Written evidence submitted by Everline

[SME0059]

 

Everline welcomes the opportunity to respond to the Treasury Select Committee inquiry into SME lending.  This follows encouraging efforts by the Government to open up the market to more competition and innovation. Our submission seeks to assess the status quo and explore new ways in which to improve and expand access to finance for SMEs. We make the following key recommendations:

 

 

 

 

 

 

Introduction

 

  1. Everline provides a fast, flexible and convenient source of credit to business owners, self-employed sole traders and entrepreneurs looking to expand their business, manage working capital, or fill a cash gap. We use data and distinctive, smart technology that sets us apart from traditional lenders by saving time and money, providing SMEs with an alternative source of funding for their business.

 

  1. We append in your ‘Additional information’ section an overview of Everline to explain in more detail the scope of our product and how it works. Everline is a trading name of WDFC UK Limited.

 

 

Restrictions on access to SME finance

 

  1. Access to SME finance is a more complex issue than the simplified, wider debate about whether ‘SMEs can access credit or not’ often suggests. Every business in search of credit is a unique case whose circumstances and suitability for finance depends upon a number of factors. These include the size of SME (be it two or 50 employees), the nature of the business (ranging from traditional ‘bricks and mortar’ to mobile games and apps), and the type of credit (whether short-term or long-term, secured or unsecured etc.). It is vital that - in helping to shape the future of SME lending - policymakers are able to account for the sheer diversity of credit needs, applicants and providers.

 

  1. Our experience is that there is significant demand for SME credit, but to date the market has been dominated by traditional providers whose products can be rigid and inflexible.  These products may not be adequately tailored to specific SME requirements, in particular short-term cashflow needs which demand some level of control around repayment timeframe and flexibility.

 

 

 

 

Length of process

 

  1. For example, certain banks have targeted cutting the time it takes to provide SME customers with loan funds from two months to one month. In our view, even the shortened period of one month can prove too long for SMEs, threatening the future of a business which is suffering from late receipt of payments from third parties or holding back growth when the business is trying to expand through the purchase and sale of stock in a digital environment. If a customer is approved for an Everline loan after completing our online application (which includes stringent credit checks), funds are received within one business day, and often within 60 minutes.

 

Inflexible terms

 

  1. Some traditional lenders may not lend below a certain minimum term e.g. 12 months, a restriction which may not suit the needs of certain SMEs. This is additionally problematic when the SME is tied into that minimum term even when they can or want to repay the loan early; moreover, if the customer is able to repay early they may incur a fee for doing so [see paragraph 10].

 

  1. Traditional lenders also often have minimum loan thresholds that are high e.g. £10,000 per loanAs a result, SMEs can borrow more than they need (or can afford) and for a longer period than required. With Everline, businesses can apply for £3,000-50,000 (sole traders are currently subject to an upper limit of £10,000) at increments of £500, and from one-52 weeks, to the nearest one week.

 

Account switching

 

  1. Banks may also require the SME to hold a current account with that institution before agreeing to lend to them or as part of the lending terms. The potential need to switch a business’s banking facilities in order to access a loan can be burdensome and makes it harder to shop around for alternative deals.

 

Unclear pricing

 

  1. Lack of transparency in pricing and fees may also act as a restriction for SMEs seeking finance. Lenders sometimes require an applicant to complete the application process before revealing the cost of a loan, whereas Everline shows the full costs upfront in clear pounds and pence before a prospective applicant chooses to apply. If all lenders were to display the cost of their loans in this way, it would enable customers to compare different options more easily.

 

Early repayment charges

 

  1. Furthermore, lenders may charge for early settlement of a loan (including ongoing interest charges for the remainder of the original term if the loan is repaid early), whereas an Everline customer borrowing, for example, over an original term of 16 weeks but repaying after 11 weeks will only be charged interest for the 11 weeks, and with no additional early repayment fee.

 

  1. The key issues outlined above highlight the need for an SME lending marketplace that is open to alternative providers which offer diverse products and flexible terms.

 

 

Overcoming barriers to entry facing alternative providers

 

Access to bank account data

 

  1. In order to lend responsibly to an SME, it is essential that appropriate credit risk and affordability assessments, anti-money laundering (AML) and identity checks are undertaken in accordance with the relevant regulatory requirements.  This is in the interests of both the lender and customer. Access to - and the quality of - data are therefore fundamental to making good commercial decisions.  One of the most valuable data sets is bank statement data, which is a key AML and identity check, as well as providing core elements of any credit risk assessment.

 

  1. In the SME sphere, it is problematic gaining access to bank statement data. The existing processes of manually scanning and sending bank statements are cumbersome, prone to error and fraud risk.  By contrast, in the traditional consumer credit lending sector, various credit reference tools and systems can be used to help businesses validate ownership of bank accounts, but these are not readily available in SME lending. As a result, banks have clear commercial advantage in SME lending due to their access to this data within the existing relationship with the customer

 

  1. Subject to customers having to provide permission, we would welcome a new process of access to bank statement data provided directly from banks / credit reference agencies or third-party service providers in an electronic format.  This measure could significantly increase the ability of customers to shop around and find the best sources of finance for their business. It would also reduce levels of fraud as bank account ownerships would be more securely verified.

 

  1. It is worth briefly noting relevant international developments on this front. The Payment Services Directive 2 (PSD2) encourages business access to similar banking data on customers, while in Australia banks must allow short-term consumer lenders access to bank statements covering the previous 90 days. In the US, meanwhile, many of the banks provide access to approved partners to obtain customer data with the customers permission and without the customer providing any confidential password-related information. 

 

Access to SME credit data

 

  1. Due to the diversity of SMEs in the market, data is a key ingredient to any algorithm-based approach to assessing risk and so we support moves to improve access to SME credit data. The more business data that is available, the better the basis for making responsible lending decisions. We have responded to the HM Treasury consultation on improving access to SME credit data and would be happy to make this detailed assessment available to you.

 

Access to tax data

 

  1. We believe that the Government can go further in providing access to data for the benefit of credit providers and SMEs. For instance, providing accredited businesses and lenders with access to the VAT register or other HMRC tax data represents a significant (commercial and public service) opportunity for Government to drive innovation and competition, and reduce fraud and business loan defaults.

 

  1. HMRC holds banking information related to each business and their associated directors (or partners in the case of partnerships and limited liability partnerships). Allowing this data to be used could be both income-generative for Government and significantly enhance fraud protection for Government, SMEs and lenders alike. While we would recommend that as much relevant HMRC data as possible is shared, a contingency option would be to create a validation service that does not actually provide the data but rather issues positive or negative responses e.g. the lender submits via Application Programming Interface (API) the bank, HMRC submission and business data provided by the business applying for a loan and the Government API provides a match or non-match response. This will additionally have a significant impact on HMRC-related fraud protection as non-match associated accounts could be investigated or earmarked as suspect and monitored.

 

  1. In addition, tax information on a business (which could be obtained only with consent from the SME) would add significant value to help with credit lending decision making.  This should also be considered or factored into data sharing as it is powerful in determining the financial health of the business. Again, access to this information would reduce the risk of default, on account of the improved ability to assess an SME’s creditworthiness, and could potentially allow for more competitive rates in the market as defaults fall and lower funding costs could feasibly be passed onto the SME.

 

Access to Direct Debit scheme

 

  1. SMEs want to engage with products that they understand and that offer them flexibility and control.  Our experience is that they are generally comfortable with the Direct Debit scheme as they have clear visibility to payments made and upcoming scheduled payments.  More specifically, the feedback from SMEs to Everline is that Direct Debit is a preferred method of controlling and settling regular commitments such as loans and utility bills.

 

  1. The Direct Debit set-up process also provides valuable customer verification information to combat fraud and money laundering, principally by ensuring that the same bank account is used to deliver the loan and collect payments.   Currently, banking partners do not supply Direct Debit services to new lending entities (it is available to existing holders with Direct Debit access), and third-party providers are also largely unable to support this sector as they require sponsorship from large bank partners to do so.   This acts as a material product barrier given that customer access to alternatives payments like corporate debit cards is not widespread.

 

  1. In order to foster competition in SME lending, we believe that the banks should make Direct Debit functionality available to new alternative lenders. Everline would welcome further discussion on this matter as we would like to offer this service to our customers.

 

Bank referrals

  1. We welcome the proposed Government consultation on whether to legislate to help SMEs rejected for finance by banks being matched with alternative lenders. However, we would caution against the possibility of alternative lenders being positioned as lenders of last resort that are effectively left to service those applicants unwanted by the banks, since this is far from the case in reality. SMEs should explore the options available to them rather than just their bank, given that new alternative lenders such as Everline may offer a better and more flexible product that might be suited to their requirements.

 

Additional regulation

 

  1. It is important that policymakers, when widening the ‘perimeter of regulation’ around SME lending, are mindful of avoiding unintended consequences which could restrict innovation, competition and ultimately access to finance for SMEs.

 

March 2014