Unlocking richer affordability insights with open banking: how lenders can improve access to financial services

Tasha Chouhan, UK & IE Banking Director at Tink

The cost of living crisis continues: the end of 2022 saw the average disposable income falling by 11.4% across the UK, 23% more people are raiding their pension pots to make ends meet and credit card borrowing is rising at the fastest rate in 17 years. It’s clear that consumers are bearing the brunt of the economic storm before them – and many are drawing on credit to weather it.

Despite the market uncertainty, the FCA’s call out last year for lenders and insurers to provide solutions for borrowers demonstrates the growing expectation for service providers to play their part and provide fair access to credit for consumers. Indeed, banks have already set aside hundreds of millions of pounds in anticipation of a new wave of loan defaults caused by the rising cost of living and interest rate hikes. 

In what may mean the difference between sink or swim for businesses and consumers alike, it’s clear that assessments of creditworthiness must be held to the most stringent of standards as the acceptable margin of error in lending decision-making diminishes.

Traditional lending models obstructing the way forward

In Tink’s 2022 survey of financial executives we found that the majority (68%) of UK lenders have reinforced their affordability criteria, as consumer confidence dropped to its lowest level since the start of the Covid-19 pandemic. Despite this, the research found that blind spots in credit assessments are leaving many at an increasingly untenable risk of being wrongly denied access to borrowing. 

For example, lenders cite the inability to verify identity or legal status (41%) or an inaccessible payment history (35%), as primary reasons people are denied credit. This is also reflected in consumer sentiment – Tink’s research from 2022 found that a third of UK self-employed workers believe their employment status has been a stumbling block to getting a mortgage or securing credit (33% and 31% respectively). 

What’s more, while lenders recognise the faults with current lending processes, a significant number do not have the tools needed to adopt better affordability assessment models and create fairer lending processes. In fact, our research found that half (50%) of UK lenders are still not using technology to generate a credit score using real-time bank account data, and over a third (35%) aren’t utilising it for assessing expenses and overall affordability.

The issues these blinkered processes create for the industry is two-fold. First of all, there are people who can afford credit that are certainly being left by the wayside due to outdated creditworthiness assessment models. Secondly, the use of backwards looking affordability models is also harmful for lenders; without a holistic view of people’s finances, lenders are putting themselves at risk from a potential new wave of defaults. 

A growing appetite for change

It is in the interest of both consumers, businesses and lenders alike to adopt processes that promote responsible financial inclusion. New data-driven affordability models powered by open banking can transform outdated lending processes, facilitating quicker and more precise credit decisions and providing the right outcome for all parties. In real terms, this could mean underwriting decisions that take hours or even days, can be made in a matter of minutes using real-time bank account data that provides an up-to-date assessment of current income.

Encouragingly, Tink’s findings illustrate a rising demand from lenders to embrace open banking-powered technologies with the power to fix these problems, as 41% of UK lenders plan to adopt digital solutions for data-driven credit scoring. So while blind spots still exist in their credit assessments, the appetite is there and the uncertain economic times presents an opportunity to push for open banking’s further adoption across the industry.

Paving the way to a new model of affordability

Whilst it is a matter of urgency to help consumers and businesses already feeling the effects of the cost of living crisis, a shift to seamless and inclusive lending processes won’t happen overnight. Rather than home-growing the capabilities to implement holistic affordability models, lenders should consider working with nimble fintech partners that can do the heavy lift for them. 

Partners can help lenders unlock real-time data insights, allowing them to make credit decisions that account for payments like housing costs, loan payments, insurance, utilities and transportation. Not only will this help transform user experience and boost financial inclusion, it will also secure providers a competitive advantage.

The current economic environment has made it abundantly clear there remains no place for outdated creditworthiness assessment models. It is of vital importance that there are more accurate and holistic lending decisions –  without it, consumers and businesses are facing a future where many of them won’t be able to survive.