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3 ways lenders can harness the power of open banking

Emily Downer
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Last editedNov 20233 min read

Open banking is taking off.

Research by Open Banking Limited shows that there are now seven million users in the UK and that there were 68 million payments over the network in 2022.

And it doesn’t just stop at payments. Consumers are waking up to its lending potential, too. A recent survey by YouGov and GoCardless found that 42% of customers believe lenders should embrace new technology like open banking to consider more data points. 41% say mortgage lenders are relying on outdated methods to assess applications.

With the lending tide increasingly turning towards open banking, how can you leverage its potential?

In this article, we’re going to look at three key ways lenders can use open banking to save time and money and improve the customer experience.

1. Get the full picture

Assessing affordability by only using credit scores can limit your knowledge of who you’re lending to and mean you might be missing out on customers by not looking at the full picture.

Things like incorrect address data or not being on the electoral register can create a low score and block a loan application, regardless of whether they can afford it.

Important factors like spending habits and financial commitments outside of credit, however, are not taken into account.

This means lenders might be missing out on customers they could otherwise lend to or lending to customers who might not be able to afford repayments.

Open banking means that you can now go beyond the credit score and access many more data points to assess an applicant's affordability.

Personal experience of the outdated system of credit scoring is what led founder Rob Pasco to start Plend. They use open banking transaction data to contribute to a more comprehensive view of affordability with their ‘Plend score’.

“I had two very expensive credit cards and got to a point where I couldn't actually service them, even though my career and income were progressing,” said Rob. “I had to go to a debt charity and restructure things.”

“A lot of credit scoring is driven by demographic data and no one's really taking the time to actually understand who you are and what you can afford,” said Rob. “Open banking allows us to look into an applicant’s underlying ingoings and outgoings to base lending decisions on more powerful insights.”

To find out more about how Plend uses open banking for payments, read their story here.

2. Stop fraud in its tracks

The latest figures show that online fraud has no intention of waning, with unauthorised fraud levels remaining largely unchanged over the last 5 years (UK Finance).

Fraudsters are primarily targeting cards as the weakest link. Over the last year, five times more money has been lost to unauthorised card fraud than the next payment method.

Open banking is changing this. Open banking provides additional security features earlier on in the payment journey to stop criminals in their tracks. It can reduce both unauthorised and authorised fraud in a number of ways.

How does open banking reduce fraud?

Unauthorised fraud

Open banking automatically redirects customers to their online banking, requiring them to verify upfront that they own the bank account they are using to pay. This makes it difficult for anyone to use stolen or fake bank details. To authorise a payment through their online account, customers are often required to use Face ID or fingerprint verification. This type of authentication is very hard to copy or replicate, much harder than just using someone's card details online.

Authorised Push Payment Fraud (APP)

Open banking providers are required to conduct due diligence on any business that uses them to collect payments. This reduces the likelihood of fraudulent businesses offering open banking. Confirmation of Payee (CoP) plays a central role in stopping APP fraud. Whilst making an online bank payment, it verifies that the account you’re paying matches to the information you’ve inputted i.e. that the name matches the account number and sort code.

With more visibility, there are less places for criminals to hide in the payments process. Open banking is fast becoming the strongest defence against fraud.

3. Variable Recurring Payments

Variable recurring payments (VRP) are set to be a game changer for the lending industry.

A VRP enables a customer to give permission for a third party provider - such as GoCardless - to make a series of payments from their bank account of variable amounts all through one authorisation process. By using open banking, customers verify themselves instantly through their online banking, reducing the risk of fraud.

It speeds up the process compared with traditional Direct Debit, increases security through bank account verification and provides flexibility for your customers.

Why are VRPs so revolutionary?

  • Get paid faster - funds move into your bank account up to 3x faster than Direct Debit, and up to 7x faster than credit cards

  • Instant payer confirmation - instantly verify a customer and set up their repayment plan in one go

  • Reduce fraud - payments are authorised through your customer’s bank account before you take the first payment, therefore you’re less exposed to fraud

  • Increase flexibility - customers can pay back varying amounts on the same schedule, perfect for paying down debt faster or fluctuating credit card balances

At present, this is only available for the sweeping use case, whereby funds can move between accounts owned by the same person. This is perfect for the lending journey, where customers can pay down debt on their own accounts.

To find out more about VRPs and sweeping, take a look at our detailed blog post on the subject.

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