Open Banking and Financial Inclusion

On Wednesday 26th July, NestEgg co-founder, Adrian Davies, is speaking at the World Credit Union Conference in Vancouver. The topic is how Open Banking promotes financial inclusion.

The UK is ahead of almost all other countries with open banking. NestEgg decision engine clients have been using these data to support lending decisions for more than five years. Open Banking supports financially excluded borrowers.

Thickening ‘thin credit files’

Financially excluded applicants are more likely to have a thin credit file. This is where there’s little or no credit history. And without a credit history, there’s not much for lenders to work with. Furthermore, a lack of payment history means the credit score will be lower. As a result, applicants are more likely to be declined.  

Moreover, it’s a catch-22. Without credit history, credit often can’t be granted. If loans aren’t made, there’s no credit history. This cycle repeats itself. Worse, borrowers often resort to high cost credit as they can’t access credit union loans. As a result, their credit score falls even further.

Critically, Open Banking provides additional data points to show credit worthiness. Not all loans report to all, if any, credit bureau. However, this doesn’t mean that there’s no repayment record. It’s just in a different place; a current account that’s accessible using Open Banking.

Credit agreements absent from the credit bureau often appear on bank statements provided by Open Banking. This is especially true for smaller value, subprime, loans. Additionally Open Banking data reveals regular bills being paid that don’t often show in a credit report. Therefore, if someone is paying back loans and their bills, these new data can complement findings from a credit bureau

As a result you’re more likely to say yes to thin file applications. Open Banking has ‘thickened’ the credit report.

Accept more declines

When there is credit data this can, of course, be adverse. Missed payments, defaults and even legal action are all a problem. Credit scores for the financially excluded are lower because there’s no history of mortgage repayments or subprime credit use is seen negatively. Even living in a certain area or repaying loans weekly can drive down a credit score.  

To make matters worse, this information can stay on a credit file for six years. Someone may be punished for making a mistake, or simply losing their job, a long-time ago. Importantly, they may have got back on their feet and have capacity to repay loans.

Despite this, Open Banking can help. The current / checking account (as shown via an open banking connection) may be in credit. The applicant could be overdraft free. Income might be very stable. Regular bills are paid on time.

Importantly, Open Banking provides information that’s often six weeks more up to date than a credit bureau. As a result, it is a more accurate view of affordability. When combined with credit data, NestEgg estimates that up to 20% of declined applications could be accepted by using Open Banking.

Join the discussion

Thickening credit files and providing a more up to date view on affordability are just two ways Open Banking improves financial inclusion.

We’ll explore these and other issues and others in the breakout session on Wednesday at 10am during the World Credit Union Conference. Be sure to join us. 

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Adrian Davies

Adrian is a co-founder at NestEgg. He is an alternative finance and credit union expert with extensive experience of start-ups, business development, IT, Target Operating Models and regulatory compliance. Adrian has 20 years’ experience in the responsible lending sector, supporting credit unions with innovative ideas so they can grow and meet member needs.

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