Using open banking data throughout the credit lifecycle
This article has been written in collaboration with Aperidata, transforming credit scoring through the power of open data.
Open Banking is driving innovation, with new products and services coming to the market all the time, particularly from fintechs.
There are already six million consumers using open banking in the UK. Most current applications are focused on providing consumers with more control of their finances in general, however, specialist applications are emerging, with prompts and nudges, often delivered through analytics and decisioning.
While consumers may not necessarily think of themselves as open banking users, there are significant benefits available to consumers, lenders, debt collection agencies and debt management providers through the use of open banking data across the credit lifecycle.
Application processing
The availability of open banking data can improve customer lending decisions by providing a considerably more detailed view of a particular customer to enhance the use of credit bureau and behavioural data, if the consumer is prepared to share their information.
“With open banking, it is far easier for lenders to understand patterns of income and affordability”
The motivation for consumers to do so has shifted with the trend towards the gig economy, multiple jobs and side hustles, where income is increasingly no longer derived from the 9-5. Traditionally, this level of fluctuation or uncertainty would make for more risk averse lending decisions. And for those who haven’t wanted or had the opportunity to use credit, thin files that result in poorer offers. However, with the addition of open banking, it is far easier for lenders to understand patterns of income and affordability automatically.
What’s more, they’re working with the most up to date picture of the consumer possible, given data is near real-time, vs the typical 1-2 months lag of credit reference agency data. Consequently, they can make better, more nuanced offers and decisions while simultaneously improving operational efficiencies in underwriting, ultimately providing more complex cases or products with more immediate decisions. In addition, a richer picture is likely to improve accept rates and consequently revenues.
Credit management
Open banking data can undoubtedly add to credit management processes, such as limit management. But it can also provide early detection of potential repayment issues and therefore the opportunity to intervene sooner, before a customer’s position worsens to the point it is unmanageable. This provides opportunities to restructure debt, provide guidance and be proactive and empathetic to a person’s circumstances.
This could also have a significant impact on bad debt charges in future and is therefore reason enough to consider the use of open banking data in credit management decisions.
Debt recovery
At the point a consumer is no longer meeting their commitments, open banking data is a rich source of information. From understanding the scale of their debt and easy calculation of income and expenditure, to working out softer recommendations such as how to change habits, the opportunity to provide an automatically composed picture and communications that are likely to cut through is ripe for the picking.
“The opportunity to provide highly tailored interaction is substantial and potentially material to success in debt recovery.”
Typically, lenders, debt collection agencies, debt charities and debt managers are not currently in this space. For those considering how or making steps to use open banking, the opportunity to provide app and online based, highly tailored interaction is substantial and potentially material to their success in debt recovery. For lenders, this could mean more success in debt recovery earlier in the process and without the need for third parties. For debt collection agencies and debt managers, those proving their ability to recover debt will undoubtedly have much greater opportunity to win more business.
That’s not to say that human intervention is unnecessary, but that the opportunities to engage are widened and the data supporting the decision about which path a person should take is much richer, with full transparency to both the consumer and the debt counsellor.
Fraud risk management
The benefits of open banking in fraud detection and management at some levels are fairly obvious. The effort involved in creating an entirely fraudulent identity that has a fully operational bank account with clear income deposits and typical expenditure is considerable, though clearly not impossible, compared with today’s identity theft. Similarly, soft or first party fraud is more tricky to commit if the lender can see exactly how much someone is earning and what bills they’re paying. It also reduces the possibility of counterfeit or adjusted documents, for example in providing paper or PDF copies of statements.
Key takeaways
Using open banking data across the credit lifecycle has the potential to enable lenders to:
Improve the customer experience and brand perception
Improve revenues through increasing accepts without increasing risk
Reduce bad charges through earlier interventions
Improve operational efficiencies in underwriting, credit management and out of order account management
Protect against challenger fintech brands
What does the open banking future look like for lenders?
While the current take-up of six million is mooted to plateau, this democratisation of data availability and sharing for consumers is still yet to be fully realised; however, as they begin to see more applications providing significant financial advantages, open banking take up will increase, as will consumers’ demands of how it is used.
Of course, with open banking data there are various challenges to using it that must be met. Including new data infrastructures, analytics and decisioning technology that can handle the markedly increased volume and frequency in data points now available.
“Lenders have the opportunity to use the tools of their trade to better effect more quickly, provided that they see the benefit ”
While many fintechs entering the market are likely to be hacking systems together, traditional lenders have the opportunity to use the tools of their trade to better effect more quickly, provided that they see the benefit of and are able to integrate open banking data into their products and processes. But they must act to ensure they do so, as fintechs move quickly and with increased traction they will open up opportunities to invest in similar technologies.
Not only does open banking data adoption provide the potential to satisfy the likely consumer demand, it allows lenders to enter a new world of more nuanced decisions that cater better for the changes in behaviours and demand for individual treatment. On the flip side, open banking data has undoubtedly opened up the fintech market, meaning more traditional lenders must also adopt open banking data in their credit decisions or risk falling behind.
Ultimately, richer data will mean better decisions, which could mean more approved customers, reduced risk, better management of financial difficulties, improved customer service and an improved ‘know your customer’ position. What’s not to like?