Consumer Finance: The Transformative Impact of Open Banking & Open Finance

01 Forward.

02 Introduction.

03 A View on Legistlation.

04 Interview with Algoan.

05 Interview with Atto.

06 Interview with Fico.

07 The ethical implication of open banking on consumer finance.

08 Future outlook conclusion.

In the last few years, our financial lives have undergone significant transformations. The pandemic compelled numerous services to shift online out of necessity, despite the many negative consequences and challenges, much innovation took place. Fintechs and young, agile companies were able to take full advantage of these new circumstances and make their services widely available to populations stuck at home. However, things have changed now. Start-ups are grappling with a very difficult funding environment, and valuations have fallen significantly in the past year. While larger companies and traditional consumer finance institutions still hold the majority of the market share and possess extensive networks of consumers and merchants, expectations have shifted. It is essential for traditional players to decisively adapt and provide the types of experiences and journeys that consumers have come to expect. It is no longer acceptable to have a time-to-yes of multiple weeks (or even multiple days) and a user journey that requires finding seven or eight different documents to scan or upload. This is where we believe open banking plays a crucial role. Aside from the obvious advantages around accuracy and a real-time view of an applicant’s finances (discussed in detail by our esteemed guests), lenders stand to gain a lot more from open banking and open finance:

• Faster time-to-yes: With standardized data delivered in realtime, lenders can automate much of their analysis activities and conduct manual reviews much faster than is possible going through paper documents and PDFs.
• Better user journeys: While some consumers are definitely still getting used to the idea of sharing their banking data in this way (and more user education is required in this area), many lenders are finding innovative ways to encourage borrowers to use open banking, for example: giving borrowers the choice between the manual process (upload documents, answer questions – 25-35 minutes) or open banking (< 5 minutes).
• Identity and credit fraud: There is huge potential to reduce identity fraud and credit fraud as open banking requires the user to perform strong customer authentication (SCA) which means that they need their bank PIN/password, the authorized mobile device and their fingerprint or face ID. With open banking you can also receive the IBAN and bank account holder name (along with the transaction data) directly from the applicant’s bank, meaning there is no chance for this data to be manipulated before it is sent.

As the landscape continues to evolve, it is crucial for lenders to understand the opportunities and explore the possibilities that lie ahead.

This paper is a collaborative effort between professionals from the technology, lending and credit risk domains, pooling their insights to shed light on the future of lending and address important topics in consumer protection, privacy, and financial inclusion. By incorporating diverse viewpoints, we aim to offer a valuable resource that explores the changing landscape of consumer finance and offer unique insights that not only examine the present state of affairs but also anticipate future developments.

Legislation plays a pivotal role in shaping the landscape of consumer finance. Governments and regulatory bodies have recognized the need to safeguard consumer interests and ensure fair and transparent practices within the financial industry. Consequently, a range of laws and regulations have been enacted to protect consumers and promote financial inclusion. These regulations govern various aspects of consumer finance, including lending practices, disclosure requirements, interest rates, fees, and consumer rights. The upcoming Consumer Credit Directive holds significant implications for the consumer finance industry within the EU.

The Digitization of Consumer Loans: How the New EU Consumer Credit Directive Promotes Ethical Lending.

The rapid digitization of consumer loans is fundamentally changing the consumer finance industry. In this context, the EU Commission is modernizing the consumer protection directive with a new Consumer Credit Directive (CCD) to ensure consumer protection is keeping pace with technological advancements. The revised CCD aims to improve rules on assessing consumer creditworthiness and prevent over-indebtedness. Below we have summarised the most important aspects of the new CCD:

Assessing Consumer Creditworthiness.

Lenders must assess a consumer’s creditworthiness to ensure that they are able to repay the loan. The new CCD aims to improve rules on assessing consumer creditworthiness to ensure appropriate and proportionate data is used. When a creditworthiness assessment is negative, a creditor cannot make the credit available to the consumer. The aim of this is to protect consumers from taking on credit they cannot afford and promotes ethical lending practices.

Clear and Understandable Credit Information.

The new CCD requires credit information to be presented in a clear and understandable way to avoid consumer information overload. This information must be adapted to digital devices to make it accessible for consumers. This is to make sure that prospective borrowers can easily understand the terms and total cost of the credit.

The revised CCD also addresses practices that exploit consumer behavior such as product tying, pre-ticked boxes, or unsolicited credit sales.

Governments and regulatory bodies have recognized the need to safeguard consumer interests and ensure fair and transparent practices within the financial industry. Consequently, a range of laws and regulations have been enacted to protect consumers and promote financial inclusion.

Q: Consumer finance has been around a long time, but the way lenders manage that risk has been changing. How is an open banking risk assessment different from a traditional credit bureau assessment?

Indeed, consumer finance has been around for a very long time. Assessment of borrowers’ affordability and creditworthiness is important to lenders in the phase of underwriting.

Credit bureau data was a revolution in the credit industry 30 years ago. It has been working well in some countries, such as the UK and the US, but it is not the case in other countries; and they are even absent in some countries, such as France. Moreover, Credit bureau data shows clear limitations to the extent:

• it is not up to date,
• it contains flawed data,
• it offers low protection against fraud, which is a big topic in the credit industry (e.g., according to the Federal Trade Commission, there were more than 200K fraud cases related to loans and leases in the USA in 2020),
• it is heterogeneous - i.e., the data offered by credit bureaus can vary drastically from one country to another, causing difficulties to lenders willing to operate in various countries.

On the other hand, the Open Banking data, which is obtained with the consumer’s consent (unlike credit bureau data), shows very interesting properties:

• it is very granular,
• it is up to date,
• it is error-free,
• it is immutable and anti-fraud by default,
• it is homogeneous as it’s the same everywhere (accounts and transactions).

What we were able to measure is that using Algoan credit decisioning suite helps our customers increase their loan volumes by up-to 40% while keeping the same level of credit risk or reduce credit risk by up-to 50% while keeping the same level of loan production/ acceptance.

Q: Financial inclusion is an important topic to Worldline and Algoan. How does credit checking using open banking data promote financial inclusion and ethical decisioning?

Millions of people don’t have access to credit simply because they don’t have enough history in their credit file reports. These people can be immigrants, young people, students, people who didn’t take many loans in the past, etc. This is the well-known problem of “thin files”.

Open Banking helps all these people easily get access to credit after a fair assessment of their affordability and creditworthiness based on their

recent financial behavior on their bank accounts.

Open Banking-based credit decisioning allows the lending industry to become:

• More inclusive: by including people who were originally excluded from access to credit.
• More responsible: by assessing people the same way – based on their financial behavior instead of taking into consideration biased and outdated data.

Open Banking represents a revolution in the credit decisioning area as it opens the door to a fair assessment of the affordability and creditworthiness of a loan applicant based on recent data directly correlated to the person’s financial behavior.