By Oliver Smith on Monday 2 March 2020
Leading lenders ask what Open Finance means for the future of credit.
With the FCA’s call for input on how Open Finance could transform financial services closing next week, AltFi and Experian brought together a roundtable of lending leaders last month to discuss what this next stage of Open Banking could mean for the industry.
Our invited roundtable speakers included:
From the start, most of our lenders agreed that the access to additional financial information through Open Finance—like savings, loans, investments and pensions—would speed up and reduce the friction involved in credit applications and approval.
“For us, it's actually about seamless processes and improving the customer flow, because the alternative would be to send PDFs or CSVs or other files that would take more effort to collect. That's why we were quite keen to build the integration right away and open up new opportunities that will help our small business customers get better and faster deals.”
Elalouf said that over 90 per cent of Iwoca’s SME customers are now eligible to use Open Banking: “but ultimately you rely on the willingness of a borrower to use it. We believe the data we're getting is higher quality and that fraud and default rates will be lower.”
Left: Michael Elalouf, Iwoca. Right: Robert Haslingden, Experian
Conversely, one of the hot topics of debate was whether access to additional data, whether through Open Banking or Open Finance in the future, came with any risks for the industry—and especially whether it would lead to an increase or decrease in the overall volume of lending.
Robert Haslingden, head of digital propositions at credit reference agency Experian, said:
“Lenders are having to come to terms with the best way of optimising the use of bureau-based affordability data such as summarised current account data, and Open Banking which provides greater insight and assurance for verifying a customer’s affordability.”
“Lenders worry is that Open Banking might preclude consumers from getting access to credit. Our experience shows you can optimise the deployment of bureau and Open Banking, and avoid this risk.”
On the flip-side, Paul Schooley, chief commercial officer of business credit provider CashPlus, highlighted that additional data might in fact bring some customers on the edge of affordability back into the fold:
“From an affordability perspective, Open Banking is readily a very good data source to use to address the 20 to 25 per cent of people who are currently dropping out due to affordability rules.”
Left: Paul Schooley, CashPlus. Right: Alan Fitzpatrick, Habito
Furthermore, Andrea Cox strategic business development director of Experian agreed that this could be a boon for borrowers once lenders grew more accustomed to using the data.
“Use of bureau data such as Current Account Turnover is still integral to many lenders particularly lower value credit products where provision of a credit score and ability to verify income are used to underpin a lending decision.”
“Open Banking comes to the fore where a deeper dive on a customer’s affordability is required in relation to the credit product and risk a customer presents. This is particularly true for ‘thin file customers’ or those with poorer credit scores. Open Banking helps reduce the cost of manually reviewing the personal finances of these customers and improves underwriting efficiencies.”
Given the relative newness of the technologies being discussed, Peter Behrens, chief commercial officer of RateSetter pointed out that, like credit scores themselves, Open Finance would need time to develop.
He pointed out that credit scores themselves can diverge over time as populations, and more importantly behaviour, changes, and due to the newness of Open Banking and Open Finance data this could also be the case.
“This is also one of the challenges that Open Banking has, it doesn't just land and you can use it tomorrow to do everything. You've got to use it, learn about it, and it will become important one day I suspect,” Behrens said.
Left: William Rist, Lending Works. Right: Peter Behrens, RateSetter
Another area of development touched on by all attendees was around education and the perceived value exchange with customers. As William Rist, head of partnerships at personal loan provider Lending Works put it:
“It's incredibly difficult to provide a value exchange to the extent that a customer is willing to hand over their information, and especially to do that up-front is really, really difficult.”
“I think we need to find a better way to educate or provide enough value so that customers have bought into this exercise.”
Ultimately most participants concluded that they were “cautiously optimistic” on the broader trend of Open Finance in the lending markets.
Alan Fitzpatrick, director of marketplace operations at Habito, the mortgage broker which recently expanded into its own buy-to-let mortgages, concluded:
“Certainly for us, if anything because we're just starting out, it's going to be an enabler and an enhancement to our service to move into those areas with more surety by knowing our customers even better.”