How Open Banking data can resolve thin credit files

What happens when over 5 million* UK residents are unable to access mainstream credit?

The issue is more significant than it seems. These 'credit invisible' individuals—ranging from freelancers to those recently arrived in the UK—often have thin credit files that fail to represent their true financial situation. 

This creates a frustrating paradox: potential customers with solid financial foundations but insufficient data to prove it.

This is where Open Banking data comes in. By providing visibility into real-time transaction histories, income patterns, and spending behaviours, it delivers a more comprehensive view of financial health than traditional credit files ever could.

In this blog, we’ll explore how Open Banking data can tackle the thin credit file dilemma, enhance lending strategies, and broaden credit access for those who need it most.

Why traditional credit files fall short

Limited credit history poses a significant challenge: how can you accurately evaluate applicants when traditional credit data is insufficient? Several factors contribute to thin credit files:

• Non-traditional income sources: The growth of gig workers, freelancers, and the self-employed has introduced income patterns that traditional credit scoring models struggle to interpret.

• Limited credit engagement: Many individuals, whether by choice or circumstance, lack a conventional credit history. This includes new market entrants and those who actively avoid using credit products.

• Economic volatility: Market disruptions can lead to temporary gaps in credit profiles, obscuring otherwise stable financial foundations.

The limitations of traditional credit reference agency data only magnify these challenges. Heavily reliant on historical credit activity, these data sources fail to capture a borrower’s real-time financial health, leaving critical gaps in assessment. This creates tangible difficulties for lenders, including:

• Misjudged affordability: Over-reliance on historical credit data leads to both missed opportunities with creditworthy applicants and potential misreading of risks.

• Hidden financial stressors: Key indicators like BNPL usage and subscription commitments often fall outside traditional credit assessments, leaving important aspects of financial health unexplored.

• Unaccounted spending patterns: Regular small expenses, such as subscriptions or frequent overdraft usage, which may indicate a lack of financial buffer, are often missed by static credit reports.

• Lagging financial indicators: Delays in capturing real-time financial changes, such as a sudden job loss or unexpected medical expenses, leave firms making decisions based on outdated information.

This is where Open Banking data truly stands out. It fills the gap, offering a real-time perspective on financial health that traditional credit scores simply can't provide.

How Open Banking data enhances thin credit files

Here's a reality of modern lending: while traditional credit data tells an important historical story, it's only part of the picture. Open Banking data completes this picture – delivering real-time financial insights that traditional assessments simply can't capture.

Here's what makes it particularly powerful:

• Real-time insights: Instead of waiting for traditional credit reports to update, you can see financial health as it stands today – not last month.

• Accurate income verification: Open Banking finally solves a persistent challenge for those with variable incomes: it captures the true stability of irregular earnings that traditional models often misinterpret.

• Detailed spending patterns: From BNPL commitments to spending trends, Open Banking spots the nuanced indicators of financial health that traditional reports miss.

• Proactive risk identification: Spot potential issues before they become problems - whether it's increasing credit reliance or sudden income changes.

• Inclusivity for underserved groups: Rather than excluding capable borrowers due to thin files, Open Banking provides alternative ways to demonstrate creditworthiness.

Let's break down exactly how Open Banking compares to traditional credit data:

By combining historical credit context with Open Banking's real-time insights, you’ll get what you've always needed: a complete view of borrower risk that's both accurate and current.

The result? Fairer, more informed credit decisions while reducing risks and expanding access to underserved demographics.

How banks and other lenders are using Open Banking data

Open Banking data enhances lending decisions throughout the credit lifecycle. Here's how firms are putting it to work:

#1. Assess gig workers and freelancers ��

Firms can evaluate irregular income streams and spending behaviours to assess the financial stability of gig workers and freelancers accurately. Open Banking data reveals patterns that static data often misses, such as consistent income despite variability or prudent financial habits.

#2. Support new-to-credit customers ��

Transaction data provides insights even when credit history doesn't exist. Firms can assess spending patterns and affordability to offer appropriate starter products, from first credit cards to small personal loans.

#3. Manage risk proactively ⏩

Open Banking data allows firms to identify early warning signs, such as increased reliance on BNPL services or overdrafts. By spotting these trends in real-time, firms can intervene before customers face financial distress, offering alternative repayment options or adjusted terms.

#4. Enhance collections strategies ✋

For customers in arrears, transaction data reveals current financial circumstances, enabling more realistic and sustainable repayment plans. This improves both recovery rates and customer relationships.

#5. Strengthen affordability assessments ✅

Open Banking data goes beyond traditional metrics to include recurring expenses like rent, utilities, and subscriptions. This comprehensive view ensures that lending decisions are based on a borrower’s true financial capacity.

#6. Tailor credit offerings 💳

Real-time financial data enables firms to design products that match customer needs, with features like flexible repayment schedules or credit limits based on actual affordability.

To sum up: These applications show how Open Banking data is helping firms make better decisions while expanding credit access responsibly.

So, the question is: Can you afford to work without Open Banking data?

Sources: https://www.experianplc.com/newsroom/press-releases/2022/meet-the-5-million-credit-invisible-brits-still-at-risk-of-exclusion-from-the-financial-system