Open banking’s penny-drop moment

This is an excerpt from AltFi’s Alternative Lending State of the Market Report 2021, which is available for free here.

Open banking has long been painted as finance’s fix-all solution to improve everything from payments to mortgage applications. 

Its impact on the lending sector has always been ‘just around the corner’, yet, in the last 12 months, the promise finally appears to be translating into reality. 

LendInvest,Atom Bank,Liberis,Iwoca and Just Cashflow, to name but a few, are all lenders who’ve begun harnessing open banking data in new aspects of their lending processes. 

Prompted by the maturing of open banking and technological improvements, the impact of Covid-19, and the increasingly digital-centric nature of their customers, adoption has reached a penny-drop moment. 

A Penny-Drop Moment

Diane Burridge is the CEO of one such lender, Moneyline. The chief executive was practically corralled into embracing open banking by her 165,000-strong customer base in 2020.

The not-for-profit lender has served low-income families with almost £100m in short-term personal loans over the last 18 years, lending to a cohort that often falls through the cracks of traditional credit bureau data and are often therefore rejected by lenders. 

Instead, Moneyline has long used bank statements to assess affordability, whether in-person through its branch network, over the phone, or online, but as many banks began charging for paper statements or restricting access to them, the team needed an alternative.

“It was getting hard for customers to provide manual bank statements so, for those who wanted an alternative, open banking was easy and free for them,” says Burridge.

Moneyline’s open banking journey began four years ago with ‘screen scraping’ in order to collect the required data, and in 2019 the lender shifted to the more modern and secure API-powered open banking, with the help of data partner LendingMetrics, but still only for a minority of its customers.

Then 2020 hit, with Covid-19 closing down its branch network, and Moneyline’s entire lending process was forced online overnight with 100 per cent of its new customers now using open banking, most for the first time.

In the words of Moneyline’s chief operating officer Shiona Crichton, the transition was compelling, letting Moneyline rapidly increase the number of applicants it could handle, all while helping it to make affordability decisions based on someone’s spending patterns from the past 12 months—an amount of data that would have been impossible to deal with on paper bank statements.

“One of the key things that we look at is we try and understand a customer's current financial traits, the stability of their income over a long period,” says Crichton. “Because a lot of our customers have lumpy income, so you have to be able to look at the averages over a long period to understand if their income is stable.” 

Strengths And Weaknesses

Burridge and Crichton’s experience is a poignant example of the broader trend of lenders harnessing additional data in their processes.

Over the past year, we’ve also seen Atom Bank beginning to offer near real-time lending decisions with the help of additional data, loan marketplace Funding Options signed up 20 of its lenders so it can start sharing open banking data that it collects with them to streamline the application process, and property lender LendInvest is using the information to underwrite an applicant’s financial history in just five minutes.

“We're seeing certain customers use our services to do everything from balance checks to understanding aggregate expenditure in any given month,” says Paiak Vaid, Head of Global Product Partnerships at open banking provider TrueLayer, which works to support lenders like Zopa, Koyo and Iwoca.

“These were typically services that were reserved on behalf of credit reference agencies… I think it's very clear that open banking players can do this in a much better way than then credit reference agencies.” 

Want to keep reading? Find the full feature in AltFi’s Alternative Lending State of the Market Report, out now!