Since January 2018 the nine major high street banks are required to allow current account customers to share their financial data. This new technology, called open banking, is creating new financial options for people. It does this by giving them a better understanding of their finances. Here we’ll explain why open banking is being used by financial institutions. We’ll also explore what that means for you if you are thinking of applying for a loan.
How Does Open Banking Work And Is It Safe?
Without getting too technical, sharing your bank account information with a third party is made possible with two methods. These are through an API (application programming interface) or screen scraping.
Screen-scraping is the method that many of the small finance management apps use to gain access to your account. You have to give providers your login details to your online banking which grants them read-only access to your statements. They cannot edit your account without your permission. There are concerns that screen scraping could be easily exploited, leaving your data at risk.
Open banking through an API is supposedly a much safer method. Put simply, an API essentially allows information to be shared securely from one party to another. This also means you don’t have to share your login information with anybody.
Every financial service that utilises open banking technology is regulated by the Financial Conduct Authority (FCA). So they must go through rigorous assessments to ensure that they can securely handle their customer’s data. You do not have to share your bank account data unless you want to. Each provider must ask for your permission to access your financial information.
How Can Open Banking Help Me Get A Loan?
When you apply for a loan there a variety of different checks that you will have to go through before approval. One of these is a credit check, which evaluates your history of borrowing and repaying your finances. If you have had a recent spell of not being able to repay your credit commitments, your credit score could be lower. You may then be deemed as not creditworthy.
On the other hand, you could have a thin credit file. This means you haven’t proven that you’ve borrowed much money before. This is where open banking can help you get a loan. By allowing financial services to look at your recent transactional data, you can show that you can afford to borrow money if you don’t have any credit history. Rather than having to get your recent bank statements and send them in, you can now simply grant a lender read-only access to your bank account.
Equally, you may be unsure if you are able to even borrow the amount that you’ve applied for. By being, literally, open with your banking, a lender may be able to advise you how much credit you can borrow and for how long.
Which Companies Use Open Banking?
A wide variety of companies are now using open banking. They want to help people manage their finances and even borrow money online.
Money management has always been difficult. But with the release of open banking, many companies have sprung up to help people better manage their money. Apps that run on AI like Plum and Chip are using this technology to work out how much you can put into savings based on your spending habits. They will then automatically save money away for you.
Other companies like Coconut are using open banking to help small businesses and people who are self-employed to manage their cash flow, invoices and tax. You can find out more about alternative accounts on our blog.
Online lenders previously had to rely on the information entered into the application form to assess a person’s affordability. You may need to provide a bank statement too, so lenders can look at your income and expenditure. But now, many types of lenders from business loan companies to short term lenders can use open banking to gain a better understanding of whether you can afford to take out a loan. By sharing their data with the lender, the underwriter can quickly see the person’s transaction history and verify their income.