GDPR risks for small and medium-sized businesses in the European Union

What every business needs to know about data protection

The European Union’ s General Data Protection Regulation (GDPR) came into force in 2018 with the aim of creating a uniform set of data protection rules in the European Economic Area. The regulation has fundamentally transformed the way businesses collect, process and store personal data.

One of the most important features of the GDPR is that it applies to all organizations, regardless of size, that process personal data in the European Union or provide products or services to individuals living in the EU. As a result, small and medium-sized enterprises (SMEs) are subject to the same basic obligations as large companies or multinational technology companies.

This is also particularly important for those planning to start a new business or setting up a company in the European Union. When setting up a business, most of the attention is usually focused on tax issues, the legal structure, or the market entry strategy. At the same time, business processes – such as the processing of customer data, marketing communication, employee administration or the operation of online services – that involve the processing of personal data already appear in the initial operational phase. That’s why data protection and GDPR compliance become relevant issues from the start-up of a business.

However, data protection compliance can be particularly challenging for SMEs. Many smaller businesses do not have a separate legal or compliance department, so data protection requirements are often overshadowed in day-to-day business operations. That said, breaching the GDPR can have serious financial, legal, and reputational consequences.

Principles of the GDPR

One of the most important features of the GDPR is that it does not merely contain specific administrative or technical requirements, but creates a principle-oriented data protection system .

This means that businesses need to design their data management processes along these principles throughout the entire life cycle of personal data — from data collection, storage and use to deletion.

Article 5 of the GDPR sets out six principles that apply to all data processing activities.

1. Legality, fairness and transparency

This principle is based on three key elements.

Lawfulness
Personal data may only be processed if there is an appropriate legal basis for the processing. For example:

• Consent of the data subject
• Contract performance
• Fulfilment of a legal obligation
• legitimate interest

One of the most common mistakes businesses make is that they choose the wrong legal basis or do not document it at all.

Fairness

The processing must not be misleading, disproportionate or unexpected for the data subject.
Even lawful data processing can be problematic if the data subject could not reasonably expect it.

Transparency

Stakeholders should be clearly informed that:

• Who Handles Their Data
• the purpose of the data processing
• How long the data is stored
• What rights they have

This is the basis of the privacy notices and privacy policies.

2. Purpose limitation

Personal data may only be collected for specific and legitimate purposes.

This means that the purpose of data processing must be clearly defined before the data is collected.

For example:

✔ Contract fulfillment Customer
✔ relationship management
✔ Invoicing
✔  Marketing communication

Subsequent use of the data is lawful only if it is compatible with the original purpose of processing.

“It may be good later” type of data collection does not comply with this principle.

3. Data Minimization

One of the most important practical principles of the GDPR is data minimization.

Businesses can only process data that:

• Relevant
• Necessary
• are proportionate to the purpose of the data processing

A typical problem is when an online form asks for an unreasonable amount of data.

For example:

• Date of birth
• Address
• Phone number

even when they are not necessary for the provision of the service. The more data an organization handles, the greater the data protection risk.

4. Accuracy

The GDPR requires that personal data must be accurate and up-to-date.

This is especially important in cases where decisions are made based on the data, such as:

• Customer Rating
• Billing
• HR processes
• Contractual relations

Handling inaccurate data can also lead to breaches and business problems.

Therefore, organisations should ensure that:

• the data can be updated
• Incorrect data can be corrected
• data subjects should be able to request the rectification of data

5. Limited storage

Personal data cannot be stored indefinitely.

The data may only be kept for as long as it is required for the purpose of the processing.

In practice, therefore, a retention period must be defined for each data processing.

For example:

• accounting documents
• Employee data
• Marketing databases
• Customer contact data

If the purpose of the processing ceases to exist, the data must be erased or anonymised.

6. Integrity and confidentiality

This principle prescribes the security of personal data  .

Organizations must apply appropriate technical and organizational measures to protect data.

Such measures include:

• Manage access rights
• Encryption
• Regular backups
• Two-factor authentication
• Incident management procedures

It is important to note that data security is not just an IT issue.

Employee data management practices, training and internal policies also play a key role in data protection.

Why are these principles important?

The principles of the GDPR form the basis of the entire system  of data protection compliance.

These determine, among other things:

• the content of the privacy notices
• internal privacy policies
• data retention periods
• data security measures
• the way in which data subjects’ rights are managed

In practice, GDPR compliance is not only a legal issue, but  also an organizational and operational approach.

Businesses that incorporate data protection into their operations not only reduce their legal risks, but also strengthen their customers’ trust and long-term business stability.

What data do businesses process in practice?

For the purposes of the GDPR, the concept of personal data  is extremely broad. This includes not only classic identification data, but also any information that can directly or indirectly identify a natural person.

This may include, for example, your name, address, telephone number or email address, but also personal data may include your IP address, an online user ID, location data, purchase history, customer ID, or even a pattern of behaviour relating to a specific person. In the digital economy, it has become particularly important to recognise that a significant part of the data generated in the online environment is also subject to data protection regulations.

In practice, most businesses process much more personal data than you would expect at first. In many cases, it is not a single data management, but a whole system of interrelated processes that appear in several areas of the company’s operation.

Customer data and business relationships

One of the most typical areas of data management is  the management of customer relationships. A business may collect personal information from the first point of contact, such as when someone asks for a quote, fills out a contact form, inquires over the phone, or sends an email.

Such processing often includes, but is not limited to:

• name
• phone number
• email address
• company contact details
• billing or mailing information
• customer history and communication history

If the company uses a CRM system, in many cases this data is stored in an organized form for a longer period of time. This in itself raises the question of the legal basis, the retention period, access rights and data security.

Contracting, performance and invoicing

Businesses also process a significant amount of personal data in the course of contractual relationships. In order to conclude, perform, invoice or administer a contract, it is often necessary to have data that can identify natural persons.

These can be:

• Name
• Address or registered office
• Tax identification data in certain cases
• Bank Account Information
• Contact information
• [Signatures]
• Contractual communication

This is particularly the case for micro and small enterprises where the contracting partner is a natural person, a sole proprietor or a contact person for a company. In addition, the retention of data stored in invoicing and accounting systems may be subject to separate legal obligations, which means that data processing is relevant not only for the GDPR, but also for other areas of law.

Marketing and customer acquisition

Many businesses also process personal data in the course of their marketing activities. In practice, this covers a much wider range than sending newsletters.

This may include, for example:

• Manage subscription lists
• Email databases used for campaigns
• data for remarketing purposes
• Audiences for social media ads
• Profiling based on interests or behaviours
• Details of participants in sweepstakes or promotions

The marketing area is particularly sensitive from a data protection point of view because the issues of consent, transparency, purpose limitation and data transfer often arise at the same time. For example, a newsletter subscription can be based not only on managing an email address, but also on tracking whether the recipient opened the email, clicked on it, what interests it shows, or which campaign it came from.

Websites, Analytics and Cookie Management

A significant number of modern businesses operate through websites, webshops or online platforms, so a digital presence in itself creates a complex data management environment.

The data processed during the operation of the websites may include:

• IP addresses
• Cookie IDs
• Device and browser data
• Location Information
• User behavior patterns
• Login or registration data
• Search and click history

In many cases, this data is processed for analytical, security, marketing or user experience improvement purposes. The problem is that businesses are often not fully aware of what third parties — such as analytics, advertising, or chat providers — have access to this information. For this reason, data processing related to the website is often one of the most complex areas of compliance.

Employee and HR data

Businesses process not only customer data, but also data about their own employees, applicants, and agents. This is a particularly sensitive area from the point of view of the GDPR, because data processing related to the employment relationship usually  involves large amounts of personal data that are detailed and stored for a longer period  of time.

The data processed may include, for example:

• Identity data
• Address and contact details
• Tax and social security data
• Bank account number
• Education and professional experience data
• Attendance and working time data
• Performance reviews
• Leave and sick leave data

In some cases, the processing of sensitive data may even arise, for example in connection with medical aptitude information or documentation of occupational accidents. This requires an even higher level of caution.

Supplier, Partner, and Contact Details

Many businesses forget that contact information for suppliers, contractors, and business partners can also be considered personal information. If a company processes the name, email address, phone number or position of an employee of another company, it may also be subject to the GDPR.

This is especially important where company contact information is stored for a longer period of time, recorded in internal systems, or shared between multiple departments.

 

Why is this a privacy risk?

In the operation of businesses, the processing of personal data affects almost all business functions. That is why data protection is not only a legal issue, but  also an operational, IT, HR and organizational issue.

The more personal data is displayed in the process, the more risks arise, for example:

• Use of an inappropriate legal basis
• Incomplete information
• excessive data collection
• unreasonably long data storage
• Unauthorized access
• inadequate involvement of external service providers
• data breaches or data breaches

In modern business operations, data management is often carried out through automated systems, cloud-based services and the involvement of several external partners. As a result, the protection of personal data can be treated less and less as a purely administrative issue:  it requires an integrated compliance and operational approach.

 

The most common GDPR risks for SMEs

Incomplete data management documentation

One of the most common problems in small and medium-sized businesses is that data management processes are not properly documented.

The GDPR requires businesses to be able to demonstrate compliance. This is the so-called accountability principle.

To do this, you need to have several documents, such as:

• Data processing records
• Privacy Policy
• Internal Privacy Policy
• Incident Management Protocol

The lack of these can pose a serious compliance risk.

Inadequate data security

One of the key requirements of the GDPR is to ensure the security of data.

Businesses  must apply appropriate technical and organizational measures to protect data.

Such measures include:

• Encryption
• Access Management
• Regular backups
• IT audits
• Two-factor authentication

There has been a significant increase in cyberattacks in recent years, and smaller businesses are often particularly vulnerable.

Management of data subject rights

The GDPR has significantly expanded the data protection rights of individuals.

For example, data subjects may request:

• access to their data
• the correction of data
• Deletion of data
• restriction of data processing
• data portability

Businesses should normally respond to these requests within 30 days.

Use of third-party providers

In modern business operations, businesses rely on a number of external service providers.

These can be, for example:

• Cloud Services
• Marketing Platforms
• accounting systems
• HR Systems

If these service providers process personal data,  it is mandatory to enter into a data processing contract  with them according to the GDPR.

Consequences of a GDPR breach

A GDPR breach is not only an administrative shortcoming, but  also carries a serious legal, financial and business risk. One of the aims of the regulation was to make compliance with data protection rules really enforceable, so the legislator introduced a much stricter system of sanctions than the previous European data protection rules.

Based on the GDPR, supervisory authorities — for example, the National Authority for Data Protection and Freedom of Information (NAIH) in Hungary — have a wide range of tools to deal with data protection violations. Authorities may issue warnings, oblige the organization to change its data processing practices, temporarily or permanently restrict data processing, or impose fines.

Financial penalties

One of the most well-known elements of the GDPR is the possibility of significant fines. The decree defines two categories of fines:

• up to €10 million, or 2% of the company’s annual global turnover, for certain less serious infringements
• up to €20 million, or 4% of the company’s annual global turnover, in the case of serious infringements

The higher fine category is typically applicable in cases where the data controller violates the principles of the GDPR, the rights of data subjects, or processes personal data without a legal basis.

It is important to emphasize that the amount of the fine  is determined by the authority on a case-by-case basis. In doing so, they take into account, among other things:

• the severity and duration of the infringement
• the number of persons concerned
• the nature of the data processed
• the cooperation of the organisation with the authority
• the data protection measures applied
• the intentional or negligent nature of the infringement

Although the highest fines mainly affected large companies, authorities also regularly apply fines to smaller companies if the infringement is significant.

Reputational and business consequences

However, the consequences of a GDPR breach are not limited to financial sanctions. A data breach often  involves a reputational risk, which can have a more serious impact on the operation of the business in the long run.

For example, if a company’s customer data is leaked or unauthorized access to a database occurs, it can easily be exposed to the public. Such cases can reduce customer trust, destroy the company’s brand, and lead to the loss of business partners.

This can be especially sensitive in industries where customer trust is key — such as financial services, healthcare, technology services or online commerce.

Operational and legal risks

Data breaches can often have additional operational consequences. For example, a supervisory authority may order the suspension or restriction of a particular data processing process, which may directly affect the business operations of the company.

In addition, data subjects may pursue civil claims. Under the GDPR, persons who have suffered damage from the breach of data processing may claim damages from the data controller or data processor. This is particularly risky if an incident involves a large number of stakeholders, such as a database leak.

Obligation to report incidents

The GDPR also requires that certain data breaches  must be reported by data controllers to the competent supervisory authority within 72 hours. If the incident is likely to pose a high risk to the rights and freedoms of the data subjects, the data subjects must also be informed.

This obligation requires a particularly high level of organizational preparedness, as the handling of a data protection incident requires a short period of time to assess the situation, document the events and take the necessary measures.

Why is prevention important?

The purpose of the GDPR sanctions regime is not only to punish, but also to increase awareness of data protection and encourage responsible data management practices.

It is therefore crucial for businesses to treat data protection not only as a legal obligation, but to make it an integral part of their operations. Proper internal policies, data security measures, employee training, and regular reviews can significantly reduce the risk of breaches and data breaches.

How can GDPR risks be reduced?

Effective GDPR compliance requires several steps.

Key actions include:

• Mapping of data management processes
• preparation of data processing records
• Develop privacy policies
• Implementation of IT security measures
• Employee training
• Review of data processing agreements

The GDPR has fundamentally changed the rules for the processing of personal data in the European Union. While regulation can be challenging for many businesses, data protection risks can be significantly reduced by putting in place the right systems.

It is particularly important for small and medium-sized enterprises that data protection is not only treated as a legal obligation, but as part of business operations.

Transparent data management practices not only facilitate legal compliance, but also contribute to the reliability, stability and long-term competitiveness of businesses  in the European market.