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Q&A: Is the future of consumer finance ‘open banking’?

Open banking is the practice of securely sharing financial data between banks or third parties.

Over the shoulder view of young woman checking banking account via mobile app on smartphone while drinking coffee at Cafe. Mobile banking makes life easier. Source: Experian (C), with permission.
Over the shoulder view of young woman checking banking account via mobile app on smartphone while drinking coffee at Cafe. Mobile banking makes life easier. Source: Experian (C), with permission.

Open banking is a financial services model that enables third-party developers to access financial data in traditional banking systems through application programming interfaces. This model alters the way financial data is shared and accessed.

To learn more, Digital Journal caught up with Ashley Knight, Senior Vice President of product management for Experian’s financial services and data business.

Digital Journal: Can you explain the concept of open banking and its potential impact on the financial services industry?

Ashley Knight: Open banking is the practice of securely sharing financial data between banks or third parties, such as fintech apps. It represents a new era in consumer empowerment and occurs when a consumer provides permission for a third-party to access their bank account data for a specific purpose. Typically, this is done through an API which gives direct access to a consumer’s bank account.

One example of open banking in action is the use of personal finance management apps, which connect to various bank accounts and credit cards to provide users with a consolidated view of their finances. This level of transparency and control was not possible before open banking. Another example of open banking in action is Experian Boost. This feature allows individuals to voluntarily add positive utility and telecom payment history to their Experian credit report by permissioning access to their banking information.

Our clients and industry experts are all highly focused on open banking. In fact, 65% of retail banks have a well-defined strategy to participate in open banking ecosystems according to Celent. This is because cashflow insights, which provide detailed information on a consumer’s income, spending patterns, and bill payment behaviors, have the potential to be hugely transformative for our industry.

DJ: What benefits do open banking and cashflow insights provide the financial services industry and consumers?

Knight: Open banking opens the door for new, predictive information, such as bank account or credit card transaction data, to be incorporated into lending decisions. This is significant because, while a consumer’s credit report is the most effective means to assess risk, lenders often hesitate to extend credit to thin file or credit invisible consumers and nearly 20% of American adults do not have a conventional credit score, according to Experian’s research. At the same time, most consumers have a bank account and cashflow insights have proven to be indicative of credit risk, particularly for consumers with limited or nonexistent credit histories. In addition, our research shows 71% of consumers are willing to share their banking information if it increases their chances of credit approval.

Using traditional credit data alongside cashflow insights can provide first and second chance opportunities that might not be possible otherwise. Ultimately, it can improve financial access for millions of underserved consumers and enable more informed decisions.

DJ: What are some of the challenges lenders face in leveraging banking information to make credit decisions?

Knight: While interest in using banking transaction data in conjunction with credit data for lending decisions is growing, many lenders face limited analytics capabilities and resources. Transaction data, or information from a consumer’s bank account, can be noisy and challenging to interpret. Financial service providers must be able to accurately categorize this information to extrapolate meaningful insights. Yet many lenders deal with massive amounts of transaction data which can be overwhelming to process. Often, transactions can be misclassified and the need for real-time data processing adds another layer of complexity.

This is where we can help; Experian can provide deep analytics and insights based on bank transaction data. We categorize consumer-permissioned account transaction information and deliver transaction categories and predictive attributes back to lenders in seconds – enabling lenders to easily incorporate this information into their decisioning. This is key because our analysis shows Cashflow Attributes can boost predictive accuracy by up to 20% — allowing lenders to drive revenue growth while mitigating risk. Our proprietary categorization model can also be leveraged independently by lenders to gain deeper insights, drive more personalized experiences, and help improve financial management tools.

DJ: What do you see as the future of cash flow data and open banking in financial services?

Knight: Open banking currently holds untapped potential, and I believe leveraging open banking enabled data alongside traditional credit information will become standard practice in financial services as we look ahead. Additionally, the continued evolution of these technologies will drive innovation and improve financial inclusion, making financial services more accessible to everyone.

As more consumers become comfortable sharing their financial data, we will see a greater adoption of these technologies, which will foster competition and spark the development of new, consumer-friendly products.

Given the unique opportunities it presents, we are committed to making cashflow data and insights, with the proper consent, more accessible. We are working collaboratively with industry leaders, consumers and regulators, to do just that and more.

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Written By

Dr. Tim Sandle is Digital Journal's Editor-at-Large for science news. Tim specializes in science, technology, environmental, business, and health journalism. He is additionally a practising microbiologist; and an author. He is also interested in history, politics and current affairs.

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