Open banking, kicked off in Europe by the Second Payment Services Directive (PSD2) legislation, has been heralded as a game changer for consumer and business banking and payments. While this is certainly true, the benefits it can bring to adjacent sectors have been somewhat overlooked.
Missive’s self-proclaimed open banking fanatic, Erin Lovett, investigates where the biggest opportunities outside banking and payments lie.
Credit and lending
The current processes for securing credit, whether consumer or commercial, are onerous. An application for any kind of loan requires a significant amount of paperwork from the applicant in order to demonstrate an ability to pay the loan back in full. This may include collating bank statements, quantifying income and expenditures, and, crucially, proving identity. The credit provider must then invest time into analysing the materials shared and authenticating the applicant to come to a decision.
Open banking has the power to change all of that. By granting the credit provider read-only access to their bank account, an applicant would be authenticating themselves and sharing all the information necessary for credit decisioning – making the process much faster and easier for themselves. The credit provider also benefits. By using next-gen credit decisioning tools that can automatically review the account details to make a decision, decisioning processes are faster and more standardised, as personal bias is removed. Additionally, they no longer have to go through separate steps to authenticate the applicant, speeding up the process and reducing the internal resource required to process a loan application.
The potential applications of open banking and finance for consumer retail are almost endless, but let’s focus on the big one: loyalty. If a consumer were to grant a retailer read-only access to their bank account, that retailer would be able to access and analyse their spending data, including their interactions with competing retailers. This would then enable the retailer to share personalised offers with the consumer, with the aim of securing all their relevant spend.
For example – let’s say you have been a loyal Caffe Nero customer for several years and have recently moved house. On your new commuting route there is a Starbucks, and you would have to make a five-minute detour to the nearest Caffe Nero. Most consumers will choose the most convenient option and start getting their morning coffee from Starbucks. If you had granted Caffe Nero visibility of your transactions, they could decide to offer you an incentive – whether that’s discounted products, a sped-up loyalty scheme, or another perk – and this incentive could change your behaviour.
Again, this benefits all parties – retailers gain access to accurate, up to date spending data, enabling them to deliver more personalised services and offers, and consumers benefit from said offers.
Much like applying for credit, the process for securing a rental property can be time-consuming for consumers and involves authentication and affordability checks. Once the applicant has collated and shared all the necessary information for the landlord or agency, it often takes several days for the information to be verified and a decision made. When looking for somewhere to live, a wait of several days can be detrimental – should the applicant continue with time-intensive applications for further properties, in the knowledge that it could be time wasted? Or, should they stop applying and keep their fingers crossed – knowing that if their first application was declined, they have lost several days in the lead up to their current lease ending?
By granting read-only access to their bank account, an applicant would be authenticating themselves and sharing all the affordability information necessary. Again, this not only makes the application process much faster and easier for themselves, but for the landlord or rental agency too. If they are able to come to a decision faster, then the applicant can secure the property faster – and is more likely to use that agency again in the future.
The number of UK users of open banking has already passed the one million mark, and this amount is only going to grow as awareness of the technology’s benefits increases. Those businesses outside of banking and payments that adopt the technology early will have access to a raft of opportunities for improving their customer relationships – and increasing their revenues.