The last decade has seen a huge drive in technological innovation and advancements. From branch only banks to online only banks, it’s hard to ignore the changes that have taken place in banking and financial services. One major development in the financial technology sector is: open banking.
What is open banking?
You can read our short guide to open banking for more detailed information, but essentially, open banking is a platform which banks and financial services organisations can access in order to view your financial data and transactional history. Financial institutions can only view this data with your consent, but it can help them to offer appropriate products and services to suit your financial circumstances and needs.
How is open banking used in payday loan applications?
There are two main elements to a lender’s assessment of your loan application:
- Affordability checks
- Creditworthiness checks
Most lenders are constantly trying to improve their loan assessment algorithms to ensure they make responsible lending decisions and keep the application process simple and easy for the customer. You’re probably already aware of some of the checks lenders do. For example, a hard search on your credit file is part of the creditworthiness checks that lenders conduct. The income and expenditure section of your loan application forms part of the affordability assessment.
The way open banking is used is fairly simple from the customer end: you will usually be redirected to an alternative credit reference agency which will ask you to log in to your online banking. After a few seconds or occasionally minutes, you will be directed back to the lender’s website to proceed with the application.
Neither the lender nor the third party site will have access to your login information, so your bank security remains intact. The open banking platform means your data is accessed securely and only by authorised and regulated firms. The third party site will run its software on the last few months of bank statements and present the findings to the lender. Usually, the whole process takes a few minutes and requires minimal effort from the customer, making it an effective and efficient way for a lender to verify your key financial information. Additionally, it also acts as a fraud prevention measure.
How does open banking improve loan decision accuracy?
There are several checks a lender can do to assess your application. Open banking means the accuracy of some of these checks can be improved. Often, lenders will look at two to three months of bank statements through an authorised credit reference agency and compare the information in the bank statements to the information you entered in your application form. They will look for specific pieces of information such as your income, and then other details will be used to create a general picture of your finances. Each lender will have different criteria and scoring systems, but generally they will want to know that you are a responsible borrower and that the loan will be affordable.
Using this kind of open banking software to verify your key financial information has several advantages:
- The software can categorise transactions (e.g. priority bills, food shopping, transport payments, direct debits etc)
- It has a wide knowledge base for transaction references
- The software can process huge amounts of data in minutes, or even seconds, meaning you’re not left waiting hours or days for a loan decision while your bank statements are manually reviewed
Open banking and the benefits to the customer
Because open banking makes loan applications quicker, more accurate and more consistent, it benefits the customer in more ways than one. The immediate advantages are that you get a loan decision within minutes, but longer term, you are less likely to be approved for loans which are unaffordable. This can help build your financial resilience and use credit products which actually suit your circumstances and financial flexibility. Sometimes the need for cash quickly can cloud a person’s judgement when applying for credit and so having extra verification steps based on real life and real-time data can mitigate the risk to both the lender and the customer of an irresponsible loan.
At cashasap.co.uk, we use an alternative credit reference agency called Credit Kudos to help us assess your application through open banking.
Beyond loan applications, open banking can provide a wealth of financial benefits to its users. The financial market is developing quickly and soon we could see products and services which use open banking to educate people and increase their financial wellness and awareness. New technology can be daunting but often it’s created when there is a demand or an issue which needs resolving. Doing a little bit of research into new services or even how to improve your own financial literacy can go a long way to increasing your financial resilience and may ultimately reduce your need to borrow money.
