Open Banking data will revolutionise the lending sector

Credit is nearly as old as human civilisation itself. Moneylenders operated more than 5,000 years ago in ancient Samaria, and the Babylonian Code of Hammurabi saw the world’s first regulator capping interest at 33% and decreeing a debtor could “wash their debt in water” – literally wiping the slate clean.

But lending has been slow to move with the times. The FCA’s credit information market study paints a bleak picture of a sector underserving large sections of society. It calls for a “higher quality of credit information” to ensure consumers and businesses get more accurate lending advice.

The FCA has set out a series of proposals which aim to ensure credit reference agencies (CRAs) improve the standard of data on offer to inform lending decisions, so that people “are not denied credit they could afford or given credit they cannot afford.” Against the backdrop of a tightening cost of living crisis and an unprecedented opening up of financial datasets, we can no longer maintain the illusion that the status quo on access to credit is acceptable.

The good news is there are trailblazing lenders out there demonstrating that fair access to credit doesn’t have to come at the cost of an increased risk appetite, and that a more transparent approach to affordability decisions makes for better outcomes for both lender and borrower.

We gathered those at the forefront of this revolution around the virtual OBE Campfire. The session, expertly hosted by Fintech Finance’s Douglas Mackenzie, delved into the data behind the risk models, access to capital, and the process of educating the stakeholders involved.

Redressing the balance

Lending is a balancing act; a balance of risk where lenders must be mindful of their obligations, which now includes the Consumer Duty. By enabling borrowers to share financial information securely, Open Banking grants lenders the ability to look past thin files, and make smarter decisions based on a real-time picture of affordability, not historical performance.

“In the UK, we have a sophisticated CRA market but the information it provides, while important, really just gives you a bit of a sketch outline,” said Chris Corbett, Product Lead, Plaid. “Open Banking data provides a much more holistic picture, boosting assessments in three key areas.”

“The first is consistency, which is a big issue. For example, if you look at the number of defaults in the last 12 months, only around 20% line up across the three main bureaus. The second is immediacy – operating on a monthly batch isn’t really good enough, and creates a lagging effect when it comes to risk indicators. And thirdly, it addresses accuracy and blind spots thanks to its real-time nature.”

A growing uptake

Our global Open Finance Index found almost a third of those surveyed expect Open Banking to change creditworthiness assessments in their market within a year, and our panellists said they are seeing this trend beginning to play out.

“We’re seeing a number of lenders now actually using Open Banking data to be able to say ‘yes’, and drive forward financial inclusion,” said Emma Steeley, CEO, Freedom Finance.

“The ones that do so are doing it very well. But many are still using the additional data to say ‘no’. This can be frustrating for the consumer, but it’s understandable. Lenders need confidence from a risk perspective that actually it’s ok to say ‘yes’. It takes time to learn to use this data, and then you have to adjust your policies and get comfortable with the fact you can lend to more people without necessarily adjusting your risk appetite.”

Encouragingly, as we seek greater levels of financial inclusion, the panellists noted it’s not just the larger institutions that are deploying Open Banking. “Where Open Banking is used, it does seem to be delivering quite extraordinary value,” explained Daniel Jenkinson, Consumer and SME Lead, Open Banking Ltd. “One study found 70% of community lenders are using Open Banking data. So these will be smaller lenders targeting more marginal communities. Altogether, around 20% of our live-to-market TPPs are active in the credit space, so things are certainly ramping up.”

Overcoming barriers to mainstream adoption

So with more lenders starting to embrace Open Banking data, how can we fully turn the dial and perhaps prompt lending to create Open Banking’s own TFL moment?

One positive catalyst is that we have a progressive regulator helping to drive efforts, but the panel highlighted that these efforts must be supported with customer education.

“The FCA has recognised the value and importance of Open Banking,” said Joanne Owens, Partner, Eversheds Sutherland. “There’s a recognition that Open Banking can provide alternative sources of data to either fill in gaps or provide a better picture of what an individual looks like. But I think there’s also some confusion amongst customers. With APP fraud, for example, the message is to not share your bank details with anyone – so there’s contradictory messaging. We need to balance that and educate people that it’s actually ok to share your data with the right people.”

Our panellists also touched on how AI can be applied to Open Banking data to speed up and automate elements of decisioning, but highlighted how it must be handled with care. “The major concern is whether the decisioning made through AI is non-discriminatory,” added Owens. “AI is learning from the information it’s given, and if there’s any element of bias or discrimination in that information, there’s a risk it can feed through to the decisions made. There has to still be a level of human intervention to ensure no discrimination is taking place.”

There’s work to be done, but it’s an exciting time for the industry as it opens up to the valuable new data available. “I think greater adoption will transform the credit market for customers,” said Steeley. “We see around 8,000 customers a month that are currently denied credit by lenders, but whom we believe actually have strong creditworthiness. When we combine Open Banking datasets with CRA data, the behavioural data we see in applications, and AI, there’s a real opportunity for lenders to be able to open up but without increasing their risk appetite or changing policies.”

So there’s lots to look forward to. The combination of Open Banking, data, and AI has the potential to unlock many benefits for lenders. Let’s make sure we continue to work together to usher in a bright future for lending.