Henk van Hulle
CEO, The Open Banking Implementation Entity (OBIE)
Bank of England figures for December 2022 showed that consumers borrowed £2bn in consumer credit, up £0.5bn from the previous month. As cost of living increases continue to bite, access to affordable credit is more important than ever.
Access to affordable credit presents a challenge for those who don’t meet the legacy scoring criteria used by traditional banks, loan companies and credit reference agencies when they assess borrowing.
Consumers in need of affordable credit
The list of those excluded is extensive:
- Younger people and those from overseas who haven’t been able to build a credit profile
- Seasonal and gig economy workers without a regular income
- Low-income households
- The self-employed
- Older people who haven’t used credit for a while
With many traditional UK lenders having tightened their affordability criteria, the end result can mean some of these individuals are excluded from borrowing altogether or resort to using costly credit cards or overdrafts to pay for everyday essentials.
There’s no doubt that open banking can offer opportunities for people who have, to date, been excluded from cost-effective borrowing.
Accurate data-driven insights
Open banking data can, however, offer a lifeline. Using this data — with individuals’ consent — as part of the assessment process can provide lenders with additional, up-to-date financial insights that can help increase consumers’ chances to receive approval for loans.
Accurately evaluating what consumers can afford to repay helps reduce the risk of debt default and enables lenders to offer loans that address real pain points. For example, short-term microloans can smooth out income based on past and future earnings.
It also avoids the need for borrowers to provide piles of paperwork, speeds up decision-making and, in some cases, can identify erratic spending.
Discounts for sharing data
One specialist lender is even offering customers who decide to share their data a 1% discount on the loan rate, while other organisations offer competitively priced credit to customers who would otherwise be excluded from borrowing completely or denied the best rates and terms.
There are also open banking-enabled loans tailored for employees in specific sectors, such as key workers.
There’s no doubt that open banking can offer opportunities for people who have, to date, been excluded from cost-effective borrowing. As more solutions come to market, we’re looking forward to seeing how open banking technology and propositions can bring further benefits to the financially excluded.