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Banking

Open banking: the key to accessible and affordable credit

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By Alfredo Motta, CTO, Creditspring

As we move away from the peak of the pandemic, the long-term financial impact is beginning to materialise. In what has been a financially challenging time, many of us have turned to borrowing, with 4.2 million people in the UK borrowing to make ends meet between March to June 2020.

For many, borrowing provides a helpful financial buffer, but there are those who can afford to borrow and yet cannot access mainstream credit due to a lack of borrowing history which makes it harder for lenders to determine whether they can afford to repay a loan. Even if an individual has the means to pay off a loan in time, some people are unfairly forced to accept high-cost, short-term alternatives such as payday lenders, which come with significantly higher debt risks.

Why is this? Traditional lenders currently rely on historic and often outdated borrowing data, which can be up to 60 days out of date. They cannot therefore, always reliably determine whether a borrower is eligible for a loan in real time. As consumers, it’s easy to feel powerless when faced with countless rejections for a loan, however, the technology is out there to help you access the credit you need when you need it, if only you know where to look.

Open banking is one innovation that can provide lenders with a more accurate picture of a prospective borrower’s finances and empower them to lend responsibly to more people. But how does it work exactly and how can it help you?

How does open banking help?

With someone’s permission, open banking connects with their bank and allows lenders to access their transactional data to better assess whether someone can afford to repay a loan, including those who can’t ordinarily prove their credit history. By providing an up-to-date overview of factors such as income and spending, open banking results in faster approvals and in turn, better options for the customer.

In an emerging concept known as open finance, a wider range of financial data, from mortgages to pensions, is securely shared with trusted third parties so that different financial institutions can offer personalised products and services that fit your personal needs. This ranges from advice and recommendations on your unique financial situation, to making automatic savings based on what you can afford.

Avoid the dangers of high-cost credit

Faced with few other options, many who are rejected for a loan turn to alternatives such as payday lenders, to source funds. While more accessible, these options come with higher risk – namely debt spirals, high-interest rates – and are frequently underpinned by pushy marketing techniques encouraging borrowers to take out more than they can afford.

As borrowers, it’s important to be savvy and avoid the trappings of high-cost lenders even when faced with rejection from traditional lenders.

Open banking equips lenders with a more detailed understanding of a person’s ability to afford a loan and improves the odds of credit acceptance among those who lack borrowing history, whether due to frequent moves or infrequent credit use, but who have the financial means to repay a loan. This means that instead of having to turn to higher cost lenders, you could have more options if you are willing to share your data in this way.

Trust will pave the way to further financial opportunity

To unlock the limitless opportunities of these technologies, customers need to trust that their data will be safe but some people are still unsure. Luckily there is regulation in place to protect people’s information. This regulation requires additional security requirements to protect your data, for example by requiring two pieces of evidence to prove that you are who you say you are. Under this regulation, you – the customer – are the owner of your data and can decide who may access your banking information. This access is granted for a sole and specific purpose and a person can withdraw their consent whenever they wish to do so. At Creditspring, we also use open banking to prove someone’s identity before they’re able to sign a contract with us, to maintain high levels of security.

From delivering new insights that can help you to manage your money, to giving way to new, innovative products, sharing data in this way can vastly improve your financial health.

Delivering valuable solutions to all

As more people in the UK turn to borrowing post-pandemic, many will likely be forced to resort to high-cost credit due to lenders not being able to access reliable information on someone’s borrowing history.

The positive thing is that consumers now have choice, and more options to help prove their creditworthiness, ensuring people can access the credit they need and which suits their situation.

Global Banking & Finance Review

 

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