The first Open Banking revolution: credit checking

We’re eight months into Open Banking and still no one knows what it is.

Of course they don’t. And you could argue they don’t really need to. Precisely the point of Open Banking is to make banking services easier to navigate for consumers, so getting to know what ‘Open Banking’ means is exactly the kind of inconvenience we want to avoid giving people.

Working properly, Open Banking will be a part of the financial services infrastructure that consumers don’t need to know about in order to reap the benefits, like payment rails.

How many people could actually explain what Visa or Mastercard do? I’d bet very few.

So who does need to know about Open Banking and the opportunities therein?

Lending businesses should serve as a major starting point. The first benefit the financial services market as a whole should reap from Open Banking, is a completely reformed credit checking infrastructure.

Open Banking is bringing a full-scale revolution in the art of determining whether an individual is likely to be able to repay credit. In fact, it’s allowing the sector to take a big leap from art to science.

Credit modelling is a data hungry activity. In fact, it’s not just data hungry, it’s data starving. The quality of recommendation and analysis available to lenders is directly correlated with the volume and quality of data available.

And Open Banking is a feast of data.

Where in the past, rules-based credit decisioning has let people down, Open Banking can fill the void.

Take for example a young couple applying for their first mortgage, they both have good salaries but have saved only a small amount towards the required deposit, largely because they have paid high rent costs for the last ten years. They’ve had very little use for credit products because they’ve lived fastidiously within their means. They don’t own a car or borrow for holidays. The only credit they’ve taken out is via a mobile phone contract.

Traditional credit checking systems let this couple down because they don’t have access to sufficient data to properly understand their financial life. Because they haven’t taken out credit products, they simply haven’t generated enough information for a credit checking bureau to give a lender confidence in their ability to repay.

But an open-banking-powered credit checking service would have the data needed. It could see the rent payments going out for 120 months in a row. It could see salary payments coming in consistently. It could see that income consistently outstrips outgoings, and could model the impact of swapping rental payments for mortgage repayments.

With data like this behind credit modelling, lenders could get a far more accurate picture of borrowers’ ability to repay a mortgage.

This impact of this isn’t just binary, with more mortgage applications being approved that were previously rejected, it could change the entire mortgage market. With a greater foresight of credit worthiness, lenders might begin to question why (beyond capital reserves regulation) such large deposits are required when lending out a mortgage.

This in turn could make growing income, rather than savings, the main driver behind people striving towards home ownership.

And that is just one part of the credit checking revolution that could be caused by Open Banking.

There has been some disappointment with the initial impact of Open Banking, with certain industry commentators expecting to see large swathes of consumers handing over their banking data for some as yet unclear benefit. The reality is that, as is often the case with change, we overestimate what will happen in a year, but underestimate what will happen in a decade.

The early adopters of Open Banking are far more likely to be businesses than consumers, and lending businesses have a clear case for leading the way.

Those lenders that move quickly to embrace credit modelling driven by Open Banking data can reap fast and significant benefits by opening up new swathes of customers that were previously locked out of the credit market.

Lenders who fail to utilise the full potential of Open Banking will be disrupted. Competitors who can be more confident of credit repayments can offer better priced credit products, and in a commoditised market like lending, price is king.

The end customer might not need to know what Open Banking is, but financial services companies need to know it inside out, and should already be acting on it.

Read our report on Open Banking to find out more about the potential impact on the financial services industry.

This blog is authored by James Varga, CEO of ID Co in partnership with Deloitte.

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