Finance is getting fairer thanks to open banking
Last editedJan 20233 min read
In this guest blog, Plend's James Pursaill discusses how the start up is reinventing the loans landscape through the greater transparency and data capabilities offered by open banking.
Plend’s mission is to offer fairer access to borrowing by rethinking the way people are assessed for loans.
Traditional credit scores mainly assess whether applicants are “prime” or not. Meet the narrow criteria for prime status and you’ll have little trouble securing a significant bank loan at a rate in the single figures. Fall even just a little short, though, and – as my Co-Founder Rob discovered – you’ll be forced to navigate the sticky world of short-term, high-cost credit provided by credit cards, overdrafts and sometimes-predatory lenders.
But, like so many other financial services, open banking is creating opportunities to level the playing field, through greater transparency and better uses of data. And offering more fair and equitable approaches to financial services will be critical to cushion the impact of the escalating cost of living crisis.
When Rob came to the UK from New Zealand, he had a great job in the City of London and the means to repay a low interest loan. What he didn’t have, however, was a credit score.
To cut a long story short, he eventually got into a serious spiral of high-cost debt that ended in an Individual Voluntary Arrangement. Because of that, even now he can't access prime lending products, such as a mortgage.
Our own research says there's at least 20 million people like Rob in the UK, who have every intention of repaying a loan but can’t access meaningful lending at a fair rate because of their credit score.
It’s time for a better, more inclusive way to lend.
The trouble with traditional lending
Part of the trouble with traditional lending is the extent to which decisions rely on data from credit bureaus. History matters, as Rob’s story showed, but they also use a set of averages from an applicant’s postcode for spend on things such as groceries, bills, rent and holiday, and assume that’s how much they also spend on these items.
Together, credit history and these averages offer a very poor picture of what people can actually afford right now and in the future.
Instead, Plend uses open banking to develop a personalised view of incomings and outgoings over the last 12 months from which a truly individualised assessment can be made. Open banking offers insights that are largely invisible to credit bureaus, such as how often you’re paid and how much; how long you’ve been in the job, and whether you’re still in it on the day you applied for the loan. It also shows how much you spend and how often on groceries, and whether you pay your phone and internet bills on time.
Even though we’re lending to non-prime customers, the degree of certainty that these stability indicators provides ultimately results in less risk for us, and we can pass on these savings via lower rates for customers.
A smart meter for money
Many customers come to Plend looking to breakout out of a debt spiral by consolidating their commitments into a single, more manageable loan. Sadly, we can see these needs becoming yet more acute as the cost of living crisis develops – after all, there are little opportunities left for people to save by switching energy tariffs, adapting their grocery shop or reining in holiday plans.
But the greater transparency into individuals’ financial health offered by open banking has the potential to stop these debt spirals from taking hold in the first place.
People who are overwhelmed by their finances can find it hard to collect the comprehensive information financial experts need in order to help them restructure things. No problem, open banking data can do it for them: comprehensively, neutrally and automatically.
At Plend, this lets us create customised packages for customers, both from the outset by offering a breakout loan at a fair price and during our relationship if any of our customers have trouble keeping up with repayments. In the near future, it could be combined with Variable Recurring Payments (another open banking capability) to create dynamically altering repayment plans. These could respond to seasonal events, like Christmas when budgets might be more squeezed, or life events such as a bonus, a pay rise or a new baby on the way.
Think of it like a smart meter for your finances.
Control when it’s needed most
With the cost of living crisis, it will become increasingly important for people to be able to access tailored financial products and advice that both reflects their actual situation and is flexible enough to help them take change in their stride.
No matter the kinds of services a business provides – financial or otherwise – developments such as API-driven technologies are now making open banking capabilities easier to integrate with wider business platforms. For us, that’s enabled self-service dashboards where borrowers can proactively adjust their repayments should their situation require.
For me, this points to one of open banking’s most impactful benefits: allowing people to take control of their finances before things start to get on top of them. Sparing them a lot of anxiety along the way.