Open banking can be defined as a collaborative model in which banks share access to their data through APIs to offer enhanced financial services to the end customer. The financial data is shared with third-parties and other financial institutions to build more personalized and data-backed applications and services.
The advantages of open banking are substantial – better financial services, newer revenue streams, and improved customer experience. Big banks around the world, majorly in Europe, the US, and South Asia are giving more control to the customer over personal account data.
Fintech lending markets hold a great opportunity to capitalize on the user information and offer better lending solutions. The scope of information covers the user’s complete banking history comprising his income from all sources, investments, and payments made. The user data could offer lenders with substantial help when it comes to providing financial or lending services.
That said, there are ample opportunities for lenders to capitalize on open banking. Let’s explore some of the important ones:
Remove friction in the loan process
Although banks and financial institutions have expanded their scope of services with the help of technology, traditional systems in the loan origination process could still be redefined to be instant and smooth.
Using open banking, lending institutions can quickly and more efficiently assess user loan applications. For instance, the process of KYC, which could take days to complete, could finish in a fraction of time ensuring faster loan origination process.
Faster credit analysis
Rather than collecting all data and reports of borrowers to assess the creditworthiness, lending firms can view detailed insights and reports shared by banks through open APIs. Open Banking can move the entire credit analysis online, speeding up the time between application and approval. It also reduces the chances of frauds and exaggerations in the credit report by the user.
Income and payments verification
Income and payment history can be easily accessed with open banking. The data can be used to perform required checks such as income verification, past loans defaults (if any), credit history – creditworthiness.
Traditional systems of evaluating creditworthiness still have certain disadvantages as they are slow, expensive, might be biased, and not based on the required terms. It can make it hard to differentiate between borrowers who are likely to repay from those who aren’t.
Redefining customer journey
Customers nowadays not only expect financial services but want banks and financial institutions to assess their needs and provide a suited solution to match their requirements. Using open banking, banks and lenders can evaluate the payment and income patterns easily to offer lending services like credit cards as per their needs.
This will also help customers to save in their interest cost and better manage their funds. Furthermore, they can keep a constant track of their loans and credit cards and gain information real-time. It will further help banks to make their products and services more personalized.
A new roadmap for banks
Banks are looking out for new and better ways to provide loans and credit services to their customers. They also wish to smoothen their processes from loan application to approval while maintaining the security standards. We also predict that banks will try to build relationships with Fintechs to enhance their capabilities and build muscles.Open banking has significant applications in the lending space from credit assessment to personalized loan offers. With open banking, banks can access user transaction details in real-time. This can help them to look beyond the numbers and identify the preferences of cust