Open Banking – December Update

I’m Jennifer (Risk Manager @ Koyo) and I attended the Open Banking Expo for the second time, this time with hands-on experience. There’s now evidence backing the value of this data in building new forms of credit scoring, with some limitations that are already being addressed. There’s an overwhelming number of B2B API products emerging, but the impact on the consumer is still weak. I’ll explain why in this post.

It continues to fascinate me how certain initiatives (such as Vitality’s Apple Watch) nudge people into making healthier decisions by effectively reducing their monthly instalments, showing an average 34% increase in the number of tracked active days per month. Vitality not only successfully encourage their users to be more active, but they also have an impact on activity intensity levels, resulting in significant cost savings in the health sector. In essence, what Vitality is doing is no different to what Weight Watchers did in the 1990s: applying prospect theory and loss aversion, whereby people make decisions based on the potential value of losses and gains rather than the final outcome, added to which a perceived loss is much greater than a perceived gain.

Whilst the Open Banking initiative is already making good headway in the payments arena with emerging ‘Payment Initiation Service Providers’ (PISPs), the overwhelming consensus is that not enough value has been delivered to date since PSD2 came into force, in January 2018.

The good news is that whilst last year the potential of Open Banking was much discussed, today we have compelling evidence backed by data. Both TransUnion and Equifax, the UK’s major credit bureaus, recognise that council tax payments, utilities and telecoms payments are reliable positive indicators, while gambling, bank account charges and cash usage serve as negative indicators to predict a borrowers’ willingness to pay. Older generations may find it disheartening to learn that ‘cash users’ fall into the subprime category. It used to be a means by which one could control spending, as well as a fundamental way of educating children about the value of money. But as times change, so does the need for an equivalent digital product.

Despite concerns over the manipulation of public opinion through highly-targeted advertising, the demand for data-driven products to deliver personalised and rewarding experiences continues to grow. 

This pressing demand is due to the wide range of lifestyles led by today’s consumer, challenging ill-suited products based on yesterday’s assumptions. 

When applied to borrowing, this consumer demand is also reflected in underwriting, where it is essential for scorecards (backed by machine learning algorithms) to be able to swiftly adapt to the continually changing societal landscape. That’s why transactional data is the main gateway, because like a fitness tracker, it monitors the consumer’s everyday life. Whilst today’s level of sophistication of OB is enough for income verification and affordability, there’s still room for significant improvement, requiring even more granular data. 

Affordability is generally calculated as an individual’s income, from which is subtracted committed, basic quality of living and essential expenditure. 

Since data is a commodity, it is only fair to say that customers should receive high value in return for sharing such data. Emma, a personal financial management app, provides valuable insights. Joy, a similar app, prompts you to classify your spending between happy and sad spends. Cleo, an AI chatbot running on Facebook Messenger, invites you to guess your previous month’s spending in return for the chance to earn rewards. Plum, using an application of artificial intelligence, runs an algorithm to get you to save at just the right amount. They are all powered by Open Banking, and yet none of these products are helping the customer to make an instant rational financial decision on a holiday, a shopping purchase or even taking a training course, including the precise impact it may have on achieving longer-term goals.

While creating a fear of loss does not require a complex algorithm, it is the easiest way to motivate users to achieve their goals, however, not the most financially empowering. As concerns grow over potential AI and data malpractice, the UK FinTech community should set an example by showing how algorithms can be applied the right way by exploring the full potential of this new source of data.

Koyo, a direct product of Open Banking, is providing much cheaper alternatives to people with thin credit files. The consumer credit space, often misunderstood, is the fundamental powerhouse of our economy, and as long as the perceived benefit is greater than the perceived loss, adoption of OB products will grow, and so too will Koyo.