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Open banking loans: 4 reasons why they outperform traditional loans

Vitor Urbano
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Last editedMay 20234 min read

Open banking revolutionised the banking industry, with the Open Banking Initiative (UK) and PSD2 (EU) leading the way. This unprecedented data unlocking is allowing banks and lenders to entirely change the way that they operate, empowering innovation in every single service they provide.

One powerful example of this change is in the lending industry. These days, lenders are moving away from traditional operations and have begun providing open banking loans instead. This is significantly improving the customer experience in several ways.

 How can open banking help when applying for a loan?

Open banking can be a crucial tool when applying for a loan, allowing lenders to access the most up-to-date information on a customer’s financial situation. When receiving a new application, the most important step for a lender is to be able to accurately determine what’s the current financial situation of each customer.

Lenders need to be able to determine as quickly and efficiently as possible if a borrower has a high-risk profile, can repay the loan, or even analyse their financial habits (earnings vs spendings).

With open banking, they can tailor each offer individually, resulting in a much wider range of options and higher acceptance rates.

What can lenders see on open banking?

Any access provided through open banking requires consent from the customer, which means that lenders can only see specifically what they have consented to. Some examples on what information is accessible are:

  • Transactions

  • Balance history

  • Spending habits

  • Recurring payments (service subscriptions, loans, credits, etc.)

Companies should only request permission to access information they absolutely need to provide the service they are offering. With that in mind, it’s essential to double-check the consent form before actually agreeing to it.

As a customer, you can choose to give access to current accounts, savings accounts, credit cards, or business accounts.

 Why are open banking loans better than traditional loans?

Open banking loans are the outcome of taking all the data unlocked through open banking initiatives and applying them to the lending industry. This is then combined with the innovation from third-party APIs, to provide a much better lending experience.

Traditional loans used to rely on limited information and outdated processes. Open banking, however, has been growing in popularity. Here are 4 ways that open banking loans improve your average experience:

1. New information improves the income verification process

Lenders can evaluate an open banking loan application much faster than a traditional loan, as open banking provides much more information, such as transaction history.

For example, some of the longest steps of a traditional loan application are affordability checks and income verification. Lenders used to have to collect copies of bank statements to verify income. 

Using account APIs, these administrative tasks can be automated. The verification and evaluation process can be reduced from one week down to a matter of minutes, through simple open banking requests.

To enable income verification, FinTechs can employ transaction categorisation, which can help clean and enrich the huge amounts of data that lenders have access to. This helps them better understand their customers and also allows them to verify income or discover risk-reducing behaviours.

2. Provide a better customer experience with loan personalisation

Everyone is in their own unique situation when they look for a loan. However, most traditional lenders set out to follow a “one-size fits all” mentality for their approach, as it is the easiest way to operate. However, open banking is flipping this idea on its head.

PwC’s report on open banking suggests that it can result in powerful personalisation possibilities from banks and lenders. It gives lenders access to transactional information, meaning they can understand each loan applicant on a much deeper level. 

With all this extra data, and more in-depth understanding of customers, each loan can be tailor-made, and designed for that specific borrower. In the end, the customer experience whilst applying for a new loan is greatly improved.

3. Increase the number of potential loan applicants

Nearly 25% of UK adults are considered near-prime or thin-filed, making it extremely difficult for them to get a traditional loan. Open banking helps both of these underserved groups to find loans when they need it most.


When people are on the edge of having bad credit, they are considered near-prime borrowers. They have numerous issues applying for loans, as they are considered high-risk for traditional lenders.

Open banking allows lenders to differentiate near-prime borrowers who can repay, and those who can't. For example, account data can show legitimate reasons for overdue loan payments, which are damaging to credit scores.


According to a PwC report, one of the most powerful benefits of open banking is the ability to credit score thin-file customers. People with a thin-file have a limited credit history, and therefore have an increased chance of being rejected for traditional loans.

Open banking gives lenders access to significantly more information and better insights when compared to traditional methods.

4. Stimulate competition and innovation in the banking industry

When there is an information imbalance between traditional companies, startups, and customers, it may lead to a situation that stifles innovation, as the traditional market leaders hold all the power.

Open banking allows for licensed startups to compete with major banks through direct access to their data. With this information, startups can provide innovative solutions to customers, forcing traditional banks to compete and innovate as well. 

That is how open banking loans emerged, providing the most value to customers and allowing lenders true unique selling points to thrive.

 Open banking can help with loans for people with bad credit score

As bad as it might sound, having a bad credit score is not that hard, and anyone can fall into that category without even knowing. According to Barclays Bank, and following the checklist of traditional loans, people can get bad credit scores due to multiple factors:

  • Failing to stick to the credit agreement

  • Declaring bankruptcy

  • Choosing the wrong credit card

  • Being the subject of a County Court Judgment

  • Only paying the minimum each month

  • Identity theft

  • Having no credit history

One of the worst things about a bad credit score is that it is incredibly hard to “erase history”. Essentially, a mistake made 10 years ago could still affect your ability to be approved on a loan application.

This applies to traditional loans, but not necessarily with open banking loans. By having access to more in-depth and up-to-date information, lenders can better access the real financial situation of each individual.

For that reason, if people with bad credit scores (due to mistakes of the past) reach out to lenders that rely on open banking to make their assessments, they will have much higher chances of being approved.

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