Why Open Banking holds the key to boosting financial inclusion
The introduction of Open Banking has proved to be a game changer for the financial services sector, creating new and exciting ways for firms to engage with customers.
By enabling customers to securely share their financial data with third-party providers, including banks and lenders, Open Banking has given rise to greater competition, a better customer experience and, importantly, more cost-effective products that are tailored to individual needs.
Lenders now have access to financial data in raw and categorised forms, which they can then analyse instead of static bank statements. Additionally, parts of the data are pre-populated into fact finds and affordability models to fast-track data fulfilment and the underwriting process.
Despite this, many lenders have been slow to fully embrace the new technology, while some consumers feel apprehensive about sharing personal data. However, Open Banking was designed to give customers greater choice and control over their finances and there needs to be much more awareness and education around its benefits to help break down misconceptions and provide reassurance to consumers.
There are already over five million active users of Open Banking in the UK and adoption is accelerating. Recently, a high street lender put out an interesting finding in an Equifax report. It found that given a choice between sharing bank statements via document upload or via Open Banking, 75% of users chose the Open Banking route, and 95% of them completed the consent journey.
A force for inclusion
It’s well known within the mortgage industry that Open Banking technology removes a lot of the heavy lifting in the mortgage search journey. Traditional loan applications are often bogged down by time-consuming processes and limited information, with lenders relying on copies of bank statements to verify income. In contrast, lenders can evaluate an Open Banking application at a much faster rate, allowing them to make not only quicker but more informed credit decisions. In fact, we believe that advisers and underwriters can each save themselves an average of 60 minutes per case when utilising Open Banking. It is not surprisingly then that research has shown that by 2023, seven in ten lenders expect to be using Open Banking.1
But while efficiency and cost savings are undoubtedly important, one of the biggest benefits of Open Banking is the boost it has given to financial inclusion.
The financial services sector has made some great strides when it comes to financial inclusion but there remains a significant gap between “financed” and “underfinanced” individuals. Data by credit reference agency Experian suggests there are 5.8 million people in the UK2 who are invisible to the financial system due to having little or no financial data.
Credit scores have long been the cornerstone of decisions on whether someone is suitable for a loan, and they also determine the quality of credit. For instance, lower scores can often translate to higher interest rates. While credit scores are a helpful way for lenders to see whether a customer has repaid credit in the past, there is a catch. To build up a good credit score, individuals need to borrow money. This can be particularly problematic for people with a limited credit history, such as young people or those who have recently migrated to the UK. Individuals who have recently divorced and whose finances were tied to their ex-spouse and those who may never have wanted or needed a loan or credit card, may also find themselves with a narrow credit history.
Being known as “credit thin” can result in someone being considered high risk, which means they often face rejection or are only offered higher, often unfeasible interest rates, due to no fault of their own.
A broader base of credible borrowers
Open banking has fundamentally changed the landscape for the better. It has allowed lenders to assess customers who don’t meet the typical lending requirements by accessing data from different sources, such as utilities and telecommunication providers. While Open Banking enables lenders to make faster decisions on mortgage applications, the security of a deeper, more up-to-date data set also helps to enrich customer profiles, opening up access to finance to a much wider range of people. Lenders can use this data to create an analytics insights dashboard, that shows income and expenditure trends, risk factors like gambling, as well as credit commitments, painting a more complete financial picture of customers.
The technology can also be transformative for customers with irregular revenue streams, including the self-employed or those who are dependent upon international income. Rather than rely on customer documentation, including three months’ worth of bank statements, Open Banking offers new ways to assess potential borrowers’ income and expenditure, significantly reducing the time it takes lenders to carry out their processes. And with better affordability calculations, lenders can also lend more to certain segments while safely expanding their loan books.
Open Banking: a new era
In short, Open Banking heralds a new era of lending for a sector that has historically been constrained by complex and outdated processes. But while the benefits are clear, the industry is yet to fully harness the technology for financial empowerment and this needs to change.
It’s vital that as an industry, mortgage lenders embrace Open Banking to reach out to a larger section of the population. By integrating Open Banking services, the lending process allows more people to access the credit they need while also helping lenders increase their customer base with more credible borrowers.
In a world where digital transformation and personalisation have become integral to every aspect of our lives, it is critical that the mortgage industry follows suit. Lenders who embrace the merits of Open Banking will be the ones to stand out, while those who are slow to adopt the technology may find themselves left behind.