Credit, Collections & Insolvency News
Historians looking back on 2020 in 100 years will remember a remarkable year, shaped by a global pandemic and increasingly populist politics. With vaccines now being rolled out at pace, 2021 is looking to be far better, and as the outlook for physical health gets brighter so too should the outlook for people’s financial health.
This year, we’ll see Open Banking move further into the mainstream, capitalising on the shift to digital adoption we saw last year and helping people to increase their financial wellbeing. The number of Open Banking users in the UK passed two million in September 2020 and momentum has continued to build. PwC predicts that this number will rise to up to 32.7 million by 2022.
In an effort to compete with innovative fintech models, the UK’s banks are doubling down on Open Banking initiatives. According to Business Insider Intelligence, 73% of UK financial institutions indicated they now have a positive attitude towards Open Banking, compared with less than half (48%) in 2019.
Painting a better picture
Credit risk changed profoundly in 2020. It was a challenging year for the lending industry, with business slowing as lenders adapted to the new conditions brought on by the pandemic. In a time where access to credit has been crucial for many individuals and SMEs, numerous lenders had to pause or cease lending, as widespread uncertainty and instability made it extremely difficult for them to lend responsibly.
As a result, more and more lenders have been turning to Open Banking to better assess risk and affordability. Understanding a borrower’s real-time financial situation in a fast-changing economic landscape has become imperative. Lenders are returning to lending responsibly by using the new data in the rich Open Banking environment to get a comprehensive and up-to-date picture of an individual’s financial situation.
Lenders are also harnessing Open Banking technology to streamline processes and improve operational efficiency in order to manage the increased customer support requests. In addition, Open Banking allows them to offer more tailored products that adapt over time with changing circumstances. One example of this is Creditspring’s membership-based loan offering which helps those with a poorer credit history to borrow affordably and build a better credit rating.
It’s not just financial institutions that are turning more towards Open Banking – people are increasingly engaging with it and this year will see the first steps towards mass adoption.
People want tools and services that will help them to manage their finances better as financial vulnerability becomes the new reality for many. Research from Nesta Challenges found that one in five adults began using online banking apps during lockdown. Individuals are more willing than ever to share data in exchange for a valuable product or service: with limited face-to-face interaction, and a greater need to manage finances, COVID-19 has made us very familiar with transacting completely digitally.
What’s next in store?
2021 is shaping up as a year of recovery and growth, spurred on by ever-increasing digital adoption. Those creating bespoke and personalised financial products for users will lead the pack. For example Serve & Protect Credit Union has created a reward loan facility with Credit Kudos, which recognises and incentivises prudent financial behaviour, reducing the APR over time. And as more and larger lenders further their use of Open Banking data to reduce costs and more accurately assess risk and affordability, I believe it’s likely these savings will be passed onto individuals and SMEs in the form of better deals.
I believe we’ll continue to see innovative solutions coming to market using Open Banking such as automated re-mortgaging based on bank transaction data, and far smoother loan application times for SMEs – helping them access the credit they need faster. I also think that price comparison sites will start to use the technology widely so they can both offer a better experience for their customers and also pass on better leads to lenders. We saw this in June 2020 with Loans Warehouse announcing its use of the technology but I think this year it will become the norm for all price comparison sites.
It also promises to be the year where Open Banking continues to lay the groundwork for ‘Open Finance’ – the extension of Open Banking’s data-sharing principles to enable third party providers to access customers’ data across a broader range of financial sectors and products, including pensions and investments, and also a wider range of industries. For example, open data could be used to help people get a better deal on insurance policies if insurers could see what people’s previous premiums were and understand more about the individual’s risk profile through their data.
I’m very excited about this transition to the broader use cases of Open Finance, but to find the right path, the industry needs a group similar to the Open Banking Implementation Entity (OBIE) to help facilitate collaboration and the right levels of regulation.
There’s also some tweaks that need to be made to existing Open Banking legislation. PSD2, for example, currently requires reauthorisation every 90 days, making many Open Banking products – particularly in personal financial management – clunky and inconvenient for users. This needs to change fast, because it leads to higher user attrition which then increases costs and reduces lifetime value of customers.
If the industry can come together and continue to work on offering consumers and SMEs genuinely innovative, useful products, 2021 can become a landmark year for financial services – in particular for lending – helping everyone get back on their feet after the rollercoaster of 2020.
