Open Banking opens up a new era of ultra-fast and simple loan decisioning
by Andrew Tierney
We are all used to going into a store and using our mobile phone to pay for purchases.
‘Tap and go’ has revolutionised our shopping experience. No more fiddling around with card readers and PIN numbers, or worse still dollars and cents, when all you have to do is wave your phone. Transactions now take seconds instead of minutes.
Who would have thought a few years back that by 2019 you’d be able to leave all your cash and your cards at home and go shopping with just your mobile phone?
Answer is, not many.
Well, we have the same situation today with taking out a loan. In what could be as little as five years, I believe the loan acquiring process will change just as dramatically.
We’ll be in a position to ‘tap and go’ a loan application.
Applying for finance these days is still pretty much an analogue experience. Chances are you’ll have to wade your way through pages of application documents and due diligence disclosures online, or in paper, before you get a provisional okay from a lender.
You’ll then have to wait longer while they check your bona fides, in analogue time.
Although lenders try, it is most definitely not a user-friendly experience. As far away from a consumer’s normal purchasing experience as you can get. And, as a result, too many prospects drop out of the process midway because it is too time consuming.
Contrast this with what will happen not too far into the future. You want a loan and all you have to do is pass your driving license number and date of birth to a lender and they will do the rest. No more time spent on lengthy applications. You may even only have to present your face to your phone, or snap a QR code, and it will be done.
How so? Well, Open Banking makes this likely because once your ID is verified and you have given your permission for data sharing, the lender can access all your current account transaction history in real time, run it through its algorithms, and in milliseconds make ultra-accurate decisions about whether to give you that loan or not.
Open banking is taking us from a reactive era where the emphasis is on past negative credit history (or the search for one) and time-consuming processes, to a proactive one where the lender gets a complete picture of an individual and is able to make super-accurate instant decisions. These are based on an applicant’s real financial status, rather than an estimate cobbled together from an analogue application.
Apart from it being instant (and telling whether the borrower can really afford the loan) - a game changer in itself – open banking will deliver a range of other benefits.
One of the most obvious is that lending decisions will cease to be largely a binary approve/decline business. When you have near-perfect knowledge of someone’s finances, you can engage in a more nuanced approach. Risk-based pricing, a feature of many other sectors, is achievable. Loan amounts and terms can be tailormade for an individual’s circumstances.
Lenders will know if a prospect can’t pay $10,000 off in three years, but can over five years. And then offer them a different deal to the one they applied for.
Notorious areas of miscalculation such as an applicant’s discretionary spending and loan serviceability (that have plagued decision-making in the past) and contribute to loan default rates, cease to be problematic.
When an applicant’s data is analysed through categorisation tools, lenders are able to identify and quantify all areas of spending. Heavy use of ATMs, unplanned overdrafts and gambling site spending, for instance, will all be noted and enable an immeasurably more robust lending decision to be made. It will pave the way for a braver form of lending: analogue would say ‘decline’, or ‘referral’, but digital, with a 3D picture, can say ‘yes’.
This new level of nuance is so much more helpful to the borrower.
The data will tell the lender when loan payments are best afforded during the month (because the consumer often does not know), so that a repayment schedule can assist cashflow. And when someone’s finances are going awry during the course of a loan term, this will be red-flagged and pre-emptive calls triggered to nip an issue in the bud. A large termination payment appears in someone’s current account and the bank knows a catch-up call is in order.
The beauty of this new era is that as time passes the data deepens and the analysis improves. After a couple of years, the data available to lenders will enable them to understand the consumer’s financial situation way better than the consumer does.
Anticipating buyer needs will be possible, creating the opportunity for proactive selling. And this selling will obviously not be of products that the consumer does not benefit from. These will be products that will advantage the consumer. Mis-selling should be a thing of the past.
Fraud is reduced because all data goes through central hubs, so anomalies, such as multiple applications are automatically noted.
The US is already further down this track than we are and there you can already get an initial okay for a loan purely on the basis of your social security number and date of birth. No need for even a telephone call when you can get all you need direct from the applicant’s account (once they have approved your access to it). There are not really any forms to fill in.
How many years away ‘tap and go’ is for us, is difficult to tell. But my bet is there will be lenders established with this technology by 2024 here in Australia.
And those that haven’t invested in having this capability, will have an exhausting game of catch-up ahead of them.
Andrew Tierney is a risk management expert who works in credit analysis and underwriting at Balance Risk Management. He has had previous roles at Westpac and Equifax.
