Open Banking Loans: 4 Reasons Why They Outperform Traditional Loans

From an outsider's perspective, it doesn’t look like the retail lending landscape has changed much over the past two years. However, this is far from the case.

Open banking has been quietly revolutionising the banking industry, with the open banking Initiative and PSD2 leading the way. This unprecedented unlocking of data is allowing banks and lenders to completely change the way that they operate, allowing innovation in every single service they provide.

One powerful example of this change is in the loans industry. These days, lenders are moving away from traditional loans and have begun providing open banking loans instead. This is significantly improving the customer experience in several ways.

What is Open Banking and what are Open Banking loans

 Simply, open banking gives licensed third-party developers the opportunity to build applications and services around a financial institution. These companies can see and use the bank’s data down to the transaction level to provide customers with new and better banking services.

 In January 2018, open banking policies required big banks to give licensed startups access to their previously hidden data. This levelled the playing field between traditional banks and innovative disrupters, starting a banking revolution.

 Open banking loans are the result of taking all the data unlocked through open banking initiatives and applying them to the loans industry. This combines with the innovation from third-party APIs to provide a much better lending experience.

 With the Traditional loans stuck in the past with limited information and outdated processes, and open banking loans growing in popularity, here are 4 ways that open banking loans improve your average loan experience.

Why Open Banking loans are better than traditional loans

  1. The new information improves the income verification process 

Lenders can evaluate an open banking loan application much faster than a traditional loan application, as open banking gives lenders much more information, such as transaction history.

For example one of the longest sections of a traditional loan application is the affordability check and income verification process. Lenders needed to collect copies of bank statements to verify income. 

Using account APIs, these administrative activities can be automated. The verification and evaluation process can be reduced from one week down to a matter of minutes through simple open banking requests.

To enable income verification, fintechs can employ transaction categorisation, which can help to clean and enrich the huge amounts of data that lenders have access to. This can help them understand their customers and allows them to verify income, discover risk-reducing behaviour and more.

2. They provide a better customer experience with loan personalisation

 Everyone is in their own, unique situation when they look for a loan. However, most traditional lenders try to follow a “one-size fits all” mentality for their loans, as it is the most efficient way to operate. However, open banking is flipping this idea on its head.

PwC’s report on open banking suggests that open banking can result in powerful personalisation possibilities from banks and lenders. It gives lenders access to transactional information, meaning they can understand each loan applicant on a much deeper level than before. With all this extra data and deeper understanding of customers, each loan can be tailor-made, and designed for that specific borrower.

3. They increase the number of potential loan applicants

 Nearly 25% of UK adults are considered near-prime or thin-filed, making it extremely difficult for them to get a traditional loan. Open banking help both of these disadvantaged groups find loans when they need it most.

  • Near-Prime

When people are on the edge of having bad credit, they are considered near-prime. Near-prime lenders have a lot of issues applying for loans, as they are considered high-risk for traditional lenders.

Open banking unlocks allows lenders to differentiate near-prime borrowers who can repay and those who can't. For example, account data can show rational reasons for overdue loan payments which are damaging credit scores.

  • “Thin-filed”

According to a PwC report, a powerful benefit of open banking is the ability to credit score thin-file customers. People with a thin-file have a limited credit history, and therefore can be rejected for traditional loans.

Open banking gives lenders access to significantly more information and better insights than traditional methods to create better credit reports to assess a traditionally thin-filed customer.

4. They stimulate competition and innovation in the banking industry

When there is an information imbalance between traditional companies, startups, and customers, it results in a situation that stifles innovation, as the traditional market leaders hold all the power.

Open banking allows for licensed startups to compete with the major banks through direct access to their data. With this information, startups can provide innovative solutions to customers, forcing the major banks to compete and innovate as well. This results in open banking loans that provide the most value to customers and allows lenders with true unique selling points to thrive.

Where to go from here? 

Even though open banking is only in its infancy, it is completely changing the banking industry for the better.

It’s clear that open banking loans significantly improve upon the traditional loan process that most customers are used to. The unlocked data allows for faster, more personalised loans available for more people who need it. 

Open banking is a vital tool but can be overwhelming when first using it. If you’re interested in exploring the power of open banking loans, get in touch with us. We’ll help you understand how to use the data and insights unlocked from open banking to improve your business.

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