Open banking has transformed the financial services sector and created the opportunity for new innovations that go beyond what was once thought possible for the safe movement of both data and money. By creating a system where third-party providers can store, manage and securely share consumer financial information, it allows for greater competition and a greater emphasis on the customer experience within the financial sector. Although the approach to implementation and regulation differs by region, open banking capabilities are now being utilized in more than 50 countries worldwide, such as the Revised Payment Services Directive (PSD2) in the European Economic Area, the Consumer Data Right (CDR) in Australia, Unified Payments Interface and Banking as a Service (BaaS) in India and Open API Framework in Hong Kong.
One substantial change that can be seen as a result of this shift is the way the lending industry is approaching the lending process. Moving away from traditional operations emerges open banking loans. A new way for lenders to ensure they have the most accurate and up-to-date picture of a customer’s financial profile. By using open banking capabilities in the loan approval process, lenders are able to see a more holistic view of a potential customer’s financial situation, including their risk profile, credit history, spending habits and repayment abilities, all from one secure connection. This empowers lenders to evaluate a customer’s true financial health and create customized loans that allow for a broader range of options and thus, higher acceptance rates.
What does open banking make accessible?
Accessing data through an open banking application programming interface (API) requires customer consent to connect. The information available for lenders to view is limited to what the customer has consented to, but a few common examples of information that can be requested access to are:
Recurring Payments (monthly subscriptions, loan payments, credit payments, etc.)
Even with open banking capabilities, there are still limits in regard to the type of information a lender can request. The scope of the information that lenders are able to request must be relevant to the loan application process. Customers are also able to select which of their accounts to permit access to, including bank accounts like chequing or savings accounts, credit cards, as well as business accounts.
Open banking loans surpass traditional loans by applying the data collected from open banking capabilities, combined with third-party software to create a faster, safer, and more accessible customer experience.
Improve the Underwriting Process with Faster Access to Accurate Information
Open banking loan applications give lenders the ability to connect in real time with customers’ banking information through banking APIs, expediting the underwriting process. Traditionally, collecting bank statements and running affordability checks on customers could take upwards of a week to complete, but through the use of data aggregation through open banking capabilities, these documents can be collected and reviewed in under an hour. These systems can be automated to pull data, run insights and provide relevant, real-time reporting so lenders can have a better picture of a customer’s true and accurate financial health.
Create Personalized Loan Structures Based on Customer’s True Financial Health
When people look for a loan, they are often in unique financial situations. However, many traditional lenders use a “one-size fits all” approach. Open banking is challenging this approach. With the additional financial information provided by data aggregation, lenders can offer tailor-made loans for each borrower, resulting in a better experience for consumers. This will also allow for more consumers in need to be able to access loans, with minimal potential risk to lenders.
Provide Greater Access to Loans for Atypical Applicants
With increased transparency into a potential customer’s financial health, it can help lenders reduce financial risk when dealing with atypical applications for personal loans. For individuals who would fall into the category of near-prime and are on the cusp of bad credit, this level of transparency can help to identify outliers or extenuating circumstances that would account for their low ranking. Lenders could easily identify and approve near-prime lenders who are able to make payment, but would otherwise be turned down with traditional loan underwriting methods.
This same principle could also be applied to applicants who are thin-filed or those who have a very limited credit history and would typically be refused a traditional loan. Through open banking lending, lenders could easily view an applicant’s spending habits, transaction history and view recurring payments to assess repayment abilities based on their current financial standing. Open banking loans could result in greater financial inclusion for otherwise undervalued groups of consumers and create an overall better lending experience for all loan applicants.
Greater Competitive Advantage and Focus on Customer Experience in the Financial Industry
Open banking enables licensed FinTech startups to compete alongside major banks with financial data sharing. Using this information, FinTech’s can offer innovative solutions to customers, driving traditional banks and lenders to innovate to meet these rising expectations. Financial service providers will be both challenged and potentially enhanced through the entrance of many rising FinTech providers and this industry-wide digital transformation. Open banking lending will likely lead to a wide range of lending products that will help mitigate risk and provide more convenient access to capital for consumers who need it.
In summary, open banking loans provide lenders with greater access to financial data which can help them create personalized loan structures for customers and offer more efficient underwriting processes. Lenders can also use this technology to get a more accurate picture of a consumer’s financial health, allowing them to approve atypical applicants who may otherwise have been denied. Open banking is also providing a much needed competitive advantage in the financial industry, creating an overall elevated customer experience for those looking to take out loans.