Open banking, a relatively new concept in the financial sphere, is the sharing of customer financial information and transaction history. It allows providers access to your financial information and past transactions.For lenders it provides a greater sense of security when loaning money as they can check for any red flags in borrower spending such as debt or gambling issues. It provides a better picture of a borrower’s financial life and can give a greater indication of if they will be able to repay loans in the future. From a borrower perspective, it could potentially help individuals, and small-to-medium sized businesses get a better deal.
Examples of Open Banking
Existing examples of open banking apps include budget planning programs. These pull data from multiple sources, such as different bank accounts and different credit cards, allowing you to have a full picture of your spending.
How Does it Work?
According to the FCA, Open banking involves financial information being shared electronically and securely, only if a customer approves it.
What are the Benefits?
“Open Banking has clear benefits for lenders,” explains Dan Kettle of Pheabs.“This new paradigm allows companies to lend money with a greater picture of a borrower’s financial situation. For consumers there are still many benefits. Both individuals and businesses could benefit from new insights about how to manage their money. ““They also may be able to gain access to better rates, products and services which were previously unavailable. When seeking loans, these could be tailored more closely to the individual’s spending behaviours and lifestyle.”
What are the Risks?
How is it Different from Credit Score?
Open banking creates a more accurate reflection of an individual’s or company’s financial situation than a credit score. In fact, open banking can use existing credit scores as one of the variables when making suggestions about a customer’s financial decisions. This could include providing options that suit their existing credit score.
The Future of Open Banking
If open banking starts to take off, it is possible that different types of loans will start using it. The benefits for lenders are clear. They can lend to borrowers with a clearer idea of borrower spending habits and transaction history and, through this, decide if they are a reliable candidate for repayment of a loan. This could mean that in the future, mortgages and other types of loans would operate in this way.