How Consumer Loans Leverage Open Banking – Trickypedia

Digital lending has been a response to the problems customers experience with traditional lending, such as: It was also a response to the digitization of personal finance as digital lenders sought to fill the gaps where customers prefer digital services. For some, financial institutions had made borrowing too difficult or simply inaccessible (Infosys BPM, no year).

Consumer credit changes

Technological advances have driven much of the changes in consumer lending. The availability of data enables the lender to look deeper than the creditworthiness when analyzing the creditworthiness of a customer, which leads to a more precise risk assessment (Infosys BPM, no year). Digital lenders can have access to employment history, educational data, and spending habits that will help them better understand whether an applicant is able to pay off their debts (Srivastava, 2021). Access to this data also enables a new way of looking at creditworthiness. In addition, the introduction of AI, algorithms and machine learning enables digital loan apps to detect and eliminate fraud and to update and simplify administrative tasks (Infosys BPM, nd).

Another change is the introduction of non-banking institutions into the consumer credit area. Amazon offers small business loans and Apple has introduced a digital credit card (Srivastava, 2021). Supported by technologies such as blockchain and AI, there will continue to be a larger number of peer-to-peer (P2P) credit institutions giving traditional financial institutions a run for their money (Srivastava, 2021).

What is open banking?

Open banking is a banking practice that securely shares financial information, such as consumer banking transactions and other financial data, with outside financial service providers (Estevez, 2020). The transfer of data takes place through the use of application programming interfaces (APIs) and only with the consent of the customers (The Balance, 2020). Open banking is the engine for innovation and competition in the financial industry (Cahill, nd).

Why does consumer credit use Open Banking?

Consumer credit is becoming more and more digital. Open banking enables companies to build a process that increases conversion rates and approval rates for creditworthy customers.

Open banking helps companies collect and analyze open banking data automatically so that the number of customers with limited or no credit history can be eliminated immediately. In addition, Open Banking helps to speed up the review and approval of loan applications. Finally, Open Banking reduces administrative costs by reducing the number of manually entered data points and enables information that is critical to the population at risk.

Some Consumer Credit Companies You Should Know About

Lendable is a London-based lending platform that offers quick loans at fair prices. The company eliminates the need for bank loans by leveraging peer-to-peer lending and enables qualified investors to invest in consumer loans on the platform. Lendable uses AISPs, which allow customers to send information about their payment accounts to them and other service providers (Lendable, nd).

IPF Digital is a leading online provider of short and medium term loans to clients in Finland, Estonia, Latvia, Lithuania, Poland, Spain, Mexico and Australia. IPF Digital uses Open Banking to increase approval from loan applicants. The company uses Nordigen’s engine to automate the analysis of bank statements and raw account data (Nordigen, nd). IPF Digital uses this information to make credit decisions.

Koyo is the UK’s first open banking based lender and uses open banking technology to base credit decisions on real financial situations (Koyo, 2020). Koyo is trying to fix the problem that people without a great credit history cannot borrow. So instead of just looking at a credit score, Koyo looks at transactions on a customer’s account.

What’s coming?

The consumer credit sector needs constant innovation to develop and grow – but to ensure security and ethics it also needs adequate regulation. The emergence of new digital credit products has raised regulatory concerns about protecting customers and limiting the risks associated with financial markets. In Europe, maladministration in the consumer credit market was exposed by raising concerns about the Consumer Credit Directive and emphasizing the need to review certain provisions of the Directive, such as the credit approval process (Vinod Kothari Consultants, 2021). In the future, the guideline should use a future-proof and technology-neutral text that makes it possible to also be relevant to technological developments (Pecchini, 2021).

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