The last twenty-four months have seen the publication of hundreds upon hundreds of articles decrying the lack of impact that Open Banking has made upon the finance sector or for the consumer.
Even those supportive of Open Banking continue to limit their horizons to some of the challenger banks or apps such as Moneybox or Money Dashboard which deal in basic roundups or account aggregation. As good as these apps are, neither represents the cutting edge of Open Banking.
Should financial journalists choose to lift their eyes from the loudest voices with the most prominent financial backers, they may well arrive at new considerations.
Account aggregation represents the lowest hanging fruit and has been widely implemented by all and sundry from the smallest fintech to the largest retail banks. As a use-case, it is now widely understood and utilised by consumers. Money Dashboard, for example, now boasts over half a million registered users in the UK.
Bank data provided through Open Banking can forever change our financial lives. More than that, however, is how it will benefit financial institutions as well. The focus over the last two years has been on the consumer – but the story of how it is providing benefits to banks is only just beginning to be told.
Here are six use-cases for Open Banking that are already beginning to impact the market, both for consumers and banks, and will prove the value of bank data and Open Banking.
Lending and credit risk
The value of Open Banking is being felt by the consumer, but it is perhaps in lending and credit risk decisioning where Open Banking may be able to make the most commercial impact. The sums spent on assessing credit risk within the big banks are truly astronomical, and bank data can resolve a raft of issues within the underwriting, credit risk and fraud decisioning within a bank.
Underwriters processing applications for credit risk need to be entirely confident in their decision and how that decision was made. To date, that has nearly always relied upon manual examination of physical bank statements.
Physical bank statements are prone to manipulation, and as such are a weakness in the veracity of the decision process. Confidence in the decision-making process can be gained – but through the digital delivery of bank data. This removes the opportunity for physical alteration of any statements.
The time taken to come to a decision within the process is currently very high. This has considerable impacts.
- The first is that it directly contributed to poor customer experience, with applicants waiting weeks or potentially even months to hear whether they have been approved or not.
- The cost of very skilled professionals taking an inordinate amount of time to gain all the information they need to make, what should be, a relatively simple decision.
- Finally, working off physical statements give no insights beyond what can be gleaned from those examining them. Using bank data offers a range of actionable insights, all presented through visual representations that can be customised to offer the information required.
- As well as reducing fraud through document tampering, bank data can be used to counter third-party fraud whereby an application is made in someone else’s name. Bank data can confirm that the applicant’s details match with the individual named on the application by verifying the bank account(s).
The use of bank data within the customer onboarding or application stage can substantially decrease the volume of time required to make a decision. Bank data can offer the insights needed to make a genuinely informed decision, and can dramatically reduce fraud. Third-party fraud particularly, continues to cost banks hundreds of thousands to millions of pounds, and eliminating this through the use of bank data can result in massive savings in cost and reputation.
Rental and mortgages
Anyone who has bought a house will know the work needed in pulling together the relevant documents to present to the bank, the meetings required to calculate deposits and monthly repayments and the overall stress that this causes.
We are already seeing bright young fintechs coming to market who are seeking to overhaul the mortgage application process. Companies such as Habito and Trussle are using machine learning, AI and Robotic Process Automation (RPA) to simplify the mortgage process, hastening the process for consumers and heightening their experiences.
Now, bank data can take this a step further. Much of the information that is required by mortgage assessors and brokers can be gleaned from a bank statement. This is information such as salary, debts, creditworthiness and affordability (ie, how much money do you have left over from your salary, once all expenditure has been taken into account).
Via Open Banking, this information can now be presented in digital format with a few clicks of a mouse. Moreover, with products such as DirectID on the market, the information required by a mortgage assessor can be categorised and classified, and visually presented, offering a rich and detailed picture of the applicant. Salary, which is normally evidenced through payslips, can also be illustrated on platforms such as DirectID.
Bank data also holds substantial advantages over credit reference agency (CRA) data, on which mortgage decisions are mainly based. CRA data is currently vital to any credit decision, and having a poor credit score is usually fatal to any credit decision. CRA data is also of limited use for people who have not built up a credit score – such as young people, financially independent, or those new to the country. Bank data can evidence what a credit score cannot. For example, it could show that a young person has successfully paid rent for the last five years, at a rate higher than the mortgage that they are applying for and is therefore, a candidate for a mortgage.
With bank data, a far more detailed and nuanced understanding of an applicant can be built. This information can be layered on top of CRA data to give a fuller picture. Critically, bank data is based on current information, not historical, backwards CRA records.
Crucially, because the bank has a far greater picture of the applicant through Open Banking data than CRA data, bespoke rates can be gleaned that may be better than what is publicly available.
The same basic principles apply when we talk about rental accommodation. Many landlords ask tenants to evidence that they are good tenants and can afford the rent on the property. As with the mortgage applicant, a renter could illustrate that they have years of successfully paying rent to another provider. They could additionally show their income, or balance to further demonstrate how they can afford a property.
I have been pleased to see Open Banking turned towards areas where it was not initially envisaged it would be able to offer support. Like many others, in the days before Open Banking’s launch, I expected it to primarily impact consumers and financial services, with some knock-on effects for companies in professional, legal and business services.
The particular example that gives me most satisfaction is its use within the charitable giving sector. New companies are now coming to market, who are directing roundups from shopping and debit card use to charitable giving.
A great example is Edinburgh based Sustainably. They’ve just gone live – having been granted a thumbs-up from none other than Richard Branson and Virgin - and are using Open Banking to allow users to roundup their digital spare change towards a charity of their choice.
This use case is now being fleshed out by other companies to develop roundups or donations to causes important to the consumer. One startup we’re aware of is using Open Banking and bank data to build a cashback scheme with retailers, whereby money is deposited into your pension when you spend money with the retailer. More projects such as this will surely come to market in the near future.
Collections and recoveries
The collection and recovery of bad debts has been, to date, characterised by willpower and perseverance. The collections process can, however, be enhanced to make significant operational savings.
Time savings are particularly prominent during the completion of income and expenditure statements. Where this is traditionally filled out manually by the debtor, Open Banking can prepopulate much of the information contained herein.
Using Open Banking also negates issues commonly found in these statements, such as error or misrepresentation. This gives collections agents an almost near-instantaneous view of the debtor’s financial situation.
With accurate information provided in a matter of minutes, collections agents are then placed to confidently inform a course of action. This could involve agreeing repayments at a sustainable rate, or referral to a debt charity.
Having the debtor build their own income and expenditure statement reduces the participation of agents in later stage arrears. The statement can form part of the basis of collaborative resolution, a payment arrangement, or referral to a debt charity.
Utilising bank data leads to:
· Intelligent debt resolutions
· Mitigation against errors
· Operational cost savings
· Time savings
· Collaboration between debtor and collections agent
· A reduction in debtor lists
Opening an account with a new provider should be straightforward in 2020. Instead, we see, for many customers, there is still a host of potential issues between initial application and their account being made live.
As with credit risk decisioning, the time taken to process an application can be high. For this reason, customer dropout rates are also high, costing financial institutions thousands in lost revenues. Worse, the customer need has not been fulfilled, so there is every chance that they have had this need satiated by a competitor.
One reason why the application process can take so long is because of the exceptions process, which applies to around 10 percent of all applications where the applicant does not provide enough information at the outset of the application.
Bank data can substantiate much of the information provided by the applicant. Account verification, can for example, match up the person making the application with the bank details submitted; similarly, income verification can accurately determine an applicant’s income to ensure it is consistent with that stated.
The payments industry is a constant state of flux as new technology and fintech propositions change our view of what is feasible. Consumers have shown their displeasure at the existing payments setup, with some payments taking days to reach their recipient, and others charging large fees to make payments – particularly for international payments.
New firms such as Adyen are complementing existing technology firms such as Stripe and PayPal in reimagining how payments can be made.
On top of this, we have new formats and methods for payments coming to the fore. These include QR Codes, P2P payments, and cryptocurrency.
Now into this mix, comes Open Banking. Payment initiation has yet to be fully implemented, but once live, and utilised, it will represent a new, intuitive and straightforward way for consumers to make purchases.
There is little doubt that Open Banking has the capacity to streamline operations and make savings in time and money across industries and job functions.
Today, the focus has been centred on consumers – principally around account switching and account aggregation. These are helpful propositions, but hardly groundbreaking.
Bank data does offer the opportunity to revolutionise offerings for consumers and financial institutions. Importantly, bank data also provides other companies such as fintechs the opportunity to develop propositions for both consumers and business. In the future, it is highly likely that bank data will be used within industry such as supply chain management, HR, recruitment and more.
In the here and now, the six propositions outlined above represent the six most immediate and high impact uses for bank data.
Interestingly, there is an even split between those that are most impactful for consumers and those for business.
For consumers, the opportunity to make charitable contributions or get cashback on their purchases will drive awareness and acceptance of Open Banking. The difference that Open Banking and bank data are making to the mortgage and rental application process is significant. Massive savings in costs and time can be made by the vendor, while the consumer has a hassle-free experience, receiving a bespoke offer in a nominal amount of time.
The business areas within financial institutions that are already benefiting from bank data and Open Banking include risk, compliance, fraud, account opening and operations. All of these departments can make considerable savings in time and money, make better decisions and enhance compliance procedure from capitalising on the advantages offered by bank data.