#Open Banking

Credit scoring as an open banking use case

Nov 26, 2021 - 8 min read
Olivier Raymond, Innovation and digital transformation consultant at Sopra Steria Next

A series of open banking use cases

A 2020 survey by McKinsey revealed Covid has “transformed business forever”, with the adoption of digital technologies accelerating by seven years. Coupled with new industry entrants and shifting customer behaviors, the financial services industry is changing fast.

Open banking is at the forefront, connecting banks and third-party financial service providers, allowing them to securely exchange data, improve customer experience, offer better value and innovate.

For banks and financial institutions, the time to act is now, with new analysis from Accenture suggesting that open banking could soon be worth as much as 416 billion dollars in revenue.

Shrouded in confusion in its early days, open banking is developing into a global phenomenon, with Europe leading the way. For example, over 2.5 million UK consumers and businesses use open banking-enabled products.

To illustrate what open banking can achieve, we’ve put together a series of business use cases, outlining the benefits for both end customers and financial institutions.

Click on the links to read our other Insights on open banking use cases: Multi-banking, Remittance, PFM and Digital Lending.

Credit scoring as an open banking use case

Creditworthiness is often complex. Traditional methods of credit scoring use limited data, locking out vast swathes of people from accessing loans. In turn, financial institutions that rely on these credit scores run the risk of losing potential customers, as poor credit scores mean loans are likely to be rejected.

Open banking-enabled credit scoring provides solutions to many of these problems. 

Firstly, by granting access to a far greater pool of customer data, lenders can build a more diverse picture of an applicant’s monetary health and spending patterns. As a result, lenders make better-informed decisions, giving the green light to customers who may otherwise be refused loans.

Furthermore, open banking-enabled credit scoring typically paves the way for and comes hand in hand with the digitization of processes, both old and new, thus speeding up the loan application process, improving customer experience, and leveling the competitive playing field with digital entrants.

Serving the underserved

Despite progress with financial inclusion, there are still around 1.7 billion unbanked adults in the world with no access to basic financial services, according to research by Findex.

Furthermore, customers with little credit history – i.e. those who have avoided taking out loans or mortgages in the past, for judicious reasons – are also at risk of being excluded. In the US, for instance, there are over 22 million “invisibles” with no record of credit, and 62 million with a “thin” credit file.

Credit bureaus like TransUnion and Equifax use markers such as payment history, total debt, length of credit history, types of credit, and number of credit searches when calculating an individual’s credit score. However, many people lack enough data to generate a score, excluding them from lending products such as mortgages, and impacting wider non-lending opportunities, such as mobile and utility contracts.

Enter next-generation credit modeling using open banking. By leveraging open banking data, lenders have the tools to take additional factors into account when assessing risk and creditworthiness, including real-time financial data like consistent salary and rent payments.

Combined with credit scores obtained via traditional rules-based methods, analysis is more complete. Ultimately, lending decisions are enhanced, because they’re based on a broader data set. With that comes a wealth of loan opportunities for previously underserved customers.

Credit rating information: quality and quantity

By reforming credit checking infrastructure with open banking and transparent tools, data volume increases and quality improves. So when lenders utilize that data, credit scoring becomes more accurate. There’s a better understanding of the financial life of potential customers, boosting confidence in their ability to repay, and reducing default risk.

Because of these factors, open banking makes the lending sector accessible to a wider pool of applicants, improving financial inclusion. What’s more, previously rejected clients can be reassessed using the data open banking offers. Additional clients generated via these avenues mean greater revenue for banks and lenders, helping them keep pace with digitally savvy competitors.

There’s a further benefit, too: fraud prevention. By retrieving information directly from applicants’ banks, and authenticating the validity of data using mechanisms such as strong customer authentication (SCA), open banking solutions reduce the risk of document falsification. Moreover, the technology underpinning open banking – application programming interfaces (APIs) – uses encryption, signatures and tokens, bolstering security further.

Digitizing to improve customer experience

As well as supporting a wider pool of eligible applicants, open banking-enabled credit scoring eoncourages lenders to easier digitize and automate existing processes. That means faster loan applications and review times and fewer manual procedures, reducing the possibility of human error.

In turn, customer experience (CX) significantly improves, attracting applicants and retaining existing clients. Lenders with a scalable platform can increase loan volumes by up to 20 percent, enabling banks to cope with these additional customers.

And with the enhanced data open banking offers, CX transforms further – a more holistic view of the customer is generated, allowing lenders to tailor offers to individual needs and circumstances.

Open banking uptake

Despite the host of mentioned benefits, skepticism still exists in the open banking world. However, greater adoption is on the horizon, with open banking starting to make waves globally. Research shows that 76 percent of banks around the world expect customer adoption and open banking usage to increase by at least 50 percent in the coming years. 

In France, for example, open banking in the credit scoring industry is a game-changer. There, credit bureaus don’t exist. Instead, only negative credit is tracked – loan applications don’t include positive financial data. Open banking is a way for banks to access up-to-date credit information about applicants, rather than relying on socio-demographic details.

And in countries where credit agencies do exist, these companies are using open banking as an opportunity to internally transform how they evaluate creditworthiness.

Open banking revolutionizing credit scoring

A wait-and-see approach regarding open banking is dangerous. Banks and lenders who aren’t on board risk being outpaced by tech-forward competitors. Credit scoring is a prime open banking use case, transforming the sector with enhanced data, and more of it.

Nearly 1 billion people across the globe lack a form of legal identification. Open banking in the credit scoring arena is a way of improving financial inclusion and customer experience, while increasing revenue. In that way, lenders and individuals both reap the benefits.