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Tuesday, 15 May 2018

How Lenders Are Already Using Open Banking




What is Open Banking?

Starting January 13th, the largest UK banks began the process of allowing their customers to request transaction data be shared with third parties. Barclays, HSBC, Lloyds, Bank of Scotland, Halifax, Nationwide, RBS, NatWest, Santander, Danske, AIB, First Trust, and Bank of Ireland have given control of current account transaction data back to customers, who can share this data if and when they see fit. Companies, including lenders, brokers and advisors can request customers share this data by partnering with specially regulated technology providers called AISPs.

The scope of information available through Open Banking covers an individual’s complete online banking transaction history, including every payment made in and out of an account. This detailed, bank-verified information is powerful, but how can businesses use it to benefit customers? This post will explore the way innovative companies are currently capitalising on Open Banking.

Removing Friction in the Credit Process

Using Open Banking data, lenders and brokers can now quickly and more efficiently evaluate loan applications. The transaction history available through Open Banking can be used to perform affordability checks, verify income, increase the number and type of borrowers eligible for loans. Lenders already collecting Open Banking data will have an advantage going forward, as businesses cannot buy historical bank transaction data on which to backtest credit models.

By partnering with FCA-authorised Open Banking service providers (AISPs), lending businesses have already begun incorporating transaction data into applications and risk models. AISPs can embed an Open Banking button or link into a lender's online application, enabling borrowers to instantly share transaction history. Lenders can view insights and reports generated from this data, streamlining income and affordability checks. Some lenders have built custom rules based on banking data, which is particularly useful for increasing lending volume of near-prime and thin-filed borrowers.

Affordability and Income Verification

Rather than having to collect copies of bank statements to verify income, companies can use Open Banking to move this process completely online, speeding up the time between application and acceptance. Some businesses take anywhere from a day to a week to request, receive and evaluate statements from borrowers, which can be cut down to minutes in a simple online Open Banking request. The bank transaction history available includes all payments into an account, and can make it easy to identify income from zero hours contracts and alternative working arrangements. Borrowers can benefit by getting loans approved faster and more efficiently, and from getting products better tailored to their particular financial situation.

The Open Banking specification also includes data that can be used to complete an identity check, directly from a user’s bank. This identity information, combined with an Open Banking-powered income analysis, makes the new technology a powerful tool for KYC/AML processes. Any company that needs to understand sources of wealth or to verify identity can benefit from exploring Open Banking.

Evaluating Near-prime and Thin-Filed Borrowers

The current system of evaluating individuals' creditworthiness has changed very little in the past three decades. The system can disadvantage people with thin credit files or with near-prime credit (25% of all UK adults), as existing methods can make it difficult to differentiate between people who are likely to repay from those who aren’t. Transaction history gathered directly from banks means that lenders now have a verified data source to evaluate borrowers, but difficulty lies in making sense of the large quantity of information generated by a single individual’s account. Thousands of lines of transaction data only make sense in the context of lending when accurately identified, categorised, and evaluated alongside prior repayment data. As this data source is new for most lenders, working with a partner who has been collecting credit outcomes as well as bank statement data is key.

Where can you go from here?

The ability to instantly collect and view insights derived directly from bank transaction data is incredibly powerful, but can be overwhelming for businesses that haven’t had any exposure to this data before. Working with an FCA-authorised AISP partner is key, as they can guide you through the practical applications of capitalising on the Open Banking standard. Lenders currently using Open Banking are already seeing benefits in the speed and number of applications they can process and accept, whilst getting a head start on understanding its implications for credit risk modelling. The future is here, but it's up to forward-thinking businesses to capitalise on it!

https://www.finextra.com/blogposting/15356/how-lenders-are-already-using-open-banking

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