It’s less than four years since the introduction of PSD2 brought about the start of Open Banking services. Until then, the valuable insights transactional data provides were only available to the customer’s current bank.
This democratisation of data arrived just in time. The Covid-19 pandemic has altered and complicated the finances of both businesses and people like nothing before it.
Without knowledge of transactional data, it would be difficult for banks and other businesses to understand customers who were not already in their portfolios. As a result, customer onboarding, and therefore growth, would be hugely challenging.
The circumstances of the last 18 months have also accelerated digital transformation. Processes that relied on physical documentation were deemed too slow or impractical, with Open Banking facilitating quicker and easier digital alternatives.
With these facts in mind, we carried out a survey in April and May, asking more than 100 clients from the Financial Services, Telecommunications, Insurance, and eCommerce sectors about their needs and the opportunities they see from PSD2. We talked to companies in Denmark, Germany, Italy, Norway and Spain.
Prioritising the use of Open Banking
Access to bank and payment card transaction data significantly increased the variety and depth of data available to organisations. Our survey found businesses are enthusiastic about the data’s potential, with 89% of respondents agreeing that Open Banking is a big opportunity for their business. Just 9% felt it would not have a significant impact.
Businesses rated originations as the area where advanced insights and analytics from transactional data can make the most significant difference. Open Banking enhances credit scoring, affordability, income verification and other essential checks when onboarding a customer.
From a lender perspective, we were told that loans and credit cards were the focus areas where fast and effective onboarding processes are crucial. In addition, the marketplace for these products is competitive, with new players challenging the traditional lenders in an increasingly digital world.
The ability to make high-quality decisions at speed in this area can have a tangible effect on commercial performance.
Making accurate decisions
Affordability has become more difficult for lenders to measure since the pandemic began. People may not be showing immediate signs of financial stress due to payment holidays, while it can be more than a year until businesses file accounts that show they are struggling. Traditional data sources are useful, yet may not immediately provide the full picture.
Transactional data helps to bridge the gap by providing a deeper understanding of people and companies’ financial behaviour in real time. Lenders can get an improved view of how much customers can afford to borrow without becoming overstretched, or when they will be in a position to make repayments.
Of course, the real power of Open Banking is in the quality of the transactional insights it can provide. With transactional data integrated into analytical models and scorecards, businesses can assess affordability and cash flow more accurately and with greater predictivity. It means lenders stand a better chance of both avoiding defaults, and assessing potential clients with a short credit history or who are entirely new to credit.
This view is supported by results from our survey, where respondents cited increased decision accuracy from better data as the single greatest opportunity from Open Banking.
Accelerating the recovery
The speed and severity of changes to customers’ finances caused by the Covid-19 pandemic means its crucial to have a credit scoring framework you can trust.
It allows your business to prioritise financial health, giving both you and your customers a better understanding of what finance is realistic and affordable.
In many cases, the additional insights from Open Banking will allow businesses to identify customers that are a good risk who were previously marginal declines. While for those in collections cycles, it can help set them back on a pathway to sustainable and stronger finances in the long term.
Gain further insight into Open Banking by reading our report, Be More Open.