By Freddy Kelly, CEO and Co-Founder, Credit Kudos
The Covid-19 pandemic has profoundly impacted the nation’s finances, with millions having to borrow to mitigate the effects of lockdown. But these unprecedented economic circumstances have dramatically altered the lending landscape, making it impossible for lenders to continue business as usual while still relying on traditional credit assessments.
British businesses have borrowed almost £35 billion under the government’s three emergency coronavirus credit programmes, but the approval rate for coronavirus business interruption loans (CBILS) remains just 50 per cent. Critics say that these emergency lending schemes rely too heavily on old, cumbersome legacy technology and if FinTechs using Open Banking were to be involved, more loans could be paid out faster.
There is a similar issue in the consumer lending market. The Credit Kudos Borrowing Index found that 32 per cent have previously been turned down for some form of lending and I’m sure this number will rise in the coming months. In the credit card sector, which had been in growth for many years pre-coronavirus, several providers stopped offering new cards and the number of 0 per cent balance transfer deals swiftly plummeted. Many people’s financial situation will have changed due to Covid-19 and so pre-pandemic data isn’t enough for lenders; they need access to up-to-date data on an individual’s current financial situation to properly assess affordability.
We have already seen adoption of Open Banking in lending increase as a result of this need, and I’d expect to see much more innovation in credit reporting on the back of the crisis, with Covid-19 acting as a catalyst for further digitisation. From car finance, to credit unions, and unsecured personal loans, lenders are hampered by inadequate, insufficient data, reducing their ability to lend responsibly. The traditional methods used to identify creditworthy borrowers are not reliable enough, often use out-of-date information, meaning lenders are unable to understand the borrower’s current and future financial health.
Opening up new opportunities
It’s time for lenders to embrace new data sources and technologies to better understand borrowers in our rapidly changing world. Open Banking provides a reliable, timely, and compliant way of accessing a wider range of real-time transaction data for credit risk and affordability assessments. It gives lenders across all sectors the opportunity to return to growth after the pandemic.
Open Banking streamlines processes and speeds up the results offered to lenders. Adding Open Banking into current customer flows need not be a large technology transformation that takes months, as technology-forward solutions can get new businesses up and running in a matter of days.
As one of the first FCA-authorised AISPs in the UK, we have seen first-hand how the lending sector has progressed on this journey. Using the transaction data available through Open Banking, we’ve been powering brokers and lenders to keep issuing loans in these uncertain times, and as we’re starting to come out the other side we’re seeing a wider range of use cases within the organisations we work with.
Servicing the full spectrum
Open Banking is relevant to each and every lending vertical. Even credit unions, the most traditional of lenders with a model rooted in face-to-face contact, have had to digitise rapidly. We’re working with forward-looking organisations such as Serve & Protect Credit Union, which caters for service personnel and other frontline workers, to draw on Open Banking to help them extend their services.
Similarly, unsecured personal loans, Open Banking helps to uncover new opportunities, converting marginal declines to acceptances thanks to the additional data and insights available. Lenders who already had Open Banking in place have been able to mitigate the cost of Covid-19 by identifying new borrowing behaviour before its reported by the traditional credit reference agencies.
Car finance is another good example. It was a steady market before the pandemic but much of the business is done through car dealerships, which have only recently reopened. Despite the dealerships being closed, some lenders were able to carry on lending through online brokers which have an enhanced credit risk model using Open Banking data. Open Banking can highlight recent loans and missed payments, and our Income Shock Detector also helps lenders to accurately detect and account for recent loss of income.
Demand remains high
Brokers felt the impact of Covid-19. Online brokers are still getting a lot of traffic, but they’ve struggled to continue to serve the market due to reduced lending appetite. They now have an essential role in supporting lenders as they seek to safely return to the market or, for those already lending again, safely return to growth.
We’ve developed a secure onward consent mechanism which is allowing companies like Loans Warehouse to safely share credit risk and affordability insights with lenders to help better inform their decisions. As part of the Loans Warehouse customer journey, individuals will be asked to connect through Open Banking. We will then analyse a borrower’s financial transaction data and securely provide Loans Warehouse’s lending panel with an up-to-date report of an individual’s current financial situation, with the borrower’s consent. By sharing richer, real-time data, prospective borrowers will be more likely to be matched with a lender that meets their needs, increasing their chances of being accepted.
Amidst the mayhem created by Covid-19, Open Banking is a cause for genuine optimism. Lenders across the spectrum are already accepting the digitisation of credit reporting, and I expect this to continue – even in more traditional sectors like banking as they endeavour to quickly embed Open Banking into their strategy further. There is no way back – Open Banking is already well on the way to creating a new lending landscape that will be characterised by innovation and collaboration; a fertile environment for increasing responsible lending and driving growth.
CEO and Co-Founder