XBRL to flatten information asymmetries in the small business lending market

There is simply nothing more frustrating than trying to communicate with someone when neither of you speak the same language. Having just returned from a holiday in Morocco, I found myself in this exact situation on more than one occasion. Luckily, when English wasn’t an option, my schoolgirl French was often able to bridge the gap between residents of the mainly Moroccan Arabic speaking population and myself.

Native English speakers (like me) who grew up in the Southern Hemisphere are generally lazy about languages in part due to our relative isolation. Unlike our European counterparts for whom multilingualism is almost a necessity for trade, English is really all we will ever need. In fact, despite it not even being the most widely spoken language, as the unofficial international language of business, English has become a common standard by which many of us communicate with each other across borders.

Like English is to business, so too in many ways is XBRL to data. It is the common language many governments and startups now hope will become the standard by which organisations share and translate information between each other. Today, without broad take-up of XBRL, many governments, investors and businesses are currently in the dark when it comes to analysing the mountains of unstructured data thrown at them by financial entities.

For small business finance and banking, XBRL has the potential to not only reduce the need for multiple data entry, but to also allow for greater comparability and portability of financial information. This opens the door to significant productivity savings and reduced financing costs to boot.

In 2010 Australia made inroads into encouraging adoption of XBRL through the launch of its Standard Business Reporting (SBR) initiative. Using SBR enabled software, businesses across Australia can now lodge key government forms (tax returns etc) straight from their accounting software to relevant government agencies. According to a report from the Australian Business Register, at the end of June 2014, over 568,000 reports had been lodged using SBR since its implementation in mid-2010.

Of course extending SBR to include sharing financial data between businesses and financial institutions is a natural next step. There is some hope that Australia will be able to follow the Netherland’s lead, where companies can now provide XBRL formatted financial statements to banks for the purposes of loan applications. Not only has this significantly reduced information asymmetry between the two parties, but is reducing the time it takes to receive a credit decision. ING, one of the frontrunners in this space, has indicated 4 day turnarounds and discounts for XBRL enabled paperless applications.

Unsurprisingly, there is evidence that suggests XBRL can play a role in lowering the cost of lending. After being spearheaded by the National Bank of Belgium back in 2005, today more than 95% of Belgian private firms’ annual accounts are voluntarily filed in XBRL. Research published in the Journal of Accounting and Public Policy in April 2016 has also indicated a correlation between XBRL adopters and lower interest rate spreads. This supports the commonsense notion that lower information processing costs have a downward effect on loan costs.

Tech focussed banks are in a unique position to work with governments and accounting software providers to leverage XBRL formatted data. Of course as information asymmetries dry up, larger, incumbent banks which have used this as leverage against their competitors will need to improve their offering quickly. Imagine as a business owner, being able to instantaneously shop your financials around several institutions without impacting your credit score or requiring a long transaction history with a provider. Banks relying on this being ‘too hard’ as their competitive moat today – which by the way many do – will certainly need to sharpen their product line.

There is nothing more satisfying than being understood. Yet for many small business owners seeking credit, this is still far more difficult than it should be. XBRL has the potential to help both sides of the lending equation communicate with each other better, faster and more fluently.

For the XBRL Week Intro and Index please click here.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech. Jessica Ellerm is a thought leader specializing in Small Business.

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