SME lending has spent decades stuck. Information gaps. Manual processes. A constant tug-of-war between risk appetite and commercial opportunity. That era is ending.
Two forces are rewriting how UK lenders assess, approve, and manage SME credit. Open banking is maturing into core credit infrastructure. Regulation is raising the bar on transparency, fairness, and accountability.
The SME market is still largely untapped. The lenders who move on it now will shape the next decade of credit. Those who don’t will be outpaced. By more agile competitors. And, soon enough, by the regulator.
Open banking: from novelty to necessity
When the Competition and Markets Authority mandated open banking in 2018, much of the lending industry treated it as a compliance exercise. Today, it is core credit infrastructure.
The reason is simple. Traditional data is too slow, too backward-looking, and too narrow to price risk for millions of small businesses. Companies House filings. Credit bureau scores. Audited accounts. None of them tell you what a business is doing right now.
A sole trader with 18 months of trading history looks opaque through a conventional credit lens. So does a fast-growing e-commerce business with irregular cash flows. Open banking changes that.
With the borrower’s consent, lenders can use real-time current account data to build a dynamic picture of a business’s financial health. Revenue patterns. Seasonality. Supplier payments. Recurring costs. Cash buffer.
Credit assessment moves from a snapshot to a film. From a single balance-sheet moment to a living view of how a business actually operates.
What this means for lenders in practice
- More accurate risk pricing. Lenders using transaction data are reporting meaningful drops in default rates on SME portfolios. Thin-file borrowers who would once have been declined or overcharged are now being priced correctly.
- Faster decisioning. Automated ingestion of bank-feed data compresses credit decisions from weeks to hours. Higher conversion. Better borrower experience. Less fraud exposure.
- Richer analytics. Lenders can assess in seconds the metrics that used to be missed or hand-calculated. Concentration risk. Peak and trough trading periods. End-of-day cash volatility. The impact of interest-rate or fuel-price shifts on cash flow.
- New customer segments. Open banking unlocks lending to SMEs that traditional models cannot serve profitably: startups, sole traders, and businesses in sectors with volatile income. Businesses trading for under two years rarely make it through conventional underwriting. Audited financials are often unavailable or too expensive to produce, so cash flow becomes the deciding factor. Open banking automates that view in seconds, cutting manual error and fraud exposure.
The FCA’s Open Finance Roadmap, published in April 2026, makes the direction of travel explicit. SME lending has been named the single highest-priority use case for open finance development. Ahead of mortgages. Ahead of investments. Ahead of insurance.
The regulator has already run dedicated SME-finance TechSprints (November 2025 to February 2026), in which firms tested AI-enhanced affordability tools and reusable loan-application data packages on synthetic data. A formal discussion paper on the first open finance scheme is due in Q4 2026. HM Treasury now has the power to introduce new smart data schemes under the Data (Use and Access) Act 2025.
The economic case is substantial. The FCA cites research showing that real-time transaction data alone could deliver up to £570 million a year in benefit to lenders, through reduced unmet demand and more accurate affordability assessment. The combined economic impact of open banking and open finance is estimated at up to £7.4 billion a year within five years.
Open finance is not coming eventually. The regulator is building the architecture for data-driven SME lending today. And inviting lenders to shape it.
Regulation: a tightening framework
If open banking is reshaping what lenders can do, regulation is defining what they must do. And what they cannot.
The FCA’s SME lending focus
The FCA has sharpened its focus on SME lending in recent years. Its review of small-business borrower treatment, informed in part by lessons from the post-pandemic loan schemes, flagged three concerns. Affordability assessment. Transparency of terms. How lenders treat businesses in financial difficulty.
Expect continued scrutiny in three areas:
- Affordability and creditworthiness. Regulators are sceptical of lending models that lean on collateral or personal guarantees in place of robust ability-to-repay assessment. The expectation: more rigorous, documented affordability frameworks. Even for products that currently sit outside FCA jurisdiction.
- Transparency of cost and terms. Standardised disclosure in SME lending is gaining ground. Clearer APR equivalents. Total cost of credit. Lenders offering revenue-based finance, merchant cash advances, and other non-traditional structures should prepare for tighter disclosure requirements.
- Forbearance and collections. How lenders treat SME borrowers in distress is under increasing scrutiny. The expectation is clear: fair, documented processes for early engagement, restructuring options, and avoiding unnecessary harm to viable businesses.
The Growth Guarantee Scheme: a long-term commitment
Regulation defines the boundaries. Government backing shows where policy attention is pointed. The Growth Guarantee Scheme is the clearest signal of that commitment.
Launched in July 2024 as the successor to the Recovery Loan Scheme and administered by the British Business Bank, the GGS gives accredited lenders a 70% government guarantee on eligible SME facilities of up to £2 million. Term loans. Overdrafts. Asset finance. Invoice finance.
What started as a time-limited scheme is now structural. The 2025 Spending Review extended the GGS to March 2030. An additional £500 million of capacity was added in April 2025 in response to global trade pressures. By September 2025, the scheme had supported nearly 17,500 facilities totalling £2.89 billion, with most of that funding reaching businesses outside London and the South-East. UK Finance is lobbying to make the scheme permanent and expand it further. A clear sign of how much the industry values it as a risk-sharing mechanism.
For lenders, the GGS is more than a safety net. It is an accreditation framework, a distribution channel for government-backed capital, and a signal of where policy attention is focused. Lenders who haven’t yet sought accreditation, or who haven’t fully embedded the scheme into their SME product architecture, should treat the extension as a prompt to revisit that decision.
Consumer Duty and SME lending
The Consumer Duty does not, in most cases, apply directly to SME lending. But lenders treating that as a reason for limited engagement should take note. The boundary between the Duty’s spirit and explicit supervisory expectation is narrowing faster than many expected.
The FCA’s Consumer Duty priorities for 2025/26 name fair value and consumer understanding in SME business current accounts as a specific retail-banking focus area. One of only a handful of sector-specific priorities called out by name. The framing targets current accounts directly, but the FCA’s approach to fair value and customer understanding in SME banking has clear implications for the lending products that sit alongside them. How they’re designed. How they’re priced. How they’re explained.
The FCA also consulted in Q4 2025 on updates to its client categorisation rules and SME definitions, with a broader review of core definitions continuing into 2026. The outcome will directly affect which SME borrowers sit within the Duty’s scope. Lenders whose compliance frameworks are built on current definitions should watch it closely.
The direction is clear. Firms serving smaller businesses should be asking three questions. Do our SME products deliver genuine fair value? Is our pricing transparent and defensible? Does the information we give borrowers support good decision-making, or obscure it?
These are no longer just good-governance questions. They are the standard the FCA will apply when it looks.
What forward-looking lenders are doing now
The lenders best positioned for this environment share three habits.
They invest in data infrastructure. The ability to ingest, process, and act on open banking and alternative data is a genuine competitive differentiator. And it goes well beyond technology. It takes analytical talent, model governance frameworks, and a willingness to challenge legacy credit policies.
They build regulatory readiness proactively. Rather than waiting for formal requirements, leading lenders are running gap analyses against emerging expectations, stress-testing their affordability frameworks, and making sure their governance can demonstrate good outcomes clearly.
They treat compliance as a trust asset. SME borrowers have more choice than ever. Challenger banks. Embedded finance providers. Alternative lenders. In that market, trust matters. Reputation matters. Lenders who can credibly demonstrate fair treatment and transparent practices are building a durable advantage.
The opportunity ahead
The UK SME lending market remains significantly underserved. According to the BVA BDRC SME Finance Monitor, only 34% of SMEs planning to apply for new or renewed bank finance are confident their bank will agree. A further 37% can’t predict the response. That leaves the majority of would-be borrowers either expecting rejection or in the dark. Many of them are creditworthy businesses that conventional credit models simply do not see.
Open banking data and a clearer regulatory framework are, together, creating the conditions for a better-functioning market. One where lenders who invest in the right capabilities can reach more borrowers, price risk more accurately, and build sustainable portfolios.
These trends are not coming. They are already here. The only question is who builds the capability today to lead tomorrow.
Atto helps lenders turn real-time transaction data into faster, fairer SME credit decisions. Our next post in this series looks at how that works in practice. What data. What signals. What changes in the credit process. To discuss what it could mean for your SME portfolio, get in touch.
