Open banking is gradually revolutionising the lending landscape, as lenders begin to offer more personalized services to customers through instant access to financial data.
So, how exactly is open banking changing lending for the better? From faster loan applications to improved customer experience and enhanced security, open banking has a wealth of benefits to offer both institutions and consumers.
1. Enhanced loan application processing
Open banking enables improved lending processes by putting customer data – with their permission – directly in the hands of lenders willing to fund quickly and responsibly. Instant access to customer financial data helps loan officers quickly assess loan eligibility and affordability.
On the consumer side, better decision-making on the part of lenders also improves access to suitable loan products, including financial products that may have been previously unavailable to them. Borrowers can also benefit from a vastly simplified loan application process without lengthy application and approval procedures for faster access to funds when they need them.
2. Increased loan acceptance rates
Lenders can get instant bank account statements from borrowers thanks to account information services (AIS). By accessing customer financial information, lenders can view a detailed analysis of a borrower’s income sources and transaction history to identify spending patterns, investments, and other creditors.
Having instant access to up-to-date financial information enables lenders to quickly assess creditworthiness and determine whether a loan product is suitable for the borrower. Having access to this level of detailed and — more importantly — accurate financial information about an applicant reduces risk on the part of the lender, meaning loans can be granted with higher repayment confidence. What’s more, access to a borrower’s historical financial information allows lenders to better understand their regular spending habits and liabilities to determine the amount a borrower can repay within their budget.
3. Offer more competitive interest rates
Interest rates are based on a number of factors. One of the most important ones is the risk the loan will not be repaid. Now that lenders have instant access to the borrowers financial information, lenders will have a much better insight in the probability of default of a borrower. This improved insight allows lower risk margins and the possibility to offer more competitive interest rates.
4. Faster onboarding through open banking
Lenders are using AIS to instantly verify identities without the need to manually process data. This accelerates the onboarding process from a few weeks to a matter of minutes for new customers, while improving the customer experience at the same time.
Access to customer financial data can also significantly reduce the time taken to set up financial services. For instance, finance providers can quickly approve and set up a loan by accessing customer financials and identity checks.
5. Improved data protection and security
One way open banking works is through secure integrated application programming interfaces (APIs). Open banking APIs use rigorously tested software and security protocols similar to online banking.
Open banking is highly regulated, meaning only approved third-party providers can use open banking systems. Regulations require account providers to use strong customer identification, allowing payment service providers to verify their customers’ identities. It doesn’t give your customer the possibility to adjust the data they provide. It is coming straight from the source.
As a side-effect this also means that when you use an open banking application or provider to access customer identity and account information, you can be confident the bank account used for loan repayments belongs to your customer.
6. Better customer experience
Open banking is benefiting customers and their operations as well as lenders. With access to customers’ financial data, obtaining answers to their needs and matching those needs with tailored services has become more effective.
On the lending side, open banking presents an opportunity to access customer financial data (with their consent) to better understand their financial position. Then, lenders can develop specific products to suit their customers’ needs, which will improve the lender-borrower relationship.
7. A wealth of new lending products
As sharing financial information gradually becomes more commonplace, lenders can utilise this data to develop new products, such as funding platforms, supplier payment services, and loan comparison sites. With greater access to financial data, these services will become better suited to customer needs and at more competitive prices.
Furthermore, the rise of marketplace services offered by financial organizations and online comparison platforms means that new lending products can come to market quickly and easily, potentially creating further disruption in the lending landscape.
8. More competition on the horizon
As open banking rolls out across Europe, new loan products and related offerings will be available to borrowers not only within the confines of the lender’s geographical region but across the EU. Lenders will be able to efficiently access new markets in other countries and regions thanks to AIS and payment initiation services (PIS).
Perhaps most importantly, the full benefits open banking has to offer only become available once both lenders and borrowers know how to make the best use of them. While some institutions may see open banking as a risk, doubtless others are more concerned about missing the opportunity it offers.