at Monto, a Stockholm-based credit intelligence company. “That’s to be expected, but the problem is that many healthy businesses are being left out of the market.”

Open Finance holds promise for SME lenders

The economic turmoil brings a renewed focus on the type of information that’s being used in credit processes. Most lenders realise that historical snapshots from annual reports are insufficient to gauge risk, so they are looking for new data sources.

Open Finance, an evolution of Open Banking, enables lenders to access a wide range of information and financial insights to form a more holistic picture of businesses.

“Real-time data sharing between lenders and borrowers is the best way to close the insight chasm in SME lending. Open Finance provides a unique opportunity for lenders to access the data they need to remain competitive. This will also increase the pool of capital available for businesses, especially during downturns,” says Schreij.

As more and more businesses run their operations from cloud-based services, the amount of data sources grows. Data from accounting, invoicing, CRM, social media and other platforms can provide the raw material for smarter lending services.

“Having an up-to-date information flow empowers lenders to optimise their portfolio and key processes such as onboarding. The better lenders can understand how inflation and market demand are affecting a business, for instance, the better equipped they are to identify low-risk, high-quality loans.”

How real-time data from accounting software can improve decisioning:

• Metrics and KPIs. How is a business’ profit margin, cash flow, ROI, developing?
• Outstanding taxes. Are there government-funded tax payments due?
• Other lending. Does the business have active loans with other lenders?
• Accounts payable vs. receivables ratio. Can the business tackle its cash flow shortage by selling or lending against their outstanding invoices?
• Rolling balance sheets and income statements to gauge performance.

Financial APIs an easy way to get started

82 percent of SME businesses in Sweden are open to sharing their real-time accounting data with lenders, in exchange for better pricing or a more seamless service. This signals a bright future for lenders that are keen on exploring Open Finance, at least in markets where data sharing attitudes among businesses are trending in the same direction as those of consumers.

That's where providers of financial APIs come in.

“As a lender, this is an ideal time to start connecting your customer base by working with a specialist data provider. Once you’ve integrated a data API into your process, it’s  also important to design solid incentives to motivate data sharing, and to back that up with clear communication as to how this benefits borrowers”, says Schreij.

“It’s often better to start a local pilot with a provider than to get bogged down in a multi-year transformation project.”

If you're interested in getting your organisation started with Open Finance, don't hesitate to be in touch. Email hello@monto.ai to learn more about our offering.