PSD2 and consumer credit: how will open banking impact the market for unsecured loans?

15 months after open banking launched in the UK, consumer understanding of what it means remains low. In January this year, research revealed that just 9% of British adults had used open banking services, and less than a quarter (22%) had even heard of it.

In fact, this is only part of the picture. Just because consumers do not recognise the terms ‘PSD2’ or ‘open banking’, does not mean they aren’t interested in their practical applications.

During research conducted in Q4 2018 for Equiniti Credit Services’ annual report into consumer attitudes to credit, for example, 70% of respondents said a service that allowed their bank to provide personal data for a loan application would be preferable to filling out the forms themselves. Such a service is only possible through open banking APIs.

Furthermore, 64% of survey respondents stated that if they knew they were going to be overdrawn, they would accept a loan at a lower rate instead. Before open banking, this would have required a significant time investment from both the consumer and financial institution – time principally spent filling out forms. As the difference in interest rate is usually just a few percentage points, the time required has outweighed the benefit to both parties.

Now, though, through the open APIs mandated by open banking legislation, a lender can take a broader view. Credit providers can make a low-friction loan facility available automatically to the customers that have consented to share their data before they go overdrawn – even when a previously agreed bank balance is reached.

Ultimately, open banking will impact the market for unsecured credit through customer-centricity, via the provision of value-added services like those explored above. Consumers have already experienced this in many other sectors (Uber, Netflix…) and now expect the same from financial services. Open banking enables this.

With opportunity, though, comes challenge. The data contained within Equiniti Credit Service’s research report, “A three part harmony: how regulation, data and CX are evolving consumer attitudes to credit”,shows that consumers are warming up to data sharing – but there is still reluctance, not to mention data protection legislation, to contend with.

This means that lenders must strike the right balance, and do so efficiently and cost-effectively. The latter will be vital, as the necessary investments in skills, compliance and systems soon adds up, strengthening the case for outsourced specialists with market-wide expertise.

These changes are just the beginning. PSD2 has fired the starting gun on the API economy and the effects will eventually be felt across all industries.