Open banking: paving the way for financial inclusion

Richard Newman at Open Banking Limited explains how open data principles applied to the banking sector will support the unbanked as well as helping smaller businesses

One of open banking’s biggest achievements has been to support financial inclusion, expanding access to financial products and services to historically underserved citizens. It has allowed customers to securely share their financial data with trusted third parties, enabling them to see a clear picture of all their finances in one place. This has helped them to take control of their money, use budgeting and savings apps, and access cost-effective credit.

Six years after open banking was launched as a regulatory requirement in the UK, we are seeing the transformative effect that this financial innovation has enabled.

In terms of the lending market, for example, the use of near real-time financial data means that eligibility assessments for loans can take into account wider criteria than traditional lending processes. This, in turn, increases the likelihood of approval in some cases, expanding access to credit to those who have thin, invisible or inaccurate credit histories - typically more financially vulnerable consumers. 

Alternative lender Salad Money, for example, was able to help users save an average of £497 in interest each, on an average loan amount of £973, as well as help identify £36.3m in unclaimed benefits by incorporating a benefits checker as part of its eligibility checks.

Open banking also eliminates the need to provide months’ worth of paperwork, speeding up the process for some lenders (simultaneously reducing their administration costs) and borrowers alike. 

For businesses, particularly smaller firms and sole traders which have restricted cash flow, this time saving is invaluable. Several open banking-based business lenders also offer more flexible repayment opportunities (such as seasonal and short-term loans), and the faster turnaround offers business owners an affordable alternative to what can be costly credit cards or overdrafts with existing providers. Several alternative lenders can approve a loan within minutes, and provide funding within 24 hours.

This can also smooth out cash flow, giving firms certainty around receipt of funds, and supporting their ongoing financial needs by eliminating the need for them to reapply for top-up loans. The data automatically flags the requirement.  

For small firms, connecting their banking data to their accounting software also provides them with real-time insights about their business helping to inform decision-making, resourcing and planning. The Federation of Small Businesses estimated that up to 70% of SMEs can’t accurately forecast their finances.

In addition, our research  showed that using open-banking driven cloud accounts can help some businesses and sole traders reduce their reliance on external accounting services, as well as cut both internal and external costs. 

We also know that the clear view of day-to-day finances offered by money management apps have helped consumers budget better and cut costs by identifying duplicate subscriptions or supporting one-click switching to cheaper products or services. Recent research from budgeting app provider Snoop stated that three quarters of its customers say that the app has made them feel better about their financial situation and 8 out of 10 of its customers say it’s easier to keep on top of their spending. Apps can also help identify problem spending and signpost users to real-life debt and support services.  

Savings apps have helped users to build a regular savings habit, even among individuals who have never saved before. We also expect to see open banking deliver further benefits to the UK’s renters and homebuyers this year too. 

Open banking is playing a key role in the rental sector, simplifying the tenant vetting process by enabling prospective tenants to provide an up-to-date snapshot of their finances direct from their bank, accurately and securely. This is invaluable for people with a thin credit file and more financially vulnerable consumers. 

A similar process applies to prospective homebuyers, as one leading building society now incorporates open banking-driven affordability checks into its mortgage assessments. For first-time buyers, linking their current account payments to their credit score, and providing additional evidence of a sound financial track record — such as regular council tax payments — can be factored into mortgage approvals, providing access to buyers who may otherwise have been excluded by traditional eligibility checks.

There is also a savings app for first-time buyers, which lets buyers open a Lifetime ISA savings account, and connect it to their current account via open banking to build their deposit. It also allows family and friends to use the ‘Instant Bank Pay’ connection to contribute to their fund.

This year, we expect to see the benefits of open banking expanded to other sectors, through the powers provided for in the Data Protection and Digital Information Bill. This is intended to support the creation of a smart data economy, and see an expansion of data sharing across key economic sectors such as energy, water, telecoms, and retail.

This richer pool of data could enable providers to better cater to individuals’ needs, helping to cut some household bills and enable both consumers and small firms compare and switch tariffs more easily. Benefits could even be seen at petrol pumps with drivers able to access real-time data on local forecourt prices to find the most competitive as part of the Government’s proposed PumpWatch scheme.

Throughout 2024, we look forward to seeing open banking deliver these additional cost savings, particularly to the financially excluded, and creating a truly connected and fairer economy.

Richard Newman is, Corporate Affairs Director at Open Banking Limited

Main image courtesy of iStockPhoto.com