Open Banking has revolutionised the financial services industry by granting customers greater control over their financial data and fostering competition among service providers.

Consumer Duty regulation aims to enhance consumer protection and drive better outcomes for customers.

This blog explores how the Consumer Duty regulation will act as a catalyst for lenders to adopt Open Banking, leading to increased financial inclusion, improved affordability assessments, and ultimately, more favourable outcomes for customers.

Traditionally, lenders have relied purely on credit bureau data when assessing an individual’s creditworthiness and affordability. This approach often led to a significant number of rejections for applicants, particularly those who lacked an extensive credit history or faced unique financial circumstances.

Open Banking has the potential to transform this status quo by allowing lenders to access real-time, comprehensive financial data directly from customers’ bank accounts.

The Consumer Duty regulation places a fundamental requirement on delivering the best outcomes for customers. By adopting Open Banking, lenders can gain access to a broader range of customer data, allowing them to assess creditworthiness and affordability more accurately.

This increased visibility into customers’ financial situations enables lenders to offer products and services to a wider pool of individuals who may have been previously under-served or excluded from the traditional credit system.

As a result, Open Banking has the potential to empower marginalised communities and contribute to a more inclusive financial landscape.

Real-time insights

One of the key opportunities for lenders is to monitor customers’ affordability throughout the life-cycle of their loans via recurring access to the data. Open Banking facilitates this process by providing real-time insights into customers’ income, expenditure, and financial commitments.

Lenders can utilise this data to conduct comprehensive affordability assessments, ensuring that customers are not overburdened with debt and can sustain their loan repayments. By actively monitoring affordability, lenders can reduce the risk of irresponsible lending practices, fostering greater financial stability for customers.

The integration of Open Banking into lenders’ processes can deliver substantial benefits for customers.

By leveraging real-time financial data, lenders can provide personalised and tailored products that align with customers’ specific needs and circumstances.

This shift from a one-size-fits-all approach to a more individualised lending experience enables customers to access credit on fair and transparent terms.

Furthermore, the utilisation of Open Banking data allows lenders to offer more accurate pricing, taking into account a customer’s actual financial situation. This ultimately leads to improved outcomes for customers, fostering greater trust and satisfaction in the lending process.

Instilling confidence in lenders 

Implementation of Open Banking into organisations requires industry-wide collaboration and co-operation among regulators, lenders, and technology providers.

Regulatory frameworks provide clear guidelines and standards for data sharing, encouraging innovation while ensuring customer protection.

Moreover, lenders must invest in the necessary infrastructure and technology to securely handle and ingest vast amounts of data efficiently and most importantly, have the confidence to use the data to say ‘yes’ more of the time to deliver financial inclusion.

Currently, most lenders who are using the data in some way are using it to say ‘no’ to customers.

The Financial Conduct Authority’s Consumer Duty represents an opportunity to reshape the lending landscape by encouraging the adoption of Open Banking.

By leveraging real-time financial data, lenders can enhance financial inclusion, monitor customers’ affordability, and deliver better outcomes for customers. This shift away from a restrictive and limited approach to credit assessments will empower individuals who were previously excluded from the financial system, promote responsible lending practices, and foster a more equitable and customer-centric lending environment.

   Guest blog by Emma Steeley, CEO , Aro