Open banking is an emerging technology that helps create straightforward and interactive digital experiences for customers while reducing operating costs for lenders.
Defining open banking
Like other technology concepts, such as big data and machine learning, there are several definitions for open banking. The definition offered by global auditing and consultancy firm Deloitte is a useful starting point: Open banking is when a bank, upon a customer’s request, shares customer data with third parties via APIs.
Essentially, open banking allows customers to share their financial information with third parties, including lenders. So how can open banking contribute to a company’s bottom line?
Use case 1: Smart onboarding
Traditionally, onboarding new customers is a time and process-intensive exercise. Regulatory requirements to combat terrorism, money laundering and fraud make the process even more expensive.
Smart onboarding is not a new concept, but open banking can make it faster and cheaper. For example, less than 20% of visitors to bank websites complete their applications, according to the ABA Banking Journal. Instead of asking customers to fill in dozens of form fields, you can use open banking technology to give customers the option of securely copying information over from their bank.
Use case 2: Enhance credit and underwriting processes
Most lenders use credit bureau data as the main driver for their credit decisions. Some lenders supplement the bureau data with alternate data sources, like Clarity, Factortrust, and Lexisnexis Riskview.
For lenders operating in the direct-to-consumer space, open banking provides an additional data source. By allowing a customer to authorize access to their bank transactional data, lenders’ risk teams can supplement their existing decisioning models, incorporating this data for a wider and more detailed view of that customer’s risk level.
Use case 3: Accelerate borrower verification
When originating an auto loan, the borrower-verification process is often considered the most cumbersome.
Borrowers don’t like it since it involves looking for paystubs, utility bills and other largely physical documents, then getting these documents to the dealer. Dealers don’t like it since it slows down the funding process significantly and creates additional tasks for them to complete. Lenders don’t like it since it adds a significant overhead for their funding teams to collect, organize and verify these documents.
Open banking can be useful to enhance the verification process. Customers can give lenders access to their bank info, allowing lenders to complete both identity and income verifications. There are several providers, like Plaid and Yodlee, that offer this service.
Given the choice between the traditional option of chasing paper and the modern option of spending less than a minute completing verifications, customers are likely to opt for the latter.
Open banking technology can help you save time and money when onboarding new customers by supplementing credit decision models with additional data. While speeding up funding verifications is a benefit in itself, creating a rich digital experience that is convenient to borrowers also allows lenders to more easily meet customers’ expectations of a streamlined online experience.
These expectations are even higher post-pandemic, and lenders who move quickly to adopt new technology will gain an advantage over less sophisticated competitors.
Shim Mannan serves as executive vice president of product and business development, Americas at the White Clarke Group.
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