Open banking is a new software championed by the regulators, allowing loan providers to see the bank transactions of their customers and make a informed lending decision. Whilst revolutionary, there are questions over its security and feasibility, as the experts highlight below
Open banking is an exciting and innovative development in the field of consumer finance. Through open banking technology, lenders can see into the bank statements and transactions of their customers and use this to make informed decisions of whether to offer them a credit card, loan or financial product.
Since January 2021, the FCA and CMA have encouraged personal lenders to use open banking as part of their application and underwriting process.
Content created in partnership with Tudor Lodge Consultant.
The data from open banking can help lenders identify any spending patterns or transactions that could determine if the borrower is potentially high-risk or low-risk.
Certainly, in the case of having multiple gambling transactions can raise warning signs – and this is something that had previously not been accessible or detected in the years and years of processing online loan applications.
In fact, if lenders can analyse the data more effectively, they can score and evaluate customers more accurately and their requirements – so we could be moving towards an era where financial products are more bespoke and tailored.
Whilst still early days, there is a question of the potential value of open banking and whether it is indeed the future of finance. It is currently being used by personal and guarantor lenders in the UK, but it could later be rolled out to other products such as mortgages and credit cards.
Despite its benefits, one of the main issues is that potential applicants and borrowers have to opt in to give lenders access to their bank accounts and this is not always adopted.
Nadeem Siam, founder of lending alternative, Fund Ourselves commented: “Open banking has a lot of advantages and it can certainly be tailored to the customer’s needs.”
“Tailoring to each person’s needs becomes easier with Open Banking, due to the infinity of APIs and better software, everything is simpler. All you need is access to technology. Time spent is reduced and operations are automated. In one place, the Banks have the control over the various services, loans, transfers etc. and therefore, there is greater control under a single admin.
“However, open banking has its drawbacks. There has been a lack of credibility on the part of customers towards Open Banking due to the fear of sharing personal data, and not fully understanding how it works. The fintech option is more appealing where services are diverse and where more and more are emerging worldwide. They are simple, fast and more cost effective.”
“Open Banking allows for a centralized service,” explains David Beard of Lending Expert.
“Banks are able to hold full control over the various services that their customers need, including advice, transfers, financing and loans. The banking data can be accumulated together onto a single dashboard, meaning that banks are able to offer complete solutions to their customer’s financial needs. As such, everything is completed under a clear, single administration.”
Dan Kettle of Pheabs confirms “Open banking is certainly revolutionary when it comes to underwriting loans. Previously, we would run hundreds of automated rules and decisions to determine which customer was best to lend to and although we try to make the best decision possible, these could never be fully verified and you were still taking on some level of risk.”
“But with open banking, we can see now the exact bank transactions that customers have had over the last few weeks and months. In particular, if there is a history of repeat gambling or taking out other high cost loans, these will raise warning flags on our system and we know that we should be more cautious with this kind of client – maybe declining them or charging a higher rate.
Previously, we would have had to have made assumptions about this kind of thing and if we were wrong, the customer would fall into arrears and we would lend to someone and struggle to collect.”
“Open Banking may not always be available,” argues Richard Dent of Finger Finance.
“The applicant will still have to opt in every time to share their data and a lot of cautious customers are not going to want to do this. It also raises concerns over safety and privacy of very personal data. If someone hacks into a lender’s system, they are getting far more data than ever before and with cyber attacks on the rise, this is not as straightforward as it seems.”
Daniel Tannenbaum is the founder of Tudor Lodge Consultants.
