How AI and Open Banking are Powering Lending

Chirag Shah

By Chirag Shah, Founder and CEO Nucleus Commercial Finance

The banking and lending industries have changed almost beyond recognition throughout the last two decades. No longer rooted in bricks and mortar and manual processes, banking has become digitised, with automated systems powering progress. But while the evolution of lending has been very much underway for a while, we’ve now reached a pivotal moment where artificial intelligence (AI) and Open Banking have the potential to be transformative.

The Impact of AI on the lending industry

AI has become an increasingly important tool within the credit industry throughout the last five to ten years. Helping lenders assess borrowers’ risks more accurately, facilitating swift decision-making, enhancing portfolio management, and providing the option for real-time or near-real-time analysis. When paired with speech recognition software, it has enabled all verbal customer contact to not only be recorded but analysed. And it helps to remove the potential for human error in repetitive processes. Producing a system that can improve customer service at the same time as increasing efficiency and empowering employees by relieving them of the burden of drudge work while providing efficient sales enablement prompts, enhancing fraud detection, and improving feedback.

While AI is not without its problems – and the issue of AI bias has been well documented in recent years, with multiple high-profile AI systems having been found to be racists, sexist, or both, something that has the potential to be incredibly damaging within the banking and lending sectors – the tech industry is intent on finding solutions. With explainable AI (XAI), a system that allows the workings of every decision-making process to be examined, the future of AI will have greater stability, securing its role within the banking and lending sectors.

The potential of Open Banking

Open Banking brings different benefits to the lending industry. Devised to democratise banking through enhanced competition and lower banking costs for customers, its role is to make it easier for lenders to make decisions. By providing greater transparency and enabling the secure sharing of data, Open Banking allows all lenders to better assess the creditworthiness of applicants.

Initially rolled out by the UK’s big banking players – HSBC, Barclays, Lloyds – in 2018, Open Banking not only gave customers greater control over their own accounts and data, but created a platform that enabled lenders to view the previous and current behaviours of would-be borrowers. So, when lenders – and other parties, such as financial advisors and brokers – partner with regulated tech providers (AISPs), they are better able to evaluate the risks associated with any given customer. The technology also allows lenders to reach new borrowing markets.

Forming the perfect partnership

While AI and Open Banking appear totally unrelated on the surface level, together they are changing the way the lending industry operates. Because while Open Banking brings to access enormous amounts of customer data and is undoubtedly beneficial, without AI, analysing that data would be incredibly time and resource hungry. When manual processing is involved, each decision is necessarily delayed and the number of credit applications capable of being processed is limited, putting strain on borrowers and reducing the potential profitability of lenders.

Together, Open Banking and AI are powering the contemporary lending system. With AI capable of rapidly analysing any borrower’s defaulting probability and creating individual risk profiles, lenders are empowered to make rapid decisions, quickly identifying low-risk borrowers, enabling the building of a greater customer base and enhanced profitability.

What is the future of AI and Open Banking?

Right now, AI and Open Banking are only being deployed in a small section of the industry. This is going to change. Together, they will influence the way in which both consumer and business banking and lending evolve. Not just bringing innovation in the form of proactive customer advice and process innovation within the credit sector, as suggested in the FLA Future of Credit Report. But supporting greater sustainability, building the future of green finance by reducing waste, and supporting the development of financial regulations and products that pursue a green agenda.

AI and Open Banking have already changed the face of the credit industry, bringing accuracy and speed to a historically cumbersome sector. While there are currently some hurdles still to overcome, widespread adoption must be advantageous to consumers and financial organisations alike.