Open Banking set to transform lending sector

Loans Warehouse has teamed up with Credit Kudos to become the latest loans broker to use Open Banking to offer consumers an up-to-date assessment of their financial situation.

Although Open Banking has been around for a number of years, some experts believe that it is now rapidly transforming the lending sector, especially during the current economic uncertainty. Freddy Kelly, CEO of Credit Kudos, explained: “Current credit risk assessments often rely on information that can be 30-90 days out of date and do not paint an accurate picture of a borrower’s financial situation – particularly in a time of uncertainty when people are facing drastic income changes as a result of redundancy, reduced workloads and furlough. As a result, many lenders have significantly reduced or paused lending, concerned that existing risk and affordability assessments can’t identify significant changes in a customer’s financial circumstances which could significantly affect their ability to repay a loan.

“Open Banking is helping lenders overcome these issues. With the customer’s permission, Open Banking allows regulated companies to connect directly to banks and financial institutions to securely access up-to-date, financial transaction data. This data can then be used to build a complete and accurate picture of the customer’s ability to borrow. This way, lenders can continue to lend responsibly, to those who can afford to repay them which is even more important in the current climate.”

Open Banking cannot be done without the consumer’s consent, which means that a lender cannot automatically gain access to a potential borrower’s banking information. Consumers who do agree to Open Banking are permitting the third party to view their banking information, such as their spending habits and regular payments. The third party can only view the information, meaning that money cannot be moved or withdrawn from the accounts.

As with any sharing of information there are potential risks to using Open Banking, but this is mainly the chance of permitting information to be shared with unauthorised companies. As such, before consenting to Open Banking, consumers need to do due diligence to ensure that the third party is a regulated, legitimate and authorised company. One way of doing this is to check the Financial Conduct Authority’s Financial Services Register, although consumers should also be aware that fraudsters can clone official banking websites. Saying this, consumers should remember that Open Banking only allows third parties to view data, however, it is important to remain on guard to ensure sensitive information is only shared with authorised companies for legitimate reasons.

While Open Banking is set to become a more popular way to share financial information, consumers can still opt-out. At the moment, many lenders are still not relying on Open Banking to assess potential borrowers’ affordability, but as the current uncertain economic climate continues, potential borrowers who do not use Open Banking could struggle to borrow money at competitive rates.

In fact, today UK Finance issued a statement proposing the future of Open Banking beyond 2021, which suggests that Open Banking functions are maintained and moved into a service company that is governed by the banking and finance industry. Commenting on the report, Eric Leenders, UK Finance managing director, personal finance, said: “Open Banking is a significant technological and regulatory initiative, which has huge potential for the future. It is vital that the Open Banking service community works together to ensure that the transition from the current roadmap to a more permanent plan is smooth, enabling the UK to maintain its world leading position in Open Banking as it develops.”