Open Banking for credit unions provides an opportunity to educate members and improve credit decisions. Because Open Banking lets lenders view applicants’ bank transactions there’s no need for paper bank statements.
But with data scandals an ever-present threat, this information should be used securely and fairly.
NestEgg believes in fair use of data. This means:
Consent should be informed
The London School of Economics found that consumers did not give informed consent when signing up to services. Terms and conditions are too long and legally complex.
Informed consent is when somone gives permission to participate in the full knowledge of what the consequences might be. In lending this usually means sending their details to a Credit Reference Agency. This creates a footprint on their record. But how many applicants read the small print? Do members know what accessing credit bureau information means? How many think they have any choice but to click ‘agree’?
Using data to improve outcomes for members is good news. Sharing information with the credit union means members are more likely to succeed with a loan application and receive useful information back at the same time. Why not create a Fear of Missing Out?
Providers should educate, not confuse consumers
In 2016, Consumer Group Which? found that half of the population has never checked their credit report. 2/3 think credit reference agencies make lending decisions.
Gathering data for credit decisions can have educational benefits. Assessing affordability is in the member’s interest as much as yours. Providing members with insights into their expenditure can improve how they think about spending.
There should be a safety net against discriminatory profiling
Surprisingly, in 2013 the UK court of appeal found that Credit Reference Agencies have no common law duty of care to ensure individuals’ credit data is accurate.
Obviously credit scoring is useful, but it can discriminate against the poor, leading to unreasonably declined loans. Repaying loans weekly can reduce a score. Applicants living in low-income areas, where default rates are higher, may have points deducted.
Consequently, rather than assuming potential behaviours transaction data provides an actual view of risk. Avoiding automated decisions based only on credit bureau data helps the financial excluded.
Re-pay-ability of credit agreements is improved
Responding to a growing debt crisis, the Financial Conduct Authority “wants firms to make a reasonable assessment, not just of whether the customer will repay, but also of their ability to repay affordably.”
Aligning repayments with income is easy with Open Banking. Organising transaction data into monthly spending patterns provides an actual view of affordability. Furthermore, you can identify repayment problems before they occur by connecting to a bank and retrieving data on a monthly basis.
Members ought to be signposted to money advice
According to Citizens Advice 3.4 million people who have raised money issues with a trusted professional don’t receive advice and fall into a ‘referral gap’.
Using policy rules to calculate debt ratios identifies unsustainable debt repayments. Bounced direct debits or overdraft fees indicates that money often runs out. As a result offering early signposting to money advice services means members can tackle problems before they get out of hand.
The wider benefits of Open Banking
Now that GDPR is in force, Open Banking means less to worry about when storing sensitive bank statements. Additionally, using automated systems to review expenditure cuts the time it takes to make a loan decision. Because Open Banking provides an extra data set, it supports applicants who have thin credit files but are actually low risk borrowers.
NestEgg is working to include Open Banking data in its decision engine for credit unions. This involves building policy rules to automate the assessment of bank statement data to save you time and money and improve member service.
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