Open finance: Time to run with it

By Cloe Atkinson on Monday 7 December 2020

OpinionDigital Banking

The best way to accelerate the uptake of open finance – by consumers, banks and other businesses – is to demonstrate its value, writes Mortgage Engine's Cloe Atkinson.

Open finance: Time to run with it
Image source: Pexels

It’s almost three years since the introduction of open banking regulations in the UK, and the Financial Conduct Authority (FCA) is now moving on. In October, the UK regulator closed its Call for Input on “open finance”. Launched in December 2019, it aimed to explore the opportunities and risks of extending the principles of open banking and the use of application programming interfaces (APIs) to a broader range of financial services, including investments, pensions and mortgages. Some might wonder, though, whether we’re trying to run before we can walk. 

After all, it would be easy to make the case that the UK regulator is getting ahead of itself. Many banks were slow to roll out the required infrastructure for open banking. Over a third in the UK missed the March 2019 deadline under the Second Payment Services Directive to enable third-party service providers to test their APIs, for example. Public awareness and uptake, too, was initially slow. 

However, things have improved since. In January, the number of customers using open banking in the UK passed one million. By September it had hit two million. In many cases, though, the scope of open banking is still limited. 

Current accounts, for example, are within the scope of the regulations, so customers can normally access their account information through open banking apps. Credit card and savings accounts are outside the current regulations, though, and in many cases are not available. As such, trying to extend APIs to other areas of finance when it’s still not fully implemented by the banks might seem a little premature. 

That is precisely what we should be doing, however. And fintech businesses need to take the lead. 

Build it, and they will come 

The best way to accelerate the uptake of open finance – by consumers, banks and other businesses – is to demonstrate its value. And in the absence of further regulation, it’s the only way. 

Applications that show how APIs can already enhance services for customers, boost efficiency for businesses and create new products and revenue streams are critical to this. They encourage the development of new APIs and for more companies to get involved. 

Success breeds success.

Even within current constraints, the value of APIs, and the potential for open finance, is already easy to demonstrate. The mortgage sector is a good example. API platforms are showing they can have a significant impact on the application process. Brokers using these can now connect and enter customer details and affordability assessments straight into the platform during the client meeting. 

It then connects directly to lenders’ systems and converts the data to the required format, without having to re-enter the information. 

The result is that brokers can give customers a decision in principle (DIP) almost instantly while saving significant time and scope for errors by eliminating the need to rekey data. Brokers can also apply to multiple lenders simultaneously. 

Under the current regulatory regime, banks have to be persuaded to actively sign up to the platform, but they are doing so. Those signed up to the Mortgage Engine platform already account for about a quarter of the mortgage market, and more will follow next year. 

Future gains 

The development of open finance to enable lenders to connect to individuals’ accounts could build substantially on these benefits. Not only would it see more banks and lenders covered by such platforms, but the use of APIs can be extended well beyond the decision in principle. 

There are at least three areas where open finance could significantly enhance the mortgage application process further: 

  • For affordability assessments, by enabling lenders to draw income and expenditure details directly from applicants’ accounts. Doing so would save customers and brokers significant time spent finding and entering this information and could give lenders increased confidence in their underwriting. 
  • For proof of funds and other requests for bank statements, which currently require certified copies. Drawing down account information using APIs would eliminate the need for this and consequent delays to the process, as well as reducing the potential for fraud. 
  • For anti-money laundering and know your customer compliance. Again, identity checks are mostly still done by certified photocopies – often required for the lender, broker, estate agent and solicitor. Government users such as the Passport Office are already using APIs for real-time identity verification. There’s no reason the mortgage sector could not do the same. 

And it’s not just in the initial application that open finance could significantly enhance the speed, efficiency and security of the process. It could also reduce the hassle of remortgaging and shifting between banks, using APIs to transfer customers’ details and credit score. 

All these applications are already possible using APIs. Of course, legislation requiring the key players to open up their data and make APIs available would accelerate their development and adoption. And perhaps, in time, it will. For now, though, it’s up to fintech pioneers to prove what can be done. We must continue to push the boundaries to make open finance an increasing reality. If we just wait for the revolution, it may never come. 

 

Cloe Atkinson is the managing director of Mortgage Engine. The views and opinions expressed are not necessarily those of AltFi.

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