The need to share data

Open banking was heralded as a game-changer for financial services, yet uptake has been slow. Michael Lloyd investigates why more peer-to-peer lending platforms should be adopting the data-sharing initiative

Open banking has been a source of much discussion in the fintech world – so why then are so few peer-to-peer lending platforms offering it? With the City regulator’s more stringent affordability rules and Covid-19 introducing challenges in assessing borrowers’ ever-changing financial situations, it is more important than ever that the entire financial services industry wakes up to this and adopts the technology.

And P2P lending platforms are perfectly placed to act as pioneers. Open banking is simply the process whereby banks share people’s personal data, with their permission, with third party financial service providers through application programming interfaces. But for P2P lenders, the main benefit comes in the form of assisting in lenders’ credit processes when assessing affordability. Yet few P2P lending platforms use the data-sharing initiative.

Those that do include Lending Works, RateSetter and most recently Leap Lending, which launched in December and requires its borrowers to share their bank transactions data via open banking, among others. P2P lending platforms can partner with credit risk firms such as Credit Kudos or CRIF Realtime, which use open banking to view the banking transactions of borrowers to provide a more accurate and up-to-date proof of affordability, and at a quicker rate.

Read more: Funding Circle looks again at open banking

This is compared to that of traditional credit bureaus which use data that is up to 30 days old, or simply request bank statements which are easily forged. By contrast, open banking provides up-to-date financial information and is thus much better at assessing creditworthiness. For instance, open banking can help to assess whether growing start-ups can afford loans as their finances are ever changing, and to discover whether borrowers with a thin credit file – such as younger people – can afford repayments by looking at their income and expenditure.

The ability to quickly and concisely assess affordability should make open banking particularly attractive to the alternative lending sector, especially given the shape of the Financial Conduct Authority’s (FCA) ongoing regulations in this space. Stricter affordability rules from the FCA have already caused problems for a number of lenders, causing them to be more cautious so that they lend responsibility.

This reinforces the need for open banking because the data sharing technology shows lenders a more accurate, up-to-date credit profile of borrowers. “Using open banking is the best way to assess affordability,” says Matt Schofield, co-founder and chief technical officer of Credit Kudos.

“Affordability assessments are not a catalyst for open banking, they’re speeding up its adoption.”

The Covid-19 pandemic makes the adoption of these affordability assessments even more urgent. By making full use of open banking technology, platforms can access up-to-date information to show whether borrowers can afford loans and if they have lost their jobs or been put on furlough in recent months.

This can offer some crucial insight into a borrower’s ability to repay their debts in the months and years to come. It is an unfortunate reality of any financial recession that many people may start looking for loans they cannot afford, and as we’ve seen before in the 2009 credit crunch, this sort of bad borrowing behaviour can have an enormous effect on the wider economy.

During the lockdown, Leap Lending has seen more interest in open banking from other companies, including competitors, asking after their experience in the field. “With the current situation, it’s a must have,” says Daniel Napon, finance director and chief operating officer at the platform.

“There’s uncertainty with furlough and people losing their jobs and the economic situation, so you need to understand in real time who your customers are. A credit report will not provide that information in real-time.”

Read more: Rebuildingsociety gains access to open banking

William Rist, head of partnerships at Lending Works, which has used open banking to assess borrowers’ affordability since the start of 2019, believes that more P2P lending platforms should be utilising it.

“As long as you can use that data to the benefit of customers then absolutely more should be offering it,” he says.

However, Leap Lending’s chief executive Fawzi Kyriakos-Saad has gone one step further, arguing that lenders shouldn’t just be adopting open banking, but that it should be a requirement from the regulator.

“Everyone who says they have done an affordability test without having access to accounts, has done one by asking clients to give them an idea of their spending,” says Kyriakos-Saad. “I think open banking ought to be something that’s not an option, but an obligation.”

Assessing affordability is just one of many benefits of open banking, alongside other advantages such as preventing fraud. Lenders can verify a potential borrower by seeing if their name matches that on their bank account, giving them confidence they are lending to the right person and reducing the risk of fraud.

Leap Lending has actually identified a few potential cases of fraud where the name of the applicant and bank account owner were different. “We’ve caught cases and you can see they are not who they say they are,” says Napon.

“Before open banking, people could impersonate others or steal their identity, but with open banking, borrowers can’t unless they have their login for their accounts.”

Leap Lending also uses open banking to look for evidence of irresponsible financial behaviour, such as gambling habits. If excessive, the platform will reject the applicant.

Furthermore, in a competitive lending environment, consumer loan platforms are often chosen by borrowers because they offer the benefit of a dynamic rate, whereby after every three months the borrowers’ rate over the lifetime of the loan could go down if their debt is reduced by five per cent. However, this service can only be offered when the platform has access to the kind of up-to-date data that open banking makes available.

Despite the various benefits open banking brings and the fact that FCA affordability requirements and the uncertainty from Covid-19 make it an important time to adopt the technology, little progress has been made by the P2P sector in tapping into open banking. This may be due to the fact that open banking is a relatively new tool which has emerged at a time when privacy concerns and cybersecurity risks are a top concern for consumers.

Open banking was only officially introduced in the EU in 2016, and in the UK in 2018,  and it takes time for lenders to build out the new customer journey, integrate technical aspects, test, learn and gain confidence in the new open banking approach, as well as for customers to trust it. Many consumers have been wary about sharing their data, although more are now getting the message about how secure and financially beneficial open banking can be.

Consumers have full control over their data with the ability to accept and reject their consent to sharing it at a click of a button. Another reason for a slower rate of adoption is that open banking is unknown territory for the banks – they have had to completely change their model to support it.

Read more: ArchOver rolls out open banking

“Open banking is gaining momentum by the month, especially for lending use,” says Dan Weaver, head of innovation at Equifax UK, which provides open banking solutions for financial services companies. “The initiative was only launched in January 2018 and its impact was never expected to be instantaneous. We are now seeing this process come to fruition and expect uptake to continue to grow throughout the coming year.”

Credit bureaus have reported that consumer uptake of open banking has increased in the past six months. As more and more consumers become used to sharing their data, integration of open banking becomes less of a challenge for P2P lending platforms.

Leap Lending launched with open banking integral to its model in December and another P2P lending platform – Rebuildingsociety – is now using the technology as well. Rebuildingsociety’s technology provider White Label Crowdfunding has partnered with TrueLayer, enabling it to use open banking to reconcile client money and assess creditworthiness.

“I think open banking is a brilliant development that’s been long awaited and anticipated to help platforms to transact efficiently,” says Daniel Rajkumar, founder and managing director of the platform.

Read more: Covid-19 could boost lending industry’s use of open banking

Meanwhile, ‘big three’ platform RateSetter offers open banking on the borrower side and sees the potential to expand the use of it beyond loan applications, for example, in the collections process.

“Open banking is here to stay, and I expect P2P lenders and other financial services platforms will use it much more as customers become aware of the benefits and take-up grows,” says Michael Hoare, chief credit officer at RateSetter.

As fintechs, P2P lenders are well placed to be at the forefront of open banking adoption and innovation. These platforms already possess better technology than some banks, and they are generally more agile and able to adopt new technology more quickly.

“More people are talking about open banking now and I think P2P will be one of the first sectors to see it moving and will become a better sector for it,” says Glen Keller, chief product officer of CRIF Realtime.

Open banking is definitely here to stay, and it looks like P2P is gradually making headway into this area. It is clear that affordability assessments are vital – and there is no room for error when it comes to the FCA’s requirements.

As the Covid-19 pandemic fades into an economic recession, the need for quick lending decisions and easy access to finance is only going to grow.

Progress is being made, albeit slowly, so perhaps more of a collective push is needed to promote open banking.

“Open banking has taken longer to gain traction – it has been more a subtle beat than a revolution – but there’s been a recent uptake in the percentage of customers using it,” says Keller. “I think the industry needs to get together and hammer home the message that it’s safe and secure, easy and quick, and regulated.”