What is CCDS, and what does it mean for the alternative finance sector?

New small business credit data sharing scheme a game-changer for alternative finance?

The potentially ground-breaking Commercial Credit Data Sharing (CCDS) scheme seems to have slipped by somewhat unnoticed this year. Officially launched 1 April 2016, the scheme will require nine major banks to share the credit information that they hold on their SME customers (with the permission of those customers) equally with all finance providers, including challenger banks and alternative lenders.

The mandated banks are: RBS, Lloyds, HSBC, Barclays, Santander, Clydesdale and Yorkshire Banks, Bank of Ireland, Danske Bank and First Trust Bank (Northern Irish subsidiary of Allied Irish Bank). Data will be funneled into the three designated credit reference agencies: Experian, Equifax and Creditsafe. These firms will then see that the data is shared reciprocally among all finance providers.

While officially launched earlier this year, the scheme is not expected to be fully implemented until January 2017. In an interview with AltFi, Equifax’s Nic Beishon said that the implementation of the scheme has taken a significant amount of work for the banks and CRAs to implement. “There’s a lot of work that needs to be done to ensure the data supplied is recorded correctly,” he said.

The new CCDS rules are designed to increase competition in the small business lending space. The government’s hope is that flooding the market with a greater volume of credit data will empower non-bank lenders to reach yet more underserved segments of the small business spectrum.

“Small businesses are the backbone of Britain’s economy and it is right we make every possible source of finance available to them,” said Harriet Baldwin, economic secretary to the Treasury. “The best way to deliver this is to increase competition in the banking sector and remove the barriers to new sources of finance for SMEs. Requiring banks to share data is a major structural reform that will level the playing field between banks and alternative finance providers.”

Once live, CCDS will run alongside the long established voluntary sharing scheme which is administered by SCOR, the standing committee on reciprocity.

In addition to opening up access to a greater volume of data, Beishon explained that CCDS will bring the added benefit of “a standard format in which to share data”.

The scheme is the result of a consultation on increasing access to credit data for small to medium sized enterprises, which concluded December 2014. A report on the outcome of the consultation, entitled “Competition in banking: improving access to SME credit data”, included the following excerpt:

“When assessing the creditworthiness of small businesses with a view to making a loan an important source of information for the lender is a business’ past financial performance. This information is, however, often held by the bank that provides the business’ current account and is not widely shared. Challenger banks and alternative finance providers therefore do not have access to the same level of information as the bank with which the small business already has a relationship.”

Expanding on the kind of data that will be shared under the scheme, Equifax’s Beishon said: “Nine banking groups will provide information on their loan, corporate credit card and current account portfolios, including those of their subsidiaries.” He believes that the information that will filter through to alternative lenders via the scheme will cover in excess of 85 per cent of the small businesses in the UK.

But what will this mean for alternative lenders? Beishon believes that an increased supply of data is likely to bring about more innovation, and to “open up different ways of financing businesses”. He believes it will be a “major benefit” to the UK economy.

Mark Williams, head of business credit and risk at RateSetter, welcomed the new scheme. “SME finance is an area where there has historically been a clear need for more availability of credit data, and if it proves successful, then Commercial Credit Data Sharing (CCDS) will help us make better underwriting decisions and lend to more businesses,” he said. “It’s particularly useful for non-bank lenders such as RateSetter, as it levels the playing field and provides SMEs with a credible alternative source of funding.”

“This has been a long time coming and there’s still more to do, but we’re already working towards reciprocally sharing information with Credit Reference Agencies, and the addition of new fields – such as business bank account and HMRC VAT data – will be helpful for us and will of course benefit creditworthy SMEs.”

RateSetter, which started out as a consumer lending platform, has been expanding its offering in recent times, now lending to a wide range of borrowers, including consumers, small businesses, property developers and other lending businesses. The platform has lent a little over £1.5 billion to date, according to the Liberum AltFi Volume Index UK.

The CCDS scheme is just one among a number of government-backed initiatives designed to support the nation's small businesses. Others include the British Business Bank and the mandatory bank referral scheme, which involves the referral of rejected loan applicants from the banks on to alternative finance providers. The referral scheme officially went live on November 1^st.