By Alex Marsh on Monday 19 July 2021
Open finance has the potential to improve lending decisions, increase financial inclusion and enable better money management, but needs smart regulation and ultimately for consumers to opt-in, writes head of Klarna UK, Alex Marsh.
Enlightened regulation is a wonderful thing. It breaks down monopolies, enhances competition and increases consumer choice. Nowhere is this truer than in finance, an industry that has long favoured the incumbent over the challenger; the interests of the lender over those of the borrower; the haves over the have-nots.
Open finance is a direct challenge to this status quo. Endorsed by governments and regulators, it allows consumers to share their financial data instantly with chosen companies. In doing so, numerous possibilities are created.
For buy now pay later (BNPL), the big opportunity is lending more sustainably and increasing access to low cost credit for those who need it most - made possible by a much better understanding of a consumer’s financial situation. I am encouraged to see the FCA call out good quality credit information as an area of focus in their latest business plan, published today. We agree that consumers should be able to choose to use credit information to make better-informed decisions.
By combining current account data with Credit Reference Agencies' (CRAs) reports, we can build an in-depth, up-to-the-minute profile of an applicant. People who would struggle to tick the boxes on a classic credit score have a way to demonstrate their financial health and gain access to credit. At Klarna, we have been implementing this hybrid approach in Germany, allowing us to take a fresh look at applicants previously refused credit because of their credit score alone. The results are encouraging, and we expect to trial this in the UK soon.
Looking ahead, we are excited by open finance's ability to enable us to build products that help consumers make better choices and manage their money well. This could be showing you whether or not you can afford a purchase or suggesting steps to improve your financial health. We can also use it to design new products that meet the needs of people in more diverse situations. This can enhance access to responsible lending for the financially marginalised.
Having a healthier credit market – with no-cost or low-cost options – benefits everyone. So there’s much to gain from this approach. The challenge is it requires consumers to opt in to share their data. As a result, adoption of open finance is low. People are naturally wary of sharing their personal financial information online and they are either unaware of or don’t understand the benefits.
We have to build trust to address this. That takes time, communication and education. As providers of financial products, we have an important role to play. We have to show people they can trust us with their data, and we have to demonstrate to them the benefits of doing so. Transparency has to be the foundation.
Traditional finance has placed a lot of obstacles on the path to inclusive lending. Complex forms and thickets of fine print surround unexpected charges and surprising interest rates. Few of us have the time and energy to wade through the verbiage about the financial products we use. The result is lack of engagement, poor understanding and, ultimately, poorer financial outcomes for consumers.
To break this pattern, we in the financial industry need to act differently. As the behavioural economist Richard Thaler said: “If you want to encourage someone to do something, make it easy.”
Regulators have an important role to play here. Mandating open finance was the crucial first step. To maintain this positive momentum, we need regulation to be focused on helping financial services providers achieve successful outcomes for consumers – and to put things right if they are going wrong. The key is not to be prescriptive about the steps and small print required. Rather, we need to give firms scope to innovate around their brand and communications, the types of products they create and their sign-up processes, to encourage consumer engagement and adoption.
The biggest change, however, must come from the industry itself. We must learn to talk to consumers on their own terms, about the things they care about. We have to show consumers simply and clearly how open finance can help them manage the cost of a big purchase, get a faster decision, or improve their credit score. This is the way to achieve the engagement necessary for consumers to swing wide the door to open finance.
Having an engaged and receptive audience makes encouraging data sharing and sustainable spending easier.
The aim of regulators and lenders alike should be simple and clear: to help consumers achieve their borrowing goals while becoming skilled and successful money managers. Eradicating debt traps and improving financial inclusion isn’t just good for society – it is good for the finance industry, too. Open finance can be at the heart of this, but the solution is in persuading consumers that it's in their interest to opt-in.
The views and opinions expressed are not necessarily those of AltFi.