Open Banking and the future of finance

Open Banking has many benefits, but end-to-end digital architecture must be embraced by financial institutions for it to become the true future of finance

September 29, 2021 | Tudor Lodge

Open Banking is an exciting proposition, whereby all banking information from customers and companies is readily open and available for potential lenders and financial providers to access.

From credit scores, income, bank statements and financial transactions, this information is made readily available through APIs, bypassing traditional financial rails and card networks. For businesses and consumers, this proposes exciting opportunities to fast track loan applications, mortgages, card payments and any other day-to-day financial transactions.

This week start-up TrueLayer, which powers open banking services, raised $130m, giving it a valuation of $1bn– highlighting the size and potential of this industry.

But despite its benefits, there are still questions over whether open banking will be the future of finance. We speak to some industry experts to find out more.

Accessing personal data

Open banking can allow potential lenders to see your data when applying for a financial product. There is no need for the lender to run credit checks, ask for wage slips or request bank statements, since this is all available immediately.

“Open banking is a safe way for you to allow trusted lenders and providers access to your personal financial data,” says Alfie Usher, founder of Forces Compare.

“Information like your income and spending habits can now be shared with lenders so they can make more informed and smarter lending decisions when it comes to applying for credit and loans.”

“Previously an underwriter may have had to read through your bank statements and manually verify your bank accounts and spending habits. However, this can now all be done digitally and much faster with open banking.”

“So whilst this might be the future of finance, the adoption for this has been quite slow, only because customers have to consent to this when applying – and so far a large proportion of people do not want to show all their financial history before the loan has even been approved.”

Fast-tracking mortgages

But for mortgages and home loans, the use of open banking is very much an exciting prospect, according to Frank Clarke, SPF short term finance client relationship manager at Octagon Capital.

“Applying for any kind of mortgage is always quite a headache and when a customer applies, they need to share all their financial documents and bank statements and it makes the process very long-winded, when actually a lot of people are time sensitive.”

“There is no real standardisation for digital financial information in terms of how it is stored or how different brokers, lenders and institutions communicate with each other. So not only is the average mortgage approval extremely long, but customer data is very loose and at risk.”

“So open banking, whilst it is not in full force yet, is very promising. Having one place where all lenders can access fast, real-time information is very transparent and good for compliance.”

Preventing money laundering

Keeping within the subject of access to data, open banking could also play a huge role in the prevention of money laundering.

“With open banking, you essentially have lots of data all in one place,” says Nadeem Siam, founder & CEO of Fund Ourselves.

“Soon open banking will be using AI to create more learnings about this data and develop patterns to understand customer behaviour. So if there is criminal activity or money laundering, this should in theory be easy to pinpoint because of abnormal behaviour.”

Faster payments

However, for some, the future of open banking lies its ability to make quicker payments or to complete transactions faster, says Richard Dent, founder of Finger Finance.

“Whilst for personal loans or car finance, there has always been a huge emphasis on manual underwriting, we are potentially able to bypass this if you have all the customer’s information immediately,” he says. “There is also nowhere for the customer to obscure their income or their financial position, because we are getting it straight from their bank and a truly accurate figure.”

“The only thing stopping us from making open banking the future is the reluctance of customers who are willing to so openly share all their data to a new company or a stranger. Not to mention that if someone hacks into a lender’s system, they are getting serious amounts of personal data and far more than ever before.”

“So whilst it presents amazing possibilities, it could take time for British consumers to fully adopt open banking and more education by tech companies and banks for it to become widely accepted and more mainstream.”

Customer relationships

The introduction of APIs will speed fulfilment of transactions with great potential upside in terms of enhancing customer experience and relationships.

“Faster payments are real-time transactions – but open-banking APIs represent a move towards real time business,” says Yogesh Sholapurkar, COO, commercial at Close Brothers. “As a corporate, you could build propositions that in the past you couldn’t, because the payment can now be part of the customer journey. For example, look at car dealerships.

“Traditionally, the interaction is between them and the finance company, with the transaction taking place the following day – so the customer can pay but can’t drive away. But with an API, they could transact instantaneously.”

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