Bridging the Gap in Retail Lending: Traditional Lending vs. Open Banking-powered Lending

In the dynamic landscape of the digital era, financial services are undergoing a rapid evolution, significantly altering the way we manage and access our money. This article, with a specific focus on Retail, scrutinizes one area that has witnessed substantial changes - lending. The traditional lending process, marked by endless paperwork and stringent eligibility criteria, is steadily giving way to a more inclusive and efficient approach known as open banking lending. We delve into the key differences between these two lending methodologies and spotlight how open banking lending is revolutionizing the financial environment. However, our exploration doesn't stop here. In the coming articles, we will extend our focus beyond Retail to dissect the transformations in SME and Corporate Lending. Keep your curiosity piqued, as we take you on this insightful journey of discovery, demystifying the future of financial services.

Traditional Lending: The Old Guard

For decades, traditional lending has been the established method for accessing credit. This process typically involves approaching a bank or financial institution, completing lengthy application forms, providing extensive documentation, and waiting for a decision. The evaluation process is often subjective, relying heavily on credit scores and historical data, which may exclude individuals with limited credit history or unconventional financial circumstances.

Challenges with Traditional Lending:

1. Limited Accessibility: Traditional lending often favours those with well-established credit histories, making it challenging for newcomers or individuals with less-than-perfect credit scores to secure loans.

2. Slow and Time-Consuming: The paperwork-heavy nature of traditional lending can be a time-consuming process, requiring multiple visits to the bank, waiting for manual reviews, and enduring lengthy approval periods.

3. Lack of Transparency: Traditional lending can be shrouded in opaque practices, making it difficult for borrowers to fully understand the terms, fees, and interest rates associated with their loans.

Open Banking Lending: A New Paradigm

Open banking lending is a modern, technology-driven approach that leverages financial data sharing through secure application programming interfaces (APIs) to assess a borrower's creditworthiness. This innovative method allows lenders to access real-time financial information directly from a customer's bank accounts, credit cards, and other financial sources, providing a more holistic view of their financial health.

Benefits of Open Banking Lending:

- Enhanced Accessibility: Open banking lending promotes financial inclusion by considering a broader range of data points beyond traditional credit scores. This allows lenders to evaluate borrowers based on their current financial situation, rather than solely relying on historical data.

- Streamlined Application Process: With open banking lending, the application process is digital and streamlined. Customers can often apply for loans online or through mobile apps, eliminating the need for extensive paperwork and enabling quick decision-making.

- Personalized Loan Offers: By leveraging real-time financial data, open banking lending enables lenders to tailor loan offers based on a borrower's specific circumstances, such as income, expenses, and cash flow. This personalized approach increases the chances of receiving loan offers that match individual needs.

- Greater Transparency: Open banking lending promotes transparency by providing borrowers with clear and comprehensive information about interest rates, fees, and terms upfront. This empowers borrowers to make informed decisions and understand the implications of borrowing.

Here is an example of how traditional lending is boosted by using open banking, and how Fintech Galaxy’s FINX Connect is leveraging it:

The challenge:

Traditionally, to make a credit decision, a lending company needs to analyse multiple financial documents that are usually prepared manually by the customer applying for the loan. Piles of documents are gathered, scanned, printed, and handed to the lender through email or to the office. Afterwards, all this information is processed by the lender, keyed in by hand, transformed into reports, and then finally analysed by the credit team. It takes countless hours for the lender to analyse, align the provided documents and build up a risk file of the potential borrower before making a well-calculated decision. Altogether, it is an exhausting and expensive process for both the lender and the borrower.

The solution:

Open Finance platforms are transforming the traditional credit decision-making process by offering lending companies an instant way of obtaining information about clients and their current financial state. Through this technology, information needed for credit assessment can be aggregated immediately and digitally, thus enabling accurate and quick decisioning. This presents a solution to the typically exhausting and expensive process for both the lender and the borrower.

Let’s analyze the general journey of a lending business utilizing an Open Finance platform to enable Instant Credit Decisioning, leveraging Open Banking for Data Access, and Artificial Intelligence (AI) for credit scoring:

1. Onboarding the Lending Business: The lending business collaborates with the Open Finance platform, expressing their interest in accessing premium APIs for AI credit scoring services and accessing customer bank account data. A fully digital KYC and onboarding process is initiated.
2. Partner Integration: Secure integration with the lending business systems allows them to access APIs for AI credit scoring and open banking data. This integration permits the retrieval of customer transaction data and automated credit and risk scoring analysis.
3. Customer Consent: Explicit consent from the customer to access their bank account data is obtained, typically through the business's application or platform.
4. Data Retrieval: The platform securely retrieves the customer's transaction data, including income, expenses, savings, and other financial activities, previously authorized by the customer via consent flow.
5. Data Analysis and Credit Scoring: Leveraging AI algorithms and open banking data, the platform's premium API analyzes the customer's transaction data to generate a credit score, considering various factors for an accurate assessment.
6. Credit Score Delivery: The lending business receives the credit score result, providing an evaluation of the customer's creditworthiness based on AI-driven analysis.
7. Risk Assessment and Decision Making: Combining the credit score with internal risk assessment processes, the lending business evaluates the creditworthiness of the customer.
8. Credit Proposal to End User: A credit proposal for the end user is formulated, detailing the loan amount, interest rate, repayment terms, and fees.
9. Proposal to End User: The lending business communicates the credit proposal to the end user, allowing them to make an informed decision regarding the loan offer.

The accuracy and speed provided by such an Open Finance platform allow for innovative lending scenarios, including:

• On-the-Spot Credit: Enabling instant credit approvals to customers.
• Point-of-Sale (POS) Credit for Bill Payment: Facilitating bill payments at the point of sale with credit solutions.
• Instant Loan Decisioning: Reducing time for loan application evaluations.
• Personalized Loan Offers: Providing customized loan options tailored to individual customers.
• Risk Mitigation: Conducting robust risk assessments, identifying potential risks and mitigating defaults or delinquencies.

These advancements revolutionize the lending landscape by enhancing convenience, improving customer experiences, and increasing operational efficiency for both lenders and borrowers. The use of Open Finance platforms holds the potential to transform lending processes, enabling more transparent, rapid, and customer-centric services.