Why open banking adoption in lending is taking off

A recent report by open banking credit reference agency Credit Kudos has found that the adoption of open banking in lending could be set to reach 87% by 2023.

The report found that one in four lenders – 26% – now use open banking technology, with 51% of those who haven’t adopted it yet claiming they plan to do so in the future. Up to 87% said they plan to adopt it within the next two years.

One of the key trends found in the report was that impact of the pandemic on the uptake of open banking by lenders, with Credit Kudos discovering 78% of lenders changed their rules about who they could lend to in the pandemic. Meanwhile, 46% of these lenders changed their policies as it was too difficult to verify borrowers’ income – for reasons including redundancies and furlough.

It was also identified in the study that more than a third – 36% – of lenders changed their lending rules in order to avoid those deemed ‘higher risk’ customers during a period of massive uncertainty. In addition, 30% of those who changed lending policies during Covid-19 underwent a loss of revenue from new customers.

Of those lenders who changed their lending policies during the pandemic, 34% saw a knock-on effect in the form of a bigger need to adopt new tech across their companies, while 30% saw an increased need for new data sources.

Up to 47% of all lenders who were surveyed stated that they believe open banking could help their organisation save time and cut the cost of credit decisioning in the future.

Credit Kudos CEO Freddy Kelly said, “From national budget deficits to individuals’ current accounts, the colossal impact of COVID-19 on the nation’s finances was felt by all. In times like these, individuals and businesses look to their financial partners for support, but without up-to-date, accurate information on borrowers’ financial situations, many lenders struggled to continue to lend as they could previously.

“The seismic shock of the pandemic has forced a period of refocusing among lenders on the need for better sources of data, and greater technology integration to help them leverage newer data to enable better decisioning. Open Banking technology is helping lenders to move beyond the limitations of traditional credit data and open the door to better financial behavioural data, all of which creates more rounded assessments, increased acceptances and reduced defaults.”

EY associate partner of corporate finance Stuart Mogg added, “COVID-19 caused a lot of worry across both the consumer and SME lending sectors, and many lenders went into survival mode, increasing credit score cut offs and pulling higher risk product ranges. Thanks to various factors, including government schemes, increased vaccine roll-out, and the return of consumer confidence, both the consumer and SME lending sector have nearly returned to pre-pandemic norms and in some cases have pushed risk beyond these levels.

“But stability has not lasted long – already we’re seeing further COVID-19 and geopolitical volatility, and it is my view that we should not expect any less of a challenge during 2022 then we did in 2021. Periods of volatility such as this is when Open Banking insights become even more valuable for lenders, going beyond traditional credit bureau data to give a real-time feel of consumer and SME behaviours.”

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