The grapevine is buzzing. A large proportion of the banks we are working with are planning new systems or applications that will rely on Open Banking data for their credit analysis. Why are they suddenly so interested – and are the rest of our community missing anything?
Open Banking, which enables individuals and businesses to share their banking data with a third party, has been around for a few years. The data is reliable, up-to-the-minute and can be low cost. It has the potential to power a transformation in product design, which should make lenders’ eyes light up as they look to find growth opportunities, improve risk assessments and drive operational efficiency in lending processes. Open Banking is also good for customer identification and product customisation.
Yet even in the European Union and UK, whose Open Banking regulations (PSD2 and Open Banking respectively) came into force in 2018, the data has not been widely used. Only recently has the volume of API Open Banking calls started to be meaningful, rising nearly 100-fold in two years (from 66.8 million in 2018 to almost 5.8 billion in 2020). Australia adopted regulations in 2020, and many other countries are making moves.
The benefits of Open Banking are substantial. Banks using the technology will gain competitive advantage that should translate to greater efficiency, better deals for customers, greater market share and greater profits for shareholders.
Many retail borrowers already share access to their bank account so that their income and employment can be verified in a safe, secure and rapid way. DirectID provides technology to do this, and its CEO and founder, James Varga, was one of the experts at our roundtable.
Also joining us at the roundtable were Ghela Boskovich, Head of Europe for the Financial Data and Technology Association, a not-for-profit representing fintechs operating in Open Banking and Open Finance; Halvor Lande, CEO of Aprila Bank, the Norwegian technology driven lender which has recently partnered with DNB bank to serve SMEs in Norway; and John Brehcist, co-founder of World of Open Account, the receivables finance professional community.
Open Banking offers four key benefits to business lenders.
First, Open Banking is up-to-the-minute. Currently much of the data used for credit decisioning is historic, looking at whether borrowers have paid their bills in the past, what their revenues were the last time a statement was created, and so on. By contrast, Open Banking data shows revenues and costs right up to the time of the application – rather than the situation weeks or months ago – and how spending patterns are changing up to the time of approval. This data can also be used to build business forecasts of profit and loss, cashflow and balance sheet, to better understand the risk of a particular borrower.
Second, Open Banking puts an end to needing to share paper documents such as bank statements. The data is digital, immutable and available on demand, so it can be acquired and analysed almost instantaneously, for fast lending decisions. The process is less effort for everyone, and can support a straight-through processing (STP) application for smaller credits, and sub-24-hour application times for larger business loans. This represents an amazing cost saving relative to many manual processes for analysing bank account information today.
Third, access to more up-to-date data, which is analysed automatically, substantially reduces operational costs for customised loan proposals. This means lenders can expand their target market to include smaller credits without substantially changing the overall risk/return profile. Customers who couldn’t previously get loans may now be able to demonstrate lendable profiles through their bank accounts.
Fourth, Open Banking data can assist cross-sell and up-sell. For example, the data may show that a term loan applicant has a corporate credit card with a competitor, and so the lender might offer their own credit card as part of the term loan offer. Banks can also offer new joint services with third parties such as Doconomy, the Swedish tech company that provides an environmental impact calculator using Open Banking/PSD2 data in partnership with the United Nations.
Find out more - watch the recording of our round-table discussion anytime: Open banking: Paving the way for the future of SME Credit Analytics. Or get in touch and let's chat.