Open Banking is a product of technological advancements and a strive towards digitalisation. It’s a fairly new platform which allows lenders and banks to access their customers’ transactional history to help them make more accurate lending decisions and offer tailored products and services. Currently in the UK, Open Banking hasn’t reached its full potential which means there are still some limitations, most of which affect how consumers can use and interact with it. However, Open Banking is secure against fraud in the same way your usual banking is, and it’s regulated in the UK.
Financial institutions can only access your data with your explicit consent, so you still have control over who can view your financial information. It’s important to note that banks and financial services organisations never have access to your online banking login details at any stage. While they view a snapshot of your financial history, your login details remain private, and the business would have to acquire your consent again if they wanted to run another Open Banking check (so they can’t continuously view your bank statements on a running basis).
Using Open Banking helps lenders create a better service for their customers.
In order to offer the best revolving line of credit, for example, the credit line lender needs to provide a seamless, quick application process, with same day lending decisions and immediate access to funds if the application is approved. If the customer has to manually provide copies of their bank statements, there is a potential friction in the application process which may lead customers to apply elsewhere. While it’s not an unusual request, if you need to borrow money quickly, then finding previous bank statements to send to the lender can feel time-consuming and fiddly.
As well as offering a smooth service, lenders also need to make sure their lending decisions are responsible and that customers aren’t being provided with unaffordable credit. While lenders use credit file searches, among other sources, some of the information can be out of date or not reflective of the applicant’s current circumstances. This can result in declined applications which should have been approved and vice versa. Open Banking allows for real-time checks to verify financial information like income and expenditure, so that lenders can quickly and accurately process applications for credit.
Just as it takes time for a customer to manually forward their bank statements to a lender, it takes time for those bank statements to be manually reviewed. Typically, a lender might view around 3 months of bank statements for each customer, which is a lot of transactions for an individual employee to check, thus slowing down the application process and resulting in customers waiting longer for lending decisions. By comparison, an Open Banking check usually only takes a few seconds which is important if you’re submitting an application because you’re looking to get money quickly.
One of the ways lenders can create a smooth application process, despite the various assessments they must perform, is by employing a third-party alternative credit reference agency to operate an Open Banking check on their behalf. Building an Open Banking platform from scratch would be costly and difficult, using valuable resources that the lender could put to better use elsewhere. So, by using a third-party, they can ensure the check remains a smooth customer experience and functions well.
If your application is subject to an Open Banking check, you will typically be redirected to the third-party provider and be asked to select your bank accounts, then to log in. Your banks will have agreements in place with the Open Banking platforms so that when you log into your bank account, you are logging in on the bank’s website. Your login information therefore remains secure. The Open Banking check scans your transactional data which is used to verify the information you have entered in your application form. In most cases, lenders only want to see that you are responsible with your finances and that you have the funds to make any potential repayments. Lenders don’t want to provide you with credit if making the repayments will land you in financial difficulty.
The Open Banking check forms only part of the assessment – your application will still be subject to standard affordability and creditworthiness checks when applying for credit application with an authorised and regulated lender. This can’t be avoided, regardless of whether you’re applying for £100 or £10,000. And although lenders have obligations and responsibilities to ensure they conduct appropriate affordability assessments, as the customer, you should only apply for credit if you need it and if you can afford the repayments. Ultimately, Open Banking is used by lenders to improve the service for consumers.
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