In our latest guest blog, we are delighted to hear from Steve Coppard, Deputy Director Government Debt Management Function at the Cabinet Office as he discusses whether Open Banking has the potential to make sense of a changing financial outlook for consumers in our approach to debt recovery.
The financial impact of Covid-19 has fast-tracked the use of Open Banking in the private sector as organisations make sense of a changing financial outlook for consumers. Observing from the public sector, this raises interesting questions on what lessons we might draw for our approach to debt recovery.
By providing organisations with accurate and up-to-date financial data, Open Banking can enable people to derive value from their bank transactions This can help them, for example, arrange repayment plans based on their specific circumstances. Although, we must recognise questions are still being asked by consumer advocates on the impact of Open Banking on some groups, including those who operate mainly in the cash economy.
Lessons from the private sector
In private sector debt recovery, Open Banking is increasingly being used to assess ‘affordability’. Lenders use Open Banking information with customers in the early stages of debt to make a more accurate assessment of their income and expenditure. If used correctly, the evidence so far suggests this should allow fair and sustainable payment plans to be agreed and take away some of the potential inaccuracy of a manual assessment. The data helps determine how much a customer can afford to pay by categorising their income and spending patterns into standardised forms.
Evidence from the private sector also indicates concerns that individuals wouldn’t consent to the use of Open Banking might not be accurate. Recent data from a car finance lender working with Equifax reported an 86% opt-in rate when customers were given the option to choose Open Banking as a route to assess their income and expenditure. Of course, the findings might not translate entirely to the public sector, but it’s a very useful benchmark to have.
It seems it might be down to value exchange. If an individual can see that Open Banking makes their life easier and ensures a fair outcome, they're more likely to give their consent - as long as they trust an organisation to keep their data safe.
Can Open Banking bring benefits to the public sector?
We can see the potential benefit of sourcing income and expenditure data through Open Banking. It could help in:
Assessing affordability of repayment plans for outstanding debts
Identifying those who are potentially financially vulnerable when agreeing arrears payment arrangements
Determining an applicant’s eligibility for benefits or services, or enabling them to maximise their entitlement
Automating parts of the process to reduce effort by both parties
These reasons spell out why Open Banking is something the public sector is already exploring.
A call for evidence approach
The Cabinet Office recently consulted on public sector debt management through a call for evidence that specifically asked for information on the potential use of Open Banking in government debt recovery. Respondents gave us some fantastic insight into this question. Our recently published summary of responses flags where we might be exploring further.
The hope is that by using Open Banking transaction data, you not only recover debts from those who can afford to pay, you also ensure that vulnerable customers are not adversely affected. This helps to protect the public purse by agreeing payment plans which are affordable and sustainable, while going some way to reducing fraud and error at the point of application.
The government has supported the economy during the pandemic by taking a conscious decision to increase its appetite for debt through deferred payments and forbearance amongst other things. While this can provide an immediate relief to financial pressures, the trade-off is that the burden of debt can eventually have unintended consequences, such as mental health issues. This makes it important to get back to proportionate debt management as soon as possible. Could Open Banking provide the next evolutionary step in fair and effective debt recovery?
A useful scenario to consider is that of somebody working in the gig economy with a variable income. They may be working hard to pay off their debts, but a traditional, fixed instalment plan might be broken fairly quickly, as the person’s disposable income fluctuates with their income. What if you could use Open Banking to set a recovery agreement based on their individual circumstances, one where repayment rises and falls with income?
Is this all too good to be true?
There are few, demonstrable examples of Open Banking being used like this in the public sector, at least not yet. So it will still take testing in a public sector environment to understand the complete potential of Open Banking.
We know there are challenges. For example, customers will have to grant consent for public sector organisations to access their Open Banking data and we don’t currently know how many of them would do so. Work would be needed to make clear any benefits to the end user via clear communication and transparency about the process.
Furthermore, Open Banking is reliant on the customer using online or mobile banking. Currently more than three quarters of people have access to an online or mobile bank. Whilst this number is growing fast, we must always be mindful of those people that are not able to rely on technology.
Finally, whilst an assessment of income and expenditure can prove to be more accurate via Open Banking, it can’t provide all the answers. For example, it wouldn’t know if someone’s financial circumstances are about to change due to losing their job. I’m mindful of a story that did the rounds in the industry of Open Banking picking up that the customer had a second income from employment with an online clothes retailer, when in reality the customer was ordering several garments to try on at home and returning the majority of them, resulting in credits on the account.
Open and honest conversations with those in debt remain essential to ensure you have all the right information, but Open Banking could potentially help fuel those conversations to reach the best outcomes.
A step in the right direction?
While it’s not perfect, Open Banking must be explored as a potential step in the right direction. It can work alongside other data sources to determine more bespoke treatment paths and deal with customers based on their individual circumstances. In the public sector we’re watching work in this area with interest and keen to take on board any lessons the private sector can share. Ultimately the key outcome is improving public service delivery for everybody in the UK.
If you want to find out more about Open Banking and how Equifax can help, you can contact us here