Open Banking and Credit Assessments
03 / 05 / 2022
It has been almost three years since the Payment Services Directive 2 (PSD2) came into effect and while some benefits to consumers were quickly realised, we are still very much in the early days of Open Banking innovation and consumer adoption. PSD2 aims to give customers as much control as possible over their financial data, and to foster competition and innovation in the European financial sector. No part of the financial sector has more to gain from PSD2 opportunities than the credit & risk assessment process. Within the secure and user-consent driven framework of PSD2, credit institutions, borrowers and merchants all have the opportunity to embrace a faster, fairer, data-driven credit assessment approach which has clear benefits for all parties. Discover more about credit assessments.
In this blog, we will zoom in on credit scoring and the benefits that can be gained.
Credit assessment within the EU: a complex and costly challenge
Within the EU the credit assessment process varies widely from country to country. Some countries are dominated by large credit bureaus who have a huge market share, while other countries rely on scant data available directly from central banks. The European Commission will also expand the scope of consumer credit rules to regulate new financial services such as Buy Now Pay Later (BNPL), among other things, expanding the requirement for credit checking.
The task of assessing potential borrowers is becoming more and more difficult as our financial lives undergo fundamental changes in how we bank, how we earn money, and how we spend it. Economic circumstances constantly change the probability of default and the risk of fraud looms ever large.
Aside from the above-mentioned challenges, the user experience in traditional credit checking no longer aligns with what consumers expect from a modern finance provider. Many credit checks still require piles of scanned paper documents (such as tax returns, pay slips, bank statements and ID documents), multiple interactions via different channels, and days or weeks of lead time to get approval. Once this dossier has been supplied, a credit analysts must try to piece together a cogent picture of the applicant's financial state and their ability to pay. However, even with this stack of documents, it can be exceedingly difficult and time-consuming to accurately predict someone's ability-to-pay.
These documents must also be assessed for validity and authenticity. The credit institution must assess and determine that they are confident that the documents supplied have not been falsified, that they belong to the applicant in front of them, and that they have not been curated to give a false impression.
If authentic, these documents do not necessarily show the lender how well the applicant manages their finances, or how their financial habits may have improved, meaning some would-be reliable customers are consistently denied good credit. All of this makes fair access to credit more difficult and increases the provider’s acquisition costs.
How Open Banking can improve credit assessments for everyone
With this complex problem as our backdrop, it is good to know that Open Banking provides opportunities for everyone to reduce complexity and decrease costs. Credit assessment with Open Banking data offers huge benefits:
- For the borrower: an easier application process, a fairer review, and a faster outcome.
- For the lender: better quality information, a more accurate risk assessment, and confidence in the validity of the data.
The core approach of credit assessment with Open Banking data is this: the lender asks the borrower to share a few months of their Open Banking data (with the framework of PSD2 this consent process is clear, and the user journey can be made very quick and simple). The open banking data is gathered by a TPP aggregator. This data (the borrower’s transactions and balances) can be automatically analysed and categorised. Clear indicators around potentially risky behaviour (such as excessive gambling, overdraft fees and payment rejections) can be flagged. With these credit insights the lender can quickly and accurately assess this borrower's ability-to-pay and have a clear picture of any risk indicators, without having to spend a lot more time going through countless scanned documents. As lenders can base their assessment directly on the applicant's banking data, they can be confident of the authenticity of the data.
For the borrower, from the application form they can be redirected to a simple interface which allows them to select their bank, log in, consent to sharing their banking data, and within a fraction of the usual application time they have a response (in many cases the lender can completely automate the approval of loans within certain parameters).
Challenges and opportunities at a glance
The table below shows some major challenges and the way these could be solved with Open Banking.
Assessing a customer's credit risk accurately is difficult and time-consuming.
Leverage PSD2 and use Open Banking data to make assessments based on good data.
Many lender processes don’t meet customers' expectations around ease-of-use, time-to-yes and user experience.
Create a faster, more consistent user journey, allowing customers to share Open Banking data rather than send multiple paper documents.
Validating borrower documents and checking for signs of fraud is difficult.
Receive data directly from your customer's bank, significantly reducing the risk of fraud.
How does it work?
Worldline's Credit Insight API provides a simple plug-and-play solution to lenders. Borrowers are redirected to our concise GUI where they can log into their bank and provide consent to share their data. This banking data is then retrieved by Worldline and scored and categorised using best-in-class machine learning techniques. Within seconds, these insights are delivered back to the lender to continue processing the borrower's application.
Worldline has a number of offers to help you take all of your application processing online (read more).
As a global leader in the payments industry, Worldline is committed to utilise its technological capabilities, supporting clients to empower their customers with capabilities to provide consumer protection and fairer access to good credit. We hope you have learnt more about Open Banking and Credit Assessments. We have digital banking solutions to help clients take all of their application processing online and support the whole customer journey. Based on our Corporate Social Responsibility (CSR) ambition, sustainable economic development is at the heart of our business model. Learn more about our solutions.
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