Revolutionizing Credit Decisions: The Impact of Open Banking Data on Financial Assessments
In the ever-evolving landscape of the UK credit industry, a significant transformation is on the horizon. This transformation is driven by the introduction of Open Banking into mainstream lending, a change that promises to address longstanding issues and bridge the financing gap created by increased regulation of high-cost short-term credit.
The UK credit industry primarily sources information on borrowers from three credit reference agencies (CRAs): Experian, Equifax, and TransUnion. However, data held by these agencies can be weeks or months out of date, and is incomplete due to the lottery of which organizations report to whom. This leaves a substantial portion of the population, seven million UK adults with no credit history, struggling to access mainstream credit.
Against this backdrop, rapidly rising living costs have forced many individuals to turn to illegal or unregulated lending. To address this issue, the British credit industry could develop alternative mainstream loan products with lower interest rates and flexible terms. Leveraging digital platforms for quick, accessible credit approval, these innovations could involve longer-term loans with reasonable rates, instant digital application processes, and partnerships with fintech to reach underserved populations.
The lending equation is constructed from two core factors: how likely is the borrower to pay back, and can the borrower afford to pay back. Open Banking data can offer a materially contrasting perspective on a consumer’s risk level compared to CRA data. By providing a more comprehensive view of an individual's financial circumstances, Open Banking data can help lenders make better and more personalized risk decisions across the credit spectrum.
Hyper-dependence on CRA data as the sole or primary determinant of a lending decision involves accepting fundamental flaws in the approach. Open Banking data can help lenders identify non-paying customers who probably shouldn't have been lent to in the first place, and it can help early adopters of Open Banking data expand their lending appetite into otherwise credit invisible populations at minimal incremental risk.
According to Tim Kelleway, the general manager at D•One, which is part of the ClearScore Group, a sea-change in the world of credit decisioning is imminent. One in three of all ClearScore marketplace viewers already have Open Banking data connected. This data can help lenders increase their portfolio profitability due to reduced credit losses.
However, lenders cannot simply elect to 'loosen up' their lending practices. They face multiple pressures, including shareholders, profit margins, staff, and regulators. Against an increasingly challenging macroeconomic backdrop, striking the right balance between risk and accessibility will be crucial.
In conclusion, the introduction of Open Banking into mainstream lending represents a significant opportunity for the UK credit industry to address longstanding issues, reach underserved populations, and foster a more inclusive and sustainable credit landscape. By embracing this change and leveraging the wealth of data it provides, lenders can make more informed decisions, reduce credit losses, and ultimately contribute to a more financially secure nation.
