The consumer credit applications of open finance: a snapshot
Earlier this year, data released by the UK government’s Department for Work and Pensions (DWP) underscored a concerning trend.
Open finance has the potential to help consumers take control of their financial lives
The cost-of-living crisis in 2022-23 led to the sharpest increase for three decades in the number of UK citizens entering “absolute poverty”, accounting for those living in households with an income below 60% of the median household income in 2010-11 and adjusted for inflation.
The prevailing cost-of-living crisis remains a key driver of financial hardship in the UK and a complex issue to resolve. While the cross-sector solutions needed to address it are numerous, the potential for greater transparency and data-sharing in financial services to relieve some of the strain on consumers, especially those with weak credit histories or lacking access to typical financial institutions, is often underplayed.
This brings us to open finance, which builds upon the foundation established by open banking to apply the concept of securely sharing customers’ financial data with trusted third parties on a much larger scale.
It encompasses all types of financial data – savings, investments, insurance, mortgages, credit scores and pensions – and most importantly, it has the potential to help consumers take control of their financial lives.
The Centre for Finance, Innovation and Technology (CFIT) published our inaugural coalition’s blueprint report on the opportunities of open finance this February. Given the wide range of potential use cases for enhanced data-sharing across the UK’s financial services ecosystem, we had to focus on some initial priority applications. Consequently, a key element of our work was on the credit-related use cases.
These apply to small and medium-sized businesses (SMEs), where lending volumes have fallen to historic lows, due in part to information asymmetries between borrowers and lenders. A pilot analysis conducted with HSBC UK showed how leveraging open finance data sets enabled over 25% of businesses from a representative sample of SMEs in HSBC’s portfolio, who had been referred and potentially did not receive an offer for credit, to receive a credit offer.
But the use case proved to be incredibly impactful in the case of financial services consumers, too. According to Experian, a credit data company and partner in the CFIT’s open finance coalition, 5.8 million adults are credit-invisible, meaning they have little to no credit footprint. This results in them being denied access to loans and driven towards higher-cost credit options.
Some companies including Experian have long focused on expanding the scope and enhancing the quality of the data that underpins lenders’ decisions on who they can extend credit to, and how much they can lend. For example, two million customers have shared their open banking data with Experian, with 63% increasing their credit scores as a result. Likewise, through the Experian Boost function, customers often opt to disclose regular payments such as council tax bills and Netflix or Spotify subscriptions and have these factored into their credit scores, too.
These examples of augmenting credit decisioning by unlocking new data sources are precisely what our coalition has sought to replicate across another 30+ inaccessible or underutilised datasets we identified and prioritised. Some of the sources that are currently inaccessible, but which we identified as providing the most value, include alternative transaction data, such as buy now, pay later (BNPL) payments; data on a person’s pensions and investment holdings; DWP data on income received by the UK’s 15.6m benefits claimants; and HMRC data on income, employment and tax, which would provide a particularly significant boost for the self-employed.
Unlocking these and other datasets and allowing lenders to access them when building a picture of a loan applicant’s creditworthiness will ultimately make it easier for consumers to access better, more affordable loans. It will be easier to improve their credit scores, as well as to avoid or mitigate debt traps. Research published in recognition of Debt Awareness Week underlines the importance of this, with a record 6.7 million people reported to be living in financial difficulty.
Integrating new data sources into credit decisioning processes will deliver practical and positive consumer outcomes. These include better financial inclusion, more informed and responsible lending decisions and quicker access to credit, avoiding inefficient manual verification processes. It will also drive innovation and adoption across other areas of the financial services ecosystem that stand to benefit from secure data-sharing, such as savings, insurance, investments and pensions.
Credit was the logical starting point for looking at open finance because it touches upon millions of consumers and businesses, and the potential impact on consumer outcomes is immense. If industry, government and regulators can drive forward the mission to unlock high-impact datasets, businesses and consumers will benefit from greater and fairer access to finance, which will continue to be of utmost importance in the months and years to come.
