Open banking credit and lending

While there are numerous use cases of open banking from personal finance to wealth management, credit and lending are getting a lot of attention lately. We’ve seen a lot of buzz around ‘Experian Boost’ and Credit Karma’s Lending Insight Report. Customers are seeing the immediate benefits of sharing their financial data with instant boosts to their credit score.

Undoubtedly, the industry experienced significant change, thanks to digital credit. McKinsey dubbed this the ‘lending revolution’, outlining how digital credit is changing banking from the inside out. In 2018, around 80 per cent of top global banks formed FinTech partnerships; 16 per cent were related to lending. These FinTech partnerships have accelerated credit decisions, improving customer experience. With 40 per cent lower costs and more secure risk profiles, the benefits of the technology are obvious for financial providers.

Almost five years later, we’re seeing open banking transform credit and lending further with the introduction of automated credit risk checks and scores to help consumers understand and improve their scores. Automated credit risk checks have streamlined assessments, helping lenders accelerate their application process, and eliminating the need for paperwork and some back-office processes. Those lenders that have adopted this technology can now offer a loan within minutes.


Consumer financing

We’ve also seen a surge in short-term consumer financing with ‘Buy Now Pay Later’ (BNPL) payment options which allow the customer to make a purchase and pay in the future with little to no interest and zero fees. BNPL options authenticate customers’ data with a simple credit check. Once approved, the provider pays the full purchase amount to the store, sharing a small percentage. This has two benefits. Customers benefit from flexible financing options. The store or retailer does not need to authenticate the customer.

BNPL is most popular among millennials with more than half using this payment option. According to WorldPay, BNPL accounted for 2.1% — or about $97 billion — of that sum. This figure is expected to double to 4.2% by 2024.


How do lenders use open banking?

Open banking helps build an accurate picture of customers’ finances in real-time. There’s so much more to understanding customers’ money habits. Previously, an incomplete or young credit score might affect a loan application adversely. However, with open banking, companies get a more accurate picture for better risk assessment and in real-time.

With open banking, third-party providers can access customers’ financial information securely. In the past, customers would send bank statements. Now, financial data is accessed instantly to make better lending decisions. Customers can access a wider range of products and services tailored to their needs.

Many customers have already experienced some of the benefits of the technology like more savings with money management apps. Bank transaction data helps users understand their spending habits with personalised insights to make the most of their money. Some companies might use financial data to assess a loan application. Whether customers want to consolidate their debt, pay for a wedding, or improve their home, open banking is a tool for lenders to make better, more informed decisions and offer customers a wider and more personalised range of products and services.


How many lenders are using open banking presently?

According to Credit Kudos, the percentage of lenders using open banking is set to increase from 26% to 70% within two years. The survey found that 44% of lenders plan to use open banking in the next two years. COVID-19 significantly changed lending policies; lenders found it difficult to verify borrowers’ income due to furlough and redundancies. Open banking helped lenders know their customers better, verifying different sources of income.

Freddy Kelly, CEO of Credit Kudos, stated, “Open Banking technology is helping lenders to move beyond the limitations of traditional credit data and open the door to better financial behavioural data, all of which creates more rounded assessments, increased acceptances and reduced defaults.”


What can lenders see with open banking?

Lenders can view the following financial data: current accounts, flexible savings accounts, e-money accounts, and credit cards. Once customers give consent, lenders can read account details, including balances and the name of the account. Additionally, they can view regular payment details, which include who customers are paying and any standing orders and/or direct debits.

Financial providers can view transactions, such as incoming and outgoing payments from customers’ banks or building societies. Finally, they may be able to view overdraft payments, fees and rewards, depending on the bank and account. It’s worth noting that customers can also make open banking payments as an alternative to more traditional payment methods, which vastly reduces processing and transaction fees.


What are the other benefits?

By aggregating data from many different accounts, customers benefit from all-in-one views. Bank accounts, credit cards and individual transactions are displayed in one single view for a powerful and compelling money portrait.

A better online payment experience is another benefit of open banking with bank-to-bank payments. Not only do they offer faster, more flexible payment solutions, but they also provide an attractive alternative to card payments and fees.


Ready to explore open banking for credit and lending?

If this has raised a few questions or you would like to explore open banking, then please do get in touch. OPEN by Eliga has the knowledge, product, team and experience to get data and payments working for you.