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HomeInsights & AdviceOpen banking set to change lending in 2021

Open banking set to change lending in 2021

by John Saunders
19th Jan 21 3:55 pm

It’s 2021 and a fresh start for personal and short term lenders who have faced a difficult year. Steep regulation from the Financial Conduct Authority, a surge in compensation claims and throw covid-19 into the mix and you have a very difficult year for lenders and the thousands of workers that they employ.

“It’s been a tough time for UK lenders,” explains Alfie Usher of price comparison site, Forces Compare.

“The year started with compensation claims and some big names going under and then covid struck, which meant carrying out income and affordability checks became challenging.”

But a lot of lenders are approaching 2021 with optimism, with a number of companies already starting to re-lend at 25% of normal capacity or more.

One of the most exciting additions to 2021 is the use of open banking, a process which allows firms to see banking transactions from customers and applicants.

Championed by the Competitions Market Authority, applicants have to opt in if they want the lender to see their transactions – and this is typically required to be approved for a loan.

“With open banking now integrated into loan underwriting, the lenders can get a better understanding of the customer’s financial history, debt and other liabilities,” Usher explains.

“This is very exciting for lenders, since now they can see if customers have large gambling debts or lots of other loans open at the same time. It should result in much, much better credit scoring, more effective underwriting and ultimately a lower default rate.”

“Early signs show that lenders are getting a lot of surprises in the data that they find. Bear in mind that some of these lenders have been operating for 10 years or longer and feel like they have a good understanding of their customers and how to score people. One of the biggest surprises is that the number of high gamblers is equal between males and females, with bingo causing a lot of debt or loss of income for female customers.”

“A lot of the lenders partnered with Forces Compare are rolling out open banking this January – and we would expect other industries such as credit cards and mortgages to follow suit very soon.”

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