- Open banking-enabled SME lending platforms could generate up to €250 billion by 2025, according to a report by Roland Berger.
- When it comes to consumer lending, open banking helps lenders consolidate a borrower’s data, including credit scoring and history, current outstanding debt, previous loans, salary consistency, and rent payments.
- According to a report by Accenture, account aggregation could create up to €4 billion in revenue gains for European banks by 2025.
- Analysts forecast that the global digital lending platform sector will experience a compound annual growth rate of 26.5% from 2023 to 2030. On top of that, by leveraging opening banking, lenders can multiply conversion rate growth by 4 and revenue per transaction by 6.
As the financial landscape evolves, open banking is poised to disrupt the consumer lending industry by creating a more transparent, efficient, and accessible credit ecosystem. A key driver of innovation and customer-centricity, open banking benefits both sides: borrowers and lenders.
Speeding up the decision-making process and helping people and businesses find affordable loans tailored to their requirements, open banking-enabled SME lending platforms could generate up to €250 billion by 2025, according to a report by Roland Berger.
Below, we explore the power of opening banking in the consumer lending and credit arena, and why financial institutions are partnering with tech-forward enterprises to offer their customers open banking-enabled lending solutions.
Traditional consumer lending solutions
Lenders are turning to open banking because long-established paper-based practices are manual, time-consuming, inefficient, and error-prone, sometimes resulting in unnecessary costs and fraud.
Moreover, disparate and unagile legacy solutions that don’t integrate with other systems or utilize technology have a slow time to market and aren’t scalable. They also lack a universal view of the customer journey, impacting the end-user experience. What’s more, traditional methods often have narrowly focused criteria, leading to lost opportunities and revenue.
Open banking and consumer lending
By contrast, open banking connects banks and third-party financial services providers via application programming interfaces (APIs), allowing them to exchange data securely, enhance the customer experience (CX), innovate, and offer borrowers better value.
When it comes to consumer lending, open banking helps lenders consolidate a borrower’s data, including credit scoring and history, current outstanding debt, previous loans, salary consistency, and rent payments. According to a report by Accenture, account aggregation could create up to €4 billion in revenue gains for European banks by 2025.
With access to a bigger information pool than traditional processes, lenders obtain a more comprehensive picture of an applicant’s financial health, helping them make detailed and accurate assessments, while reducing the chance of default and additional fees linked to fraud. Indeed, according to Sopra Banking Software’s internal analysis, using open banking data can lead to a 49.7% risk reduction across some loan types.
Armed with the data to make informed decisions and better gauge borrowers’ potential to make monthly payments, lenders greenlight customers who may otherwise be refused loans and credit, like the unbanked population. Meanwhile, as new players enter the lending arena, borrowers have broader and more bespoke options to choose from.
Open banking-enabled lending comes with further advantages for both sides, including:
- Quicker loan and credit processing: Real-time access to financial data streamlines applications.
- Greater competition: It’s easier for new entrants to join the market, encouraging innovation and helping lower borrowing costs.
- Improved data security: Information is retrieved directly from an applicant’s bank and authenticated using tools like strong customer authentication (SCA), and know-your-customer (KYC) checks are automated, reducing the risk of fraud and document falsification. Indeed, according to a Capgemini report, identity verification could generate up to €16 billion in revenue gains for European banks by 2025. Meanwhile, APIs – the technology underpinning open banking – use encryption, tokens, and signatures, strengthening security further.
- Efficiency gains. Capitalizing on technology like artificial intelligence (AI), machine learning, and predictive analytics helps de-risk and de-bias processes. For example, self-learning AI-enabled credit scoring solutions use data from a range of sources (not necessarily finance-based) to uncover non-linear and nuanced relationships that traditional methods struggle to identify (or miss entirely), providing creditworthiness predictions at scale.
- Enhanced digitalization: Less time is spent filling out paper-based forms and signing documents, cutting costs and increasing the number of processed applications.
These reasons have led to analysts forecasting that the global digital lending platform sector will experience a compound annual growth rate of 26.5% from 2023 to 2030. On top of that, our research reveals that by leveraging opening banking, lenders can multiply conversion rate growth by 4 and revenue per transaction by 6.
Enter Sopra Banking Software
But as it currently stands, traditional lenders are losing customers and revenue due to low-quality, long-winded ID and affordability checks that aren’t customized to applicants’ needs. To remedy that, lenders should consider leveraging Sopra Banking Software’s modular and Service-as-a-Service open banking platform, enabling them to gather, aggregate, and analyze customers’ data.
Our EU- and UK-compliant solution offers SCA, third-party provider authorization management, and customer secure communication. Moreover, it’s easy to deploy, and end users enjoy a fast and seamless CX. The IBS Intelligence 2023 Sales League Table highlights the strength of our platform – we ranked number one in the lending category for the seventh consecutive year.
Leading French telecoms provider case study
Our opening banking platform gives clients in the financial services industry and beyond a valuable opportunity. Indeed, telecoms, insurance, utilities, and media businesses (and their customers) can reap the benefits.
For example, a leading French service provider (energy, telco, e-commerce, etc.) works with Sopra Banking Software’s solution to optimize and secure its customer/prospect subscription process. Let’s use an example to illustrate how that’s achieved.
Carlos is a 40-year-old father of three who moved from Spain to Paris. He’s in the market for a new cell phone and wants a contract with a French telecoms operator. To ascertain suitability, our open banking platform works as follows:
- Performs automated KYC checks via first and last name and IBAN verification to confirm Carlos’ identity.
- Conducts next-generation credit affordability analysis using traditional scoring and real-time financial data.
Depending on the results, Carlos’ application is approved or rejected – quickly, smoothly, securely, and robustly.
If the loan’s approved, the telecoms operator enhances their brand reputation and cultivates loyalty, while ensuring regulatory compliance and lowering costs. If it’s turned down, they feel confident our innovative platform has comprehensively assessed risk. Meanwhile, applicants experience an enriched journey that’s seamless and swift, regardless of the outcome.
Future of lending
Looking ahead, new and enhanced regulations are on the horizon, driving open banking-enabled lending forward and standardizing the sector. For example, in June 2023, the European Commission announced proposals that “place consumers’ interests, competition, security and trust at their center, empowering them to share their data securely, so they can access a wider range of better and cheaper financial products and services”.
Measures include revising the current Payment Services Directive (PSD2), which will become PSD3, and introducing a Payment Services Regulation (PSR) and a framework for financial data access. In practice, the package aims to stimulate innovation and competition.
Investing in open banking for consumer lending
Harnessing the power of opening banking and digitalizing consumer lending improves the process for lenders and borrowers. To successfully achieve that, financial institutions and businesses across an array of industries are collaborating with trusted partners like Sopra Banking Software to streamline and automate lending. By doing that, they also lower costs and risk, give the unbanked population greater access to loans and credit, increase conversions, and enhance the all-important customer experience.
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