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2023 Roundup: Open banking flips the traditional lending game

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Open Banking-led Transformation of Traditional Lending

In 2023, a wave of innovation swept through the lending industry, thanks to several key players in Open Banking taking a stab at reimagining how traditional lending works. 

Before exploring Open Banking’s role in transforming lending, let’s recap our journey. Previous blogs covered the Top 20 Big Moments in Open Banking, showcasing key developments, the revolution in A2A payments enhancing payment efficiency and security, and Open Banking’s role in reinventing mortgage processes.

So, what’s up with lending lately? 

Gone are the days when your chance at a loan rested solely on a credit score that seemed more like a magic number than a real reflection of your financial life. You know the drill – traditional lenders pull up that score, and if it’s not up to snuff because of past mistakes, limited history, or it just doesn’t capture your true financial health, you’re out of luck—no loan for you, or at least not one with favourable terms.

But here’s how Open Banking transforms the lending game. It’s like that friend who actually takes the time to get to know you rather than just judging you based on your past. With Open Banking, lenders can take a deep dive into consumers’ financial lives, looking at not just income and expenses, but the whole shebang. We’re talking real-time transaction data, every dime consumers earn (yep, including that side hustle or that stock dividend), and how they choose to spend their money – essentials versus those splurge moments. And the best part? This isn’t just about proving consumers can pay back what they borrow. It’s about fairness and opportunity. By getting a more accurate picture of consumers’ financial situation, lenders can offer loans that truly fit their ability to pay, potentially lowering the borrowing costs.

Infograhic design featuring the various financial players leveraging open banking to transform traditional lending.

Elevating Credit Scores with Open Banking

Boosting Creditworthiness: Open Banking revolutionises how credit scores are calculated by giving lenders a more nuanced view of consumers’ financial health. Instead of just looking at credit history, lenders can now see consumers’ real-time income, spending habits, and financial decisions. This means those who’ve been responsible with their money but haven’t had the chance to build a traditional credit history can now shine. The following companies are at the forefront of using open banking to enhance consumer credit scores:

  • The Housemate app partnered with TCS to utilise open banking to build credit scores for users who are living in shared accommodations.

  • BuildMyCreditScore introduced a Mastercard debit card in the UK that leverages open banking to help consumers enhance their credit scores.

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Streamlining Underwriting Through Open Banking

Revolutionising Risk Assessment: The underwriting process gets a major facelift with Open Banking. Lenders can dig deep into consumers’ financial data, understanding not just the past but the most recent financial behaviour. This access to detailed income streams, expenditures, and financial habits means lenders can make more informed decisions faster. For borrowers, this means quicker loan approvals and potentially more favourable terms, as their financial potential is assessed more accurately. These companies are pioneering the use of open banking to refine credit underwriting processes for lenders:

  • Alternative lender Iwoca leveraged CRIF’s open banking-powered solutions to launch instant decision loans for SMBs. 
  • New Zealand-based credit bureau Centrix partnered with Envestnet|Yodlee to access transaction data directly from the borrower’s bank account.
  • Monthio, a credit decision-making solution, joined forces with Enable Banking to facilitate improved loan approval procedures in Spain.
  • FICO teamed up with Belvo to develop an interpretable and explainable machine learning model to provide a credit risk score based on consumer-permissioned transaction-level data. 
  • Plaid launched a new entity to provide actionable and differentiated cash flow insights from open banking transactions data to better predict a borrower’s ability to pay.
  • Plaid unveiled a new on-demand hosted link solution to allow lenders to access consumer-permissioned cash flow data through Plaid during their underwriting process. 

Debt Collection Gets a Makeover with Open Banking

Humanising Debt Recovery: Open Banking is changing the debt collection game by making the process more personalised and less daunting. With access to up-to-date financial information, collectors can understand a debtor’s current financial situation, allowing them to offer realistic repayment plans. This approach not only makes debt recovery more efficient but also more compassionate, helping maintain a positive relationship between lenders and borrowers even in tough times. These firms are capitalising on open banking to revolutionise debt collection practices:

  • Debt collection software provider Paycepaid partnered with Envestnet | Yodlee to leverage consumer-consented financial data to assist with near real-time financial hardship assessment of its customers. 
  • SuperFi partnered with Truelayer to leverage its variable recurring payment (VRP) solutions to facilitate better management of debt repayments. 
  • KapitalKontroll, a Norway-based collection services provider, partnered with Neonomics to launch a debt collection system.

The Dawn of a New Era in Lending

Open banking isn’t just a trend; it’s the bedrock of modern finance, set to revolutionise how we access and manage credit. It promises a future where securing a loan is as simple and tailored as your favourite online experience, and handling debt feels empowering. With open banking, the vision is clear: a more equitable, transparent, and efficient financial world awaits. As we embark on this transformative journey, the possibilities for borrowers across the spectrum are endless.

Ready to see what the future holds?

Authors

Founder & CEO | sanjeev@whitesight.net

Sanjeev is a fintech aficionado who loves to explore the depths of the industry as much as he loves to explore the depths of the ocean in his scuba gear. He is the founder and CEO at WhiteSight, bringing a wealth of research and advisory experience to the fintech world.

Senior Research Associate

Risav is a senior research associate at WhiteSight, where he spends his days navigating the complex fintech landscape and poring over market trends. When he's not decoding the world of fintech, you'll find this sports fanatic decoding the perfect curveball on the football field.

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