How open banking can help prevent arrears

July 2, 2024
July 21, 2022

It has become widely recognised that open banking holds the key to unlocking a seamless mortgage journey.

With access to a wider and richer array of data, lenders can develop more informed insights about their customers, therefore speeding up the underwriting process by automating affordability calculations in real-time, using detailed financial data. This significantly reduces the risk of human error and helps to avoid unnecessary rejections.

Open banking is set to explode in the coming months. According to a survey by Credit Kudos, over half (51%) of those that do not yet use the technology say that they intend to do so by 2023. That will take the number of lenders using Open Banking from one in four to seven in 10. If banks can’t keep up and offer the same personalised, efficient services as challengers, they ultimately risk being left behind.

For banks and customers alike, the benefits are limitless. But in light of the pandemic, and the more recent cost-of-living crisis, the need for a granular level of support that the technology can provide has been brought to the forefront.

Indeed, open banking offers a comprehensive way for a bank to support its customers, especially those with more complex financial circumstances. Lenders can capitalise on open banking technology to foresee financial difficulties before they arise, thereby facilitating real-time arrears management of their customer base and reducing any unforeseen costs in the process.

Predicting to protect

Typically, most lenders are unaware of customers who are struggling with their finances until they miss a mortgage payment. Lenders have no visibility of changes to a customer’s income, or new financial commitments which can very easily cause repayment difficulties. Through open banking, this could all change.

Solutions exist which allow lenders to create an analytical insights dashboard using data obtained through open banking. These dashboards can show income and expenditure trends, risk factors like gambling, a full list of credit commitments, as well as automated affordability calculations. This variety of data gives lenders a granular view of their customers’ finances, allowing them to assess what borrowers can reasonably afford to repay towards their arrears, or better yet, enabling lenders to put a plan in place before an arrears situation even arises.

This shift away from ‘arrears management’ to ‘pre-emptive action’ is especially critical in today’s market. Amid the cost-of-living crisis, fuelled by rising interest rates and soaring energy prices, a large proportion of borrowers could be at risk of falling into arrears. According to latest research from The Mortgage Lender, approximately 3.2 million adults in the UK have missed some form of major payments over the last two years, highlighting the extent to which people are wrestling with the economic aftershock of the pandemic as well as the current cost-of-living squeeze.  As such, it is imperative that lenders are well-equipped to support homeowners to repay their mortgages and offer a safety net for people experiencing the knock-on effects of inflationary pressures.

Building trust

Open banking can also support borrowers whose financial circumstances may have changed for the better since they originally took out a loan.

The popularity of applications helping borrowers save within their means, or to navigate interest rates and early redemption charges, demonstrates consumer appetite for technology to assist with personal finances. This also includes using technology to ensure they are making the most of their evolving financial situation.

Using the right technology, lenders and brokers can offer this service to their clients. finova, for example, allows users to invite their clients into a white-labelled client portal to complete data-sharing consents securely and efficiently. Lenders can then analyse the available data in a raw and categorised form, rather than relying on static bank statements.

Using the array of data at their fingertips, lenders using this technology, or similar, can adopt a predictive approach and have informed discussions with their customers to ensure repayment plans suit their needs – both when they take out the loan and now. Helping a customer avoid arrears or supporting someone to pay off their mortgage on a far shorter trajectory, also builds a stronger level of trust between the customer and the bank, resulting in better business prospects further down the line.

Data security

For lenders, the benefits are often obvious. However, there can be scepticism from customers when it comes to sharing an uncapped, granular level of personal information with companies, including concerns about the safety of their data.

Ultimately, it’s important for lenders to reiterate that the power is very much in the hands of the customer. Lenders can invite their customers into a white-labelled, secure client portal, where they can revoke or allow consent at any point. Therefore, data sharing is only ever possible if customers give their mobile and web applications permission to ‘plug into’ their current account, in a secure and standardised way.

If customers do choose to consent, lenders can benefit from having sight of on-going transactional history, and therefore keep abreast of their customer’s credit situation in real-time, supporting customers and building stronger, more profitable relationships at the same time.