How Can Your Lending Business Benefit from Open Banking – From the Basics to Specifics

Blog Post Digital Lending

Open banking has turned financial services upside-down and inside-out. These data-driven programs cater to consumer needs and wants, instead of pushing out prepackaged products and services. What started as a regulatory directive in the UK has opened up a whole new world of opportunity for consumers and innovative lenders.

So open banking was developed by regulators in the UK as a way to level a playing field dominated by 8 of the largest financial institutions in England. These big banks minimized choice, by controlling the consumer’s primary banking relationship along with all their account data. Times have changed. Open banking is spreading around the globe like wildfire. The EU was right on the heels of the UK. And countries like Hong Kong, Brazil, and Australia followed suit within months.

The goal of open banking is to increase competition, lower costs, and foster innovation. It gives consumers control over their account information, because it allows them to grant access to a third-party entity. Open banking will be a boon for fintech lenders who embrace the astounding potential. However, it could prove to be a challenge for traditional banks that may struggle just to deploy the required technology upgrades.

This article provides an overview of open banking. It highlights some of our favorite products and services. And it outlines the technology and compliance requirements. Open banking is an exciting development in the financial services arena. The only limit will be your own imagination.

Basics of open banking  

It can be tough to grasp the potential of open banking, because published explanations tend to be based on technology requirements and compliance regulations. You literally can’t see the forest for the trees. Innovative lending professionals will move beyond deployment details. They’ll see an unparalleled opportunity to deliver custom programs based on behavioral data at an individual level. Products and services that move money faster and cheaper, simplify budgeting and money management, and optimize interest earned and interest paid.

What exactly is open banking?

Open banking is the process where a consumer allows a third-party entity to access their personal banking information. The third-party gathers and analyzes account data, gleans insights, and delivers a targeted offer. In a way, it’s like building a product or service from the bank’s existing technology and intelligence. The offer could be a loan with more favorable terms, an enhanced credit bureau score, or an easy budgeting and money management tool.

There are two broad categories of open banking participants. The first broad category is Account Information Service Providers (AISPs). These groups aggregate data from multiple accounts into one consolidated resource. An example is a company that integrates traditional credit bureau information with additional predictive data in order to create a more comprehensive credit score for their client. The second broad category is Payment Initiation Service Providers (PISPs). These groups initiate digital payments for their users at a far lower cost than their brick-and-mortar bank would charge, by working around the established banking systems.    

Why would a bank customer allow account access to a third-party?

Consumers are willing to give out personal information when there’s a value exchange. The top value categories are convenience, intelligent recommendations without time-consuming research, and cost savings. Many consumers have already engaged in open banking. For example, when a consumer clicks on Experian Boost as a way to improve their credit score, they have engaged in open banking. They gave Experian permission to review their personal checking account in order to confirm regular, on-time payments for monthly charges like rent, cell phone, cable, and utilities. Many consumers consider an improved credit score to be a more than fair exchange for access to their account.     

How does bank data get shared?

The data is accessed via open application programming interfaces (APIs) that integrate bank software with third-party solutions. This integration enables instant data transfer. Open banking is a complex ecosystem where one entity interfaces with at least one, and potentially several other entities, in order to aggregate data or complete a money transfer. So all open banking APIs must adhere to a standard set of specifications in order to ensure a seamless experience for the consumer.  These APIs are the technological foundation for open banking, but the category is so new that standard technical requirements are still being written for most geographic markets.

What are the broad categories of open banking programs?

There are three primary ways for lenders to engage in open banking:

  • Originate loans as a direct lender.
  • Create a proprietary service that complements their loan products, like an enhanced credit score.
  • Partner with a company that provides this complimentary service.

Many open banking products are not direct loans. They are valuable services that can establish a relationship and become a lead magnet that attracts new, qualified loan prospects. In this way, the service becomes a lead generation pipeline.  

Who will thrive in the open banking era?

Open banking is all about database integration, data management, and data mining that uncovers customer insights. The kind of intelligence that allows innovative financial professionals to cater to their prospects. Alternative and digital lenders are uniquely positioned to dominate this arena. They’ve already mastered the technology. It’s just a question of finding clever new ways to use it.

Innovative open banking products

Here are some of our favorite new products and services that rely on open banking systems. You’ll notice that these programs start with a consumer benefit, and then configure the technology to deliver the desired outcome. We believe this is a more powerful approach than traditional product development, where too often a bank may work out the best way to leverage systems functionality with minimal regard for their customer base.    

Send money with a simple voice command

Consumers are comfortable making payments on peer-to-peer networks like Paypal, Venmo, and Facebook Messenger. Now Paypal users can send money with their smartphone using voice commands. It’s as easy as, “Hey Siri. Send $100 to my niece Ashley with a note that says “Happy Birthday”.

The technology ecosystem uses a series of APIs to integrate six distinct entities:

  • the sender’s Apple smartphone
  • the Siri voice command functionality
  • the sender’s Paypal account
  • the sender’s personal bank account
  • their niece’s Paypal account
  • their niece’s personal bank account

The ecosystem may be complex, but the transaction is completed within seconds.  

Your turn:

How could your lending operation use voice-activated transactions, or voice recognition security features to exceed customer expectations?

Improve your business credit score

Credit Data Research launched an enhanced business credit report called Credit Passport. This borrower-centric program counteracts a large number of small to mid-size enterprise (SME) loan applications that are declined due to thin business credit. Traditional credit bureau reports are notoriously limited when it comes to information on new businesses. The Credit Passport uses APIs to access multiple bank accounts plus accounting software to track sales revenue and supplier payments in real-time. This broader view of the business often assigns a higher credit score than a single business credit bureau. When a subscriber applies for a business loan, they include their Credit Passport account number. Their business file shows a superior credit rating, and they get a faster approval in addition to more favorable terms.   

What about you? Could your lending operation use the idea of enhanced credit reports to approve more business loans with more favorable terms, or to attract more loan applicants?

Protect your ARs with an early warning signal

Ormsby Street created a product called CreditHQ. It allows an SME to monitor their clients’ payment patterns in real-time. This product uses open APIs to access each client’s accounts payable ledger and business checking account. The system sends the CreditHQ subscriber an early warning signal when it sees late payments to vendors and suppliers. This red flag prompts the subscriber to take fast action to make sure they get paid ahead of other creditors. In this way, they pre-empt potential bad debt and protect their profits.

CreditHQ provides two additional benefits. It helps subscribers ascertain the credit risk for a potential new customer by reviewing the customer’s vendor payments. And it includes a short-term loan option. The service is continually calculating the cost of a short-term loan to cover the subscriber’s outstanding APs, in case they need to cover payroll or make payments to their own suppliers. This open line of credit option helps subscribers protect their own good credit by never missing a due date on their own payables.     

How could your lending operation use the idea of a business protection service to attract more business loans?

Optimize prompt payment discounts

Xelix prioritizes business invoices, based on the number of days outstanding and the amount of the prompt payment discount. The data for this analysis is accessed by integrating the subscriber’s checking account, their accounts payable ledger, and their suppliers’ accounts receivable ledgers. The subscriber saves money by taking advantage of prompt payment discounts. In addition, the procurement team can use the trends analysis to renegotiate product pricing and/or the dollar amount of their prompt payment discounts. Some of these optimization services claim to deliver as much as a 20% savings through a combination of payment discounts and product price reductions. They don’t charge any upfront fees, because they’re confident they can earn a substantial commission on the savings they deliver.   

How could your lending operation use the idea of prioritizing payments to generate pre-qualified leads for loans?

 Contribute to your investment account while you shop  

Dvdendo is an online investment platform whose motto is Small Steps Lead to Big Results. They wanted to teach young investors the value of disciplined investing, which was no small task. They knew from decades of experience that even a seasoned investor will struggle with this issue. Their unique solution was to generate automated daily account contributions, by rounding up credit and debit card purchases to the next dollar and depositing the small change. They integrated debit and credit card activity with the online investment account using open APIs. This was a fairly simple process that was similar to a grocery store that supports local charities, by adding an extra dollar to the total bill at check-out.    

This idea makes us smile. It harkens back to the age of piggy banks and my grandfather’s pottery change jug. What a simple way to bring an old idea into the 21st century.


How could your lending operation use the idea of rounding up credit and debit card purchases (by one or two dollars) to offset monthly loan payments?

Open banking compliance and technology requirements

Open banking relies on third-party access to bank account information via open APIs. The digital nature of these transactions exposes banks and third-party participants to a myriad of cybersecurity and identity protection issues. Therefore, the technology requirements and regulatory compliance requirements are almost inseparable.

Banks and third-party entities must comply with all regulations governing cybersecurity, including identity verification and data protection. In addition, the APIs must facilitate a seamless data transfer that supports an exceptional user experience with no obstacles and no delays. The tricky issue for open banking participants is that the specific technology requirements are still being written for most geographic markets.

Only two regions, the EU and the UK, have published their technical specifications. The Berlin Group created a uniform standards guide for the EU with detailed technical and operational requirements. This guide is referred to as NextGenPSD2. The Open Banking Implementation Entity (OBIE) created the same type of guide for the UK. It is referred to as Open Banking Operational Guidelines and Checklist.  

Different geographic markets are at different stages of development when it comes to oversight of open banking systems. These are the current governing bodies for the major consumer markets:

  • European Union – PSD2
  • United Kingdom – CMA
  • Hong Kong – HKMA
  • Australia – Treasury Open Banking
  • North America, Latin America, and Asia Pacific – currently exploring open banking rules

One last note when it comes to compliance. It’s a good policy to assume that any existing regulatory rules will be updated, or changed altogether, as open banking products, services, and technologies evolve.

Media consumption has changed  

Back in the 1960s, the era of madmen, it was easy to push ads at your prospect audience. Choose between television, radio, direct mail, newspapers, or magazines. And then pick the print publication or broadcast program most often consumed by your prospect audience. The typical consumer watched television news in the morning, listened to talk radio while driving to work, read business magazines on the train, and watched the corporate-sponsored family drama in the evening. This scenario explains why advertising executives had time for those infamous three-martini lunches.

Today’s media consumption could not be more different. Innovative lenders must become a part of their prospects’ everyday lives in order to be front and center at that unpredictable moment when a consumer needs money. Lenders who thrive in the open banking era will embed their product offers in all the apps and programs used by their prospect audience. The playlist could eventually include hundreds of media outlets, plus personal and business apps housed on omnichannel platforms.

Next Steps

Now is a great time for your team to start brainstorming creative, customer-centric ways to integrate open banking into your lending operation.

One of the best ways to stay grounded in your creative zone is to outsource deligate technology to an advanced LaaS platform. These fully managed, cloud-based software programs help lenders launch new ideas quicker, more effectively, and more cost-efficiently.

If you’re exploring open banking opportunities, then it’s time to request a Free TurnKey Lender Trial.   

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