Open banking had opened up more straightforward access to financial data and brought limitless advantages to many industries. Open banking lenders were one of the benefactors and they had tremendous potential for enhancements to both business operations and customer experience. Due to open banking, most of the friction caused by parties not sharing transactional data was eliminated and lenders finally had capabilities to gain a competitive edge.
The finance industry has changed enormously since the emergence of open banking. Its effect was felt not only in Europe but also beyond it, pressurising the lending environment. The contemporary circumstances cultivated a demand for digital products and lenders had to obey. Even though this created enormous opportunities for growth and new revenue streams, lenders had to unravel ways to guarantee business succession. They had to develop a system that enabled consumer assessment without their physical presence. Therefore, the marathon of endless solutions and developments ensued.
The main questions had to be answered - how to retain customer acquisition and ensure stable evaluation of borrowers? Open banking guidelines were there to aid. It presented an opportunity to design a way to develop a fast and reliable consumer evaluation process based on real-time information. This allowed open banking lenders to gain insights and provide loan decisions within minutes.
Compared to the past the risk assessment process for lenders was lengthy and required a lot of time. They had to depend on insufficient financial information which often turned out to be outdated and delayed decisions. Customers could manipulate their financial records and it lacked accuracy from the lenders perspective. This way customer's expectations were higher than what a lender could offer and the mismatch caused miserable customers which in turn led to negative business outcomes.
Open banking lenders were able to upgrade their business offerings by acquiring the necessary data in real-time and the accessed financial information was taken directly from the customer's account. Therefore, all the data was already validated and came straight from the consumer bank - no more data manipulation or interpretations by customers. Now the lender sees all the required transactions and can verify their offerings to a client which also reduces the friction between the lender and the customer.
The aforementioned information comes in handy, however, let’s divide it into separate benefits and examine the reasoning behind them. Here are the three mostly communicated advantages that lenders can implement into their businesses:
In the past, it looked very different from what it has become. A customer had to fill out plenty of forms providing the required information - bank account number, personal information, income etc. The manual form filling brought inevitable mistakes, uncertainties and income manipulation. When a lender received such forms it was hard to verify the information and ensure its accuracy.
Open banking allowed lenders to eliminate this process and possible misunderstandings. Everything can be done by digitally accessing personal customers data straight from their bank accounts and it can be used to auto-fill the forms. The less manual work and data aggregation the more happy customers resulting in growing conversion rates.
However, with open banking manual work can be highly reduced and income verification becomes an easy process with real-time transaction information. Customers willing to use lenders services can provide access to their bank account and open banking lenders can evaluate their income within seconds. Lenders can view full customer's transaction and income lists. Therefore, a customer doesn't have to collect payslips and prove their monthly income. A lender instantly detects if the income is steady, what amount a person receives and any current changes in the salary can be evaluated at the same time. If a lender notices recent salary increases it can acknowledge that and implement better lending conditions to the applicant. Better lending conditions implies higher sums of money, lesser interest rates and more favourable terms towards loan repayment.
The loan application process becomes convenient and reliable while significantly reducing costs and optimising risks. Optimised risks convert to higher loan approval rates and increased revenue.
Open banking also unleashes the opportunity to aggregate financial data about the applicant in any financial institution within the European Union (EU). Since the connection occurs automatically the applicant loses a chance to manipulate the given information. As a result, a detailed analysis can be performed including all the income sources - self-employment, dividends, salaries from foreign countries, investments. A lender can identify the borrower's spending patterns, recognise risks, view other commitments or loans.
The online services and digitalisation processes bring more optimisation opportunities and enhance operational processes which lead to individually tailored offerings in a snap of a finger. Let’s put the digital lending process in steps to portray a clearer image:
From the comfort of a person's home or any other convenient location, a borrower fills in the application. A bank requests to provide consent to access their bank account. After the permission is given, the data aggregator retrieves the financial information through open banking channels. Then, gained data is being processed and supplemented with the merchant information. In most cases, during this step, the financial data can also be categorised by transactions. When the processing is done, a lender receives that information in a chosen format or channel - PDF, CSV or via API. The last step is for a lender to analyse gathered data and conclude the outcome - approve or reject the application.
This way of payment eliminates added fees, saves time and causes increased repayment rates as borrowers must perform fewer steps and can initiate payments 24/7.
The question for open banking lenders is whether customers will trust open banking systems and allow third-party connections to their bank accounts. However, in most cases the answer is clear - customers yearn for fast services and easy interfaces with fewer steps to take. Consequently, if consent to access their bank account means that loan application assessment duration will be shortened from days to hours, they are more than willing to take this step. Most importantly, before granting access a customer will always have to go through security screens which provide added feeling of reliability and security.
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