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Open Banking: The hidden cure for financial vulnerability

As more and more companies evolve Open Banking technology into live customer solutions, both businesses and consumers are beginning to experience its transformational benefits. Despite this, its full potential remains largely untapped. From addressing unmet SME needs, such as resolving payment pain-points to plugging credit application gaps, Open Banking provides a myriad of applications and advantages. In particular, it can play a critical role in helping those facing financial vulnerability and supporting better outcomes for consumers in debt.   

Building a picture of affordability

Open Banking can play a key role in identifying financially vulnerability, which in turn can help providers work out appropriate and affordable approvals and debt recovery plans.

Current account transaction data can be leveraged to interpret spending patterns, providing a range of insights to help customers understand their finances better. By reviewing a customer’s transactional data digitally and overlaying categorisation logic, each transaction is assigned a category which in turn can be used to create a fully transparent income and expenditure profile. This kind of personal financial management is provided by the majority of banks electronically to help customers understand their spending patterns.

As well as finding spending trends overtime, such as where and what money is being spent on, an expenditure profile also identifies the regular use of an agreed overdraft or drops into excess, such as spending more than you earn - which can result in additional charges. Categorising spending into buckets highlights areas of expenditure that need reigning-in, helping customers recognise spending patterns and alter their behaviour, especially on discretionary items when finances are tight.  

Financial stress-points

Similarly, it’s possible to pinpoint the main stress-points in people’s monthly finances. This information can be used to help avoid overloading financially vulnerable customers with repayments at certain time periods, supporting positive outcomes and avoiding debt spiral.   

The beauty of Open Banking is that it provides a current view of a customer’s finances, which can be combined with a more historical view of an individual’s lending performance (e.g. payments made on time or missed). A simple picture that represents a customer’s income and expenses on a daily, weekly and monthly basis informs clearer, more effective decisions about repayment structures, ensuring that a customer does not incur excess or unpaid item fees. This could be as simple as aligning payments with payday to make sure they’re met on a timely basis, which reduces charges while also avoiding an adverse impact on a customer’s credit file.

Fast-streaming the credit process

A less well known benefit of Open Banking is that it also offers faster consent, verification and processing for credit applications than traditional methods, giving people who need credit quicker access.

To inform their decisions, lenders use credit scoring, which uses historical information to rank a customer’s previous payment performance and indicate how they’re likely to fare with new lending requests. Reviewing and assessing affordability using bank statements is an integral part of this, but typically banks don’t send paper statements, so when these are required it can take time and result in a fee.  

However for customers who are digitally enabled, information related to their current account (and credit card) can be quickly, consensually and conveniently provided via Open Banking, without incurring any service cost. Additionally, full control remains with the customer – for example, with Equifax and AccountScore, customers can review the consents they have given and de-activate future access.

Helping entrepreneurs

Finally, Open Banking has also created opportunities for start-up and freelance businesses, helping struggling entrepreneurs gain access to credit and create payment plans that work with their financial patterns. This helps avoid issues that cause stress with the business, as well as supporting those with thin business credit files by drawing upon personal financial history.

As with individuals, Open Banking allows businesses to understand spending patterns, timings and stress-points. This is being further facilitated by HMRC, which is transitioning business and commercial customers to VAT online and digital self-assessment for tax. There is also a growth in the number of accountancy software packages to help customers attribute their spending to different receipts allowing VAT, Tax and Management Accounts to be generated and viewed electronically - alerting customers to potential pain-points. 

While Open Banking is gaining evermore traction, there’s a still a long way to go. Achieving global adoption is a marathon not a sprint. Increasing awareness among consumers and entrepreneurs of the wider ways in which it can be leveraged, particularly in areas such as financial vulnerability, will accelerate the momentum of the Open Banking journey, helping to address and alleviate the most urgent financial needs faced by society.

 

 

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