Open Banking As The Permanent Disruptor of Lending

Articles Loan Processing & Underwriting

Open banking changes everything

“Open banking” is a financial-information exchange methodology and a source of innovation that’s transforming banking as we know it. It gives third-party financial-service developers and providers permission-based access to customers’ financial data from financial institutions via “application programming interfaces,” or APIs.

In plainer terms, open banking has the potential to change everything about banking, from who gets to be a customer to who provides underlying services (and on what terms).

Philosophically tied to the information-age principle of “open innovation,” open banking includes the “open data” concept, which holds that some data should be freely available for everyone to use as they wish, without restrictions from copyright, patents or other claims to exclusivity, according to one study. At root, open banking is based on the idea that data can be used to improve customer outcomes along the lines of faster, fairer, and more accurate service delivery — and that without it, the potential for innovation is blunted by considerations of data ownership.

“Many financial institutions welcome APIs begrudgingly, as a cost of doing business,“ says Elena Ionenko, co-founder and business-development head of lending-software maker TurnKey Lender. “But we see them as powerful tools for making the most of relationships between customers and banks — or bank-like entities, keeping in mind that it’s not just banks playing a role these days.”

The case for open banking

In fact, lending by retailers, medical-service practices, capital-equipment providers is on the rise, and their success is as dependent on unhindered open-banking inputs as any old-line bank. Just in terms of mortgages, non-banks originated 53% of US loans in 2016, but 64% of home loans for black and Hispanic borrowers, according to a Brookings Institute report cited by the Washington Post.

With open-banking coming to the forefront as an equalizer in the marketplace, fintech innovators have APIs in mind at virtually every turn.

Part of the agility you need to compete as a lending-tech provider these days is reflected in how configurable you are,” says Ionenko. “Nothing is hardcoded here because we know we have to be ready to support any lender anywhere in the world at any time. We win business because we’re API-minded, and have been from our inception.”

Meanwhile, informed consumers see putting their (usually anonymized) financial information out there for use by third parties via APIs as a fair exchange for better service at better prices and, in some cases, for more accurate credit scores.

Imagine paying for your daughter’s guitar teacher for this week’s Zoom-based lesson with your smartphone. That’s something you can do right now, and it’s all thanks to open banking, which allows you to buy items or services with a phone app that’s linked to your bank card or PayPal account. The fact you can pay that way involves a veritable ecosystem of permission-based data sharing, but the technology and necessary protocols are more than up to the challenge.

Integration and interpretation of data

In practical terms, open banking is dependent on database integration, and the mining and management of data that provide relevant customer insights. The timeliness of a loan applicant’s rent and car payments can shed light on the ability and willingness to meet additional financial obligations. This can help determine loan scores that are more nuanced than old-line credit scores — which have in turn have been criticized for perpetuating race, gender, and age disparities in lending decisions.

In fact, innovations in loan-servicing software show how open banking can work to everyone’s advantage. Typically, lenders participate in open banking in one of three capacities.

  • They seek to originate loans as a lender
  • They want to create a proprietary service that complements their loan products, like an enhanced credit score
  • They are partnered with such complementary service providers

Whether the offering is a direct loan or another service that can help establish or improve relationships between lenders and customers, it can function as a lead generator that owes its power and durability to an open-banking environment.

Open banking as a permanent disruptor

The fact that customers have to “opt-in” to benefit from open-banking programs puts a constraint on lenders and related service providers because customers have to see a clear-cut benefit from participation. Incentives of this type in the lending realm include:

  • Easier access to loans through point-of-sale loan-origination systems
  • More nuanced loan decisioning derived from more credit-score inputs with better consumer outcomes
  • “Favored client” status with access to offers and incentives that can help establish enduring customer-lender relationships

In some jurisdictions, oversight of open-banking systems has been formalized. In this category are the European Union, the UK, Australia, and Hong Kong. Meanwhile, in most of the Americas, and in the Asian-Pacific region, open-banking protocols are on — or quite close to — near-term legislative agendas, according to news reports. And it’s safe to assume that compliance criteria will change as open-banking technologies evolve.

“The future of open banking and API development is exciting to contemplate,” says TurnKey lender’s Ionenko. “The concept and the interfaces that make it real add up to a disruptor for which pre-digital legacy systems are a clear hindrance. The future of banking belongs to providers who are technologically nimble enough to align themselves organically to the brand at the front of every customer engagement.”

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