Head of UK, Klarna
Open banking offers an innovative way for lenders to make better decisions about a person’s creditworthiness. That’s a win-win for financial services companies and their customers.
Alex Marsh believes the UK could be on the cusp of a banking revolution. The big high street banks have had it too easy for too long, he says, because their customers have traditionally found it too troublesome to move to other financial services providers. But open banking — and, ultimately, open finance — is going to change all that by freeing up the system, making it more transparent and giving customers more flexibility and choice.
There’s no financial incentive for us to offer our products to customers who we don’t believe will be able to repay us on time and in full.
Marsh, Head of UK at Klarna, a Swedish fintech which provides online buy now pay later (BNPL) services, points out that nearly four million people in the UK are currently using open banking — and in two ways. Firstly, by making open banking payments at online checkouts that send funds directly to merchants or service providers at the click of a button; and, secondly, by utilising a single app for a holistic view of their different bank accounts.
Yet Marsh thinks that there’s another important way for open banking to benefit consumers and financial services companies — and, as a bonus, encourage more people to use it. “One of the areas we are active in — and where we see a very strong future for open banking — is credit underwriting,” he explains. “This works when consumers consent to share their bank account information instantly and securely with other financial services companies.”
Instant visibility of up-to-date customer data is a ‘win-win’
Marsh notes that this type of instant data sharing is good for customers who have limited (or no) credit histories, but still need to demonstrate their financial health before lenders will grant them access to their services.
“Take those usually younger people who don’t have a mortgage or credit cards, haven’t built up credit scores and therefore struggle to get access to lower cost forms of credit,” he says. “They may have good incomes and be responsible spenders; but, without a credit file, they can be unfairly penalised by lenders and pushed into taking out high APR loans and credit cards.” However, with open banking, lenders have immediate visibility of their finances, and are therefore able to make quicker decisions about their credit applications.
This type of instant data sharing is also a boon for companies like Klarna, who have a social duty to lend responsibly. and addresses an important concern identified by the former CEO of the Financial Conduct Authority Chris Woolard, in his review into the unsecured credit market published in February 2021. “Plus, given our credit products are interest and fee free, there’s no financial incentive for us to offer our products to customers who we don’t believe will be able to repay us on time and in full,” says Marsh.
How ‘open banking’ will bloom into broader ‘open finance’
Lenders usually do this by obtaining information about potential borrowers from credit reference agencies (CRAs); although CRA data can be as much as four to six weeks old. On the other hand, open banking offers immediate visibility of an applicant’s financial data in real-time. That’s a game-changer. “Analysing up-to-date financial information allows us to comprehensively assess a person’s suitability for our interest free services, which ultimately saves them money,” says Marsh. “That’s why I think open banking can be amazing.”
Still, he stresses that uptake of open banking (which is mandated by both UK and EU regulators) will only increase when consumers become confident that information is being shared in a secure way. “I believe adoption of open banking will grow when more and more consumers realise the standards and protocols are in place to protect them — and they experience personally or see from people around them the clear benefits it offers.”
Ultimately, Marsh expects open banking to develop into a wider open finance model, if the likes of mortgage providers and pension providers get on board. “Open finance offers much broader consumer benefits,” he says. “That’s because customers will be able to view their entire financial situation — bank accounts, credit, insurance, mortgages, pensions, etc — in one place, and move freely between the best value financial products and providers.”