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What is an Open Banking lender?

Open Banking is a safe, secure way for you to allow trusted providers to access your financial data.

To give you a really quick summary: your bank has all sorts of data on your income and spending. If other providers could view that information, they might be able to use it to give you access to tailored financial services, or save you money.

Open Banking makes this possible – your bank gives you the option to share your financial information with providers you choose.

That probably gives you enough of an overview to get started, but if you want to know more about how exactly this all works, we’ve written a detailed guide to Open Banking.

Koyo uses Open Banking technology, so that we can base our lending decisions on your real financial situation – rather than what someone else says about you. Find out more at www.koyoloans.com. Representative APR 27%

What does the traditional borrowing process look like?

The traditional process is actually pretty simple:

  1. You decide you want a loan

  2. You apply for a loan, and submit some very basic information, such as your address and how much you want to borrow

  3. The lender carries out or requests a credit check (more on this later)

  4. The lender uses this information to decide whether to offer you a loan, and how much to charge you

This application process has barely changed in decades. Even though the application itself may have moved online, the steps remain the same.

However, it’s worth really paying attention to step 3. What exactly is a credit check?

When you send off a loan application, a lender doesn’t actually know that much about you. The information you have to submit is fairly basic, and generally covers:

  • Personal details such as your date of birth and full name

  • Current address, and previous addresses from the past few years

  • Basic employment information

That’s not enough to make a well-informed lending decision, so a lender will usually also go to a credit bureau. There are three credit bureaus in the UK (Experian and Equifax are the best known), and each one gathers information on you.

They then package this information up and provide it to potential lenders, for a fee. The information that credit bureaus provide is much more detailed, and includes:

  • Your name, address and date of birth

  • Whether you are on the electoral roll

  • How much you currently owe to other lenders or credit card companies

  • Whether you have missed payments to other creditors, or defaulted on loans

  • Any County Court Judgements (CCJs) made against you

It also produces a credit score, which gives a very simplified indication of how creditworthy you might appear to lenders. However, the credit score isn’t the full story: a credit check really helps a would-be lender to do two things:

  1. Check that you really are who you say you are

  2. See whether you have a track record of paying back loans on time

That’s useful information, but there’s a lot that these checks don’t show or verify: most importantly, how much you earn and spend each month. That’s very important information – if you want to lend someone money, you’d want to be sure that the repayments are affordable.

It’s also worth noting that a credit check might not be a good way of assessing someone who hasn’t taken out a loan in the UK before, perhaps because they’re borrowing for the first time, or recently moved here from another country.

How does Open Banking help me get a loan?

Open Banking provides the missing piece of the puzzle.

Your bank knows exactly how much money you earn and spend each month. So, they allow trusted third party providers to view this information, via APIs – a standardised way of safely sharing data.

Graphic showing how lenders use Open Banking data to make fairer lending decisions

Two important things to note here:

  1. Only third parties who are approved by you can view your current account data

  2. Open Banking is only open to providers who are authorised by the Financial Conduct Authority (FCA) or the European equivalent.

In fact, because you don’t have to give anyone your login information or share your bank statements, Open Banking is a very safe way to share information.

So, Open Banking is a safe way to allow trusted lenders to get a clearer picture of whether a particular loan is right for you.

Open Banking lenders: Affordability and income verification

How does it work in practice? Firstly, Open Banking helps with affordability checks.

If you borrow £3,000 over two years, you might have monthly repayments of between £100 and £200 each month. Whether or not that’s affordable depends on two factors:

  1. How much you earn each month

  2. How much you spend each month

Open Banking data lets a lender check that a given loan is affordable, as the lender can verify your income and outgoings.

As well as encouraging responsible lending, this also means that lenders who use Open Banking might be able to charge less, as they’re making better-informed decisions.

Open Banking lenders for thin-file borrowers

Open Banking can also be especially helpful for “thin-file” borrowers – borrowers who haven’t built up a credit history yet, because they’re new to the UK or haven’t taken out a loan before.

Conventional credit checks look at whether would-be borrowers have a history of paying back loans. If you’ve never taken out a loan, even though you’ve never missed a payment, traditional lenders find it hard to offer credit – because you don’t yet have a track record.

This is another advantage of Open Banking lenders: unlike traditional credit checks, Open Banking data can be used to verify information and focus more on affordability. That means that Open Banking lenders don’t have to rely on what someone else says about you when you apply for a loan: they can base decisions on creditworthiness on real data.

Why Open Banking is a fairer way to lend money

That’s the big difference when using Open Banking data. Traditional financial institutions are reliant on what credit bureaus say about you, and they’re not always correct. In fact, borrowers are generally encouraged to check their own credit reports for errors, and you can ask for mistakes to be corrected.

Instead of relying on credit bureau data, Open Banking lenders get financial information directly from you, and can make fair, accurate decisions, almost in real-time.

Without having to share your bank account information, you can give lenders a clear view of your financial situation, and benefit from data protection enforced by regulators.

Lenders that use Open Banking in the UK

Open Banking was only launched in 2018, so it tends to be something that newer companies, such as fintech firms, have embraced.

That means it’s generally used by modern firms who focus on providing a great user experience.

There are Open Banking-enabled companies set up for all sorts of use cases, whether that’s providing enhanced money management to individuals or helping SMEs to ensure that they’re getting the best deal on their savings. In 2018, Koyo became the first company to use Open Banking data for credit decisions.

Hopefully this article shows you just how powerful Open Banking can be: it’s a huge leap for the industry, and will really help to make finance fairer for everyone.

Now that you’ve read our article on Open Banking, you might want to take a look at some of the options available to you. Our loan calculator is a great place to start.

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