70 per cent of lenders expected to use open banking within two years

The proportion of lenders using open banking is set to jump from 26 per cent to 70 per cent within two years, a report says.

The report by Credit Kudos, called Lender Insights, look at the use of open banking technology in the lending sector.

One in four lenders,  the report found, currently use open banking, with 44 per cent planning to do within the next two years.

This means 70 per cent are expected to be using open banking within two years while nearly half (47 per cent) of those surveyed think open banking could help their organisation save time and cut the cost of credit decision making in the future.

The report also highlights the significant impact that Covid has had on lenders, showing that eight in ten lenders (78 per cent) lenders changed their rules about who they could lend to in the pandemic.

Nearly half (46 per cent) of these lenders changed their policies because it was too difficult to verify borrowers’ income, for reasons including furlough and redundancies.

Amid million being furloughed and unemployment rates at 5.2 per cent in Q4 2020,  more than a third (36 per cent) of lenders changed their lending rules in order to avoid those deemed higher risk customers during a period of huge uncertainty. 

Overall, 30 per cent of those who changed lending policies during COVID-19 experienced a loss of revenue from new customers.

Freddy Kelly, CEO of Credit Kudos, said “From national budget deficits to individuals’ current accounts, the colossal impact of COVID-19 on the nation’s finances was felt by all.

"In times like these, individuals and businesses look to their financial partners for support, but without up-to-date, accurate information on borrowers’ financial situations, many lenders struggled to continue to lend as they could previously.”

Kelly adds “The seismic shock of the pandemic has forced a period of refocusing among lenders on the need for better sources of data, and greater technology integration to help them leverage newer data to enable better decisioning.

"Open Banking technology is helping lenders to move beyond the limitations of traditional credit data and open the door to better financial behavioural data, all of which creates more rounded assessments, increased acceptances and reduced defaults.”

Stuart Mogg, associate partner, corporate finance, EY, said: “COVID-19 caused a lot of worry across both the consumer and SME lending sectors, and many lenders went into survival mode, increasing credit score cut offs and pulling higher risk product ranges. 

“Thanks to various factors, including government schemes, increased vaccine roll-out, and the return of consumer confidence, both the consumer and SME lending sector have nearly returned to pre-pandemic norms and in some cases have pushed risk beyond these levels. 

“But stability has not lasted long – already we’re seeing further COVID-19 and geopolitical volatility, and it is my view that we should not expect any less of a challenge during 2022 then we did in 2021. 

“Periods of volatility such as this is when Open Banking insights become even more valuable for lenders, going beyond traditional credit bureau data to give a real-time feel of consumer and SME behaviours."

The survey involved Credit Kudos surveying 102 lenders, who have heard of open banking, from October to November 2021.