In Business World Loan Approval: Since its introduction under the Payment Services Directive 2 of EU law, open banking has positively impacted financial markets. It continues to grow significantly, indicating widespread adoption with the numbers to prove it. As of this year, approximately 13 million consumers and small businesses are using open banking services using third-party apps.
Open banking systems were designed to lend increased protection for consumers and bring innovation and greater efficiency to financial products and services. This includes stronger authentication for online payments, reducing unauthorised transactions, and affording consumers greater transparency from payment providers.
So, how does this impact lenders and credit products?
Ethical lenders like Salad are using open banking to offer affordable loans with faster processing times and credit options tailored to your financial needs. This is particularly helpful if you are looking for same-day loans for emergencies or need quick access to funds.
In this article, we explore how open banking is speeding up the loan approval process.
Table of Contents
1. Instant Access to Real-time Financial Data
Before open banking, banks held a majority of the granular financial data of their consumers. This information often included transaction details, account balances, credit usage, etc., which was never shared with third parties. As a result, banks always held a competitive advantage over lenders who had to work with limited data or had to go through a lengthy underwriting process.
This made credit offerings more exclusive as borrower information was based on incomplete financial data. Additionally, lenders had to spend a lot of time making manual assessments and going through paperwork. For borrowers, this meant credit was more costly, had unfavourable terms and conditions and had limited credit options that didn’t suit their financial needs.
With open banking, ethical lenders like Salad can access real-time financial data. This is done through open banking API’s which securely share financial information with your consent. It allows lenders to detect income and expenditure patterns and assess your existing loan commitments more accurately to offer tailored products speedily.
2. Going Beyond Credit Scores
Credit scores are used widely, and there’s no denying that they’re key to credit assessments. However, relying solely on them to make lending decisions has impacted vulnerable borrowers with less than ideal credit scores or those with a thin credit file. It makes credit more exclusive and harder to access, leaving borrowers with limited choices.
Direct online lenders and credit unions were already invested in breaking this barrier to offer greater financial inclusion to borrowers with varying credit profiles. They relied on a different set of algorithms and factors that went beyond credit scores to offer inclusive and affordable credit options.
Open banking has further strengthened this trend, allowing lenders to make assessments based on current financial health rather than on previous credit history. This allows lenders to offer inclusive and affordable same-day loans to borrowers, irrespective of their credit score, which is particularly helpful in times of an emergency.
3. Speedier Fraud Detection Checks
Lenders spend a significant amount of time assessing their risks, doing their due diligence on every application that’s made to them. This is a time-consuming process that requires doing background checks, going through endless paperwork and verifying financial and personal data.
Because these were done manually, final assessments were often not error-free and could impact lender decision-making. For borrowers, this meant long wait times on loan applications and delayed credit availability. Open banking has changed this narrative significantly.
Lenders relying on open banking data can detect suspicious activity and patterns in a matter of minutes. This is because real-time data gives them a holistic view of the applicant’s financial situation, including any potential fraud. It has helped lenders cut down time spent on manual checks, making loan review times shorter.
4. Improved Affordability Checks
The FCA rules on affordability checks are pretty straightforward. It encourages lenders to carry out thorough affordability checks to ensure that borrowers aren’t strained financially by taking a loan. This is done to encourage responsible lending and protect borrowers.
Traditionally, affordability checks often relied on verification of employment, payslips, credit scores, expenditures, self-declarations, etc. While this was helpful, this static data was limiting and could contain errors, leading to a skewed or inaccurate view of the borrower’s financial situation.
Open banking has helped affordability checks become more precise by giving lenders verified, credible, error-free data on a borrower’s financial health. This includes accurate risk identification by real-time behavioural indicators like gambling, BNPL activity or repeat borrowing patterns. Improved affordability checks lead to faster decision-making.
Conclusion
Open banking systems are continuing their upward trajectory and are positively impacting the lending landscape. Lenders are able to access real-time data to make faster decisions and reduce downtimes in the loan review process. This has been particularly helpful for same-day loan providers like Salad, who can now offer suitable and inclusive credit options in a matter of hours.
For borrowers, open banking is a step in the right direction as your borrowing experience is more transparent, hassle-free and speedier than ever before.