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September 7, 2017

My recent perspective, Open Banking: Roadblock or Change Driver? speaks about the various stages of the adoption of open banking by banks globally, and associated challenges. Until now, the solutions that open banking sought to resolve were related to payments and financial planning. However, open banking has significant applications in the lending space too from credit assessment to personalized loan offers management and SME lending. Let us see how open banking can help banks as well as consumers.

How Lending Transforms Open Banking: Dynamic Customer Credit Profiling

Banks are looking out for better ways to assess the credit-worthiness of customers. The big question is How does one assess thin file customers, that is, customers who have not availed a credit card or prefer to deal in cash. With open banking, banks will be able to access banking transaction details in real-time. AccountScore is one such banking transaction data fintech service provider. This can help them look beyond traditional credit scoring to provide loans to customers based on their revised credit assessment derived from financial data obtained from their utilities-related transactions. Therefore, situations such as steady decline in balance can be considered a warning signal for the bank to reassess the customers credit risk profile.

Many a time, the problems can relate to poor financial planning on part of the customer, or a one-off event such as a medical emergency and job loss. Being able to better understand the needs of the customer, banks can provide personalized services on sound financial planning or restructuring of loan or bridge loans to the customer.

Customers are no longer only expecting service when they approach the bank. Banks should proactively present customer with solutions suited to their requirements. This will be the defining factor toward customer satisfaction and loyalty. Fintech companies like SafetyNet Credit aided by AccountScore, are able to provide a feature similar to the sweep facility on customer loan accounts, by leveraging open banking. This helps customers save on interest costs and better manage their funds. In the case of loan repayment and debt collection management, financial institutions can use open banking to send payment alerts to the customer to settle the debt by tracking income in the customer bank accounts.

An Open Banking Offer: Tailor-made Personalized Loans in Real-time!

Currently, when a customer of one bank approaches another financial institution to borrow a loan with whom they dont have a transaction account, the bank requires them to submit all documents relevant to the loan requirement. This happens as currently financial institutions do not share customer data with each other. Open banking, however, enables such data to be shared directly between the customers existing bank and the new bank, and in real-time. Based on this information, banks will be able to offer an accurate personalized loan offer to the customer.

Open banking can also aid banks in serving SME needs better. By gaining access to customers financial information, relationship managers can better assess the needs of the customer. Banking information can reveal the growth of sales, cash flow patterns, business expenses, investments for future growth and so on. Banks will also be in a position to process online SME loans faster by using analytics to integrate the customers banking data from other financial institutions into the banks own credit assessment model. In addition to this, banks can pitch financial product based on the SMEs needs, derived by analyzing the customer financial information.

Will Lending Work in an Open Banking World?

With open banking, banks will aim to provide simpler, faster, and personalized customer experiences. There are, however, some concerns around data privacy, security, and consumer protection. When sensitive financial information is being shared with a third party, a thought must pertinently go toward the partys safety measures whether they are adequate enough to safeguard customer information. Also, there must be a provision for stringent rules, and heavy penalties must be imposed for breaking them. Regulators and governments will need to bring in policy frameworks and measures to address concerns related to open banking.

Open banking has the potential to reshape lending services from the way we see it now. It will level the playing field for non-banks like NBFCs and fintechs. Currently, they dont have access to adequate customer financial profiles, and are hence using alternative means to get hold of it, such as screen scraping. Open banking will ensure that all players are on the same level due to equal access to information. This will likely result in tougher competition for banks. Even though open banking is currently in unchartered waters in the lending space, banks can convert this into an opportunity to increase their market share, while improving their customer experience.

It’d be interesting to know your thoughts on this.

Harish Kumar Dhilip Kumar is a functional consultant with TCS' Banking, Financial Services, and Insurance (BFSI) business unit. He has more than 12 years of experience with expertise in the commercial and consumer lending space. Kumar has previously worked with leading multinational banks in lending domain. He has an MBA in Operations and Analytics from the Great Lakes Institute of Management, Chennai, India, and a Bachelor's degree in Industrial Engineering from the University of Kerala, India.


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