#Open Banking

Digital lending as an open banking use case

dec 17, 2020 - 6 min read
Duco de Lange, Senior VP of digital and large deals at Sopra Banking Software

A series of open banking use cases 

The financial services industry is changing fast. New industry entrants, shifting customer behaviors and ever-evolving digital solutions have created a new landscape that financial institutions have to contend with. And in the past year, the coronavirus and its impact have only accelerated this change.

Open banking – a practice that allows third-party financial service providers open access to consumer banking – is at the forefront of the industry’s evolution, as both a disruptor and a vehicle of opportunity for players of all shapes and sizes.

And open banking’s stock is growing fast. Sixty-one percent of financial executives feel more positive toward open banking than they did in 2019, and investment in open banking opportunities is significantly on the rise.

However, given the fast-moving nature of open banking, it’s still shrouded in confusion. Forty-six percent of financial executives, for instance, aren’t confident that the benefits of open banking are widely understood within their organizations.

Given this uncertainty, we’ve put together a series of articles outlining different business use cases enabled by open banking, and the benefits they offer to both end-customers and financial institutions.

Digital lending as an open banking use case

The current global crisis has highlighted the importance of lending. Consumers and businesses alike are looking for loans to keep them afloat through difficult times, and lenders need fast and accurate processes to manage these loans while also minimizing risk and adhering to social distancing. Problematically, traditional lending processes – often time consuming, unnecessarily expensive and reliant on physical interaction – are no longer fit for purpose.

Open banking addresses many of traditional lending processes’ problems. With access to data from outside of their systems and client base – as well as non-financial data – lenders can perform enhanced credit scoring and risk assessment during the complete loan lifecycle. This drives down costs for the lender, improves the customer experience (CX) and, because it’s digital, can be done without needing to go into a physical branch.

Better credit scoring and up-to-date account information

Traditional credit scoring is often based on older and more narrow financial data, so it doesn’t necessarily provide an accurate view of a borrower’s true financial position. For lenders, this can lead to an increase in defaulted payments further down the line, as well as higher risk of fraud. To avoid this, lenders need to gather holistic profiles of their applicants and ensure the data they collect is validated and up-to-date.

With open banking, lenders can have access to a larger pool of an applicant’s real-time financial data, not just by gathering up-to-date account information, but by also allowing applicants to provide access to their full financial situation in order to be accepted for a loan. With this level of insight, lenders are better able to assess a borrower’s eligibility.

Personalized customer experience

Open banking-enabled digital lending isn’t just good news for lenders, it also enriches the customer experience. Not only does it create seamless and fast lending applications, it also allows lenders to tailor their offers and financial advice to customers’ unique circumstances, thanks to access to a richer and wider source of customer data – a common thread across many open banking use cases, such as personal finance management (PFM).

A great example of customer-facing digital lending in action is Klarna, a Swedish financing company. Founded in 2005, Klarna connects customers with their favorite retail brands, providing them with short-term personal loans for one-time purchases.

Digitization of the lending process

Key to all of this is the digitization of the lending process. For the purposes of open banking, digitization of lending is vital, as it allows for the instantaneous exchange of data between different ecosystem players. However, there’s more to it than that.

For the lenders, an automated, digital process – rather than a traditional one – significantly decreases costs associated with slow, manual underwriting processes and paper applications, and allows them to process more loans. In fact, a scalable digital lending platform can speed up loan processing by around 25 to 40 percent, and increase loan volumes by as much as 20 percent, according to Accenture.

And for customers, a digital process means less paperwork and faster, more efficient credit decisioning.

These qualities in the lending process are nothing to be sniffed at, particularly in an era where the coronavirus is forcing businesses to rethink their interactions with clients, and where CX is king.

Be part of something bigger

While the pandemic has highlighted the fragility of individuals’ and organizations’ finances, it has further reinforced the notion of business ecosystems. Practices such as open data and embedded finance, where different players from across the financial services industry can pool together insights, expertise and infrastructure, are becoming increasingly clear, for both businesses and customers.

Check out our articles on PFM and multi-banking use cases, from the same series. And click here to find out how we can help your organization to meet its open banking needs.