How is open banking simplifying the world of credit lending?

Based on our research from the PSD2 (Open Banking) Market Observatory, the use of PSD2 licenses have paved the way for such a change, leading to opportunities to simplify the life of both the consumer, and the lender. Use cases revolve around automated risk assessments, improving credit scores and instant lending. In this blog we dive deeper into a few innovative services.

Automated credit risk checks and scores

To assess creditworthiness of a credit applicant, lenders can use information provided by external companies. These companies, such as Experian, may collect credit related data of a customer (e.g. identity information, credit cards and account information, payment history), enabled by their PSD2 license, and assign a credit score. Based on this score, lenders decide on the approval, loan size and interest rate. Customers may therefore be interested to share their payment data to enhance their personal credit score. Experian provides customers insights into their score and options for improving it.

Loan offer within one hour

These automated credit checks are not only beneficial for lenders, but also for consumers. Consumers who ever tried to get a mortgage or other credit facility will most likely remember the amount of paperwork that was needed to be filled in and returned to their bank. The same applies to business owners who request a loan for their new business ideas. Qred is one of the Fintechs that combines automated credit scoring with lending services to small business. Their PSD2 license allows them to optimize their processes by including customers’ account information. The fully digital application process enables a very quick conversion: they promise an offer within one hour, and a pay out on the same day once the offer is accepted.

Buy Now, Pay Later

Short-term consumer financing is reinvented by the concept of ‘Buy Now Pay Later’, which allows consumers to make purchases and pay at a future date, mostly interest and fee free for consumers. Klarna is probably the most known provider of such point-of-sale installment loans. The approval process takes just seconds: A customer opts for the BNPL option at check-out when ordering a, say, new sofa of a participating retailer. Behind the scenes the customer is authenticated and his/her data is undergoing a (simple) credit check. When approved, the BNPL provider pays the full purchase amount to the retailer, but also charges a certain percentage of it. Retailers are still in favour as customers tend to spend more when BNPL is offered. In addition, the retailer does not need to authenticate the customer, which became more difficult since the introduction of Strong Customer Authentication requirements in 2021.

With the rise of e-commerce, the popularity of BNPL is increasing rapidly, especially among millennials, and is expected to continue doing so. With that, concerns are also rising that consumers may be spending more than they can afford. New regulations are expected to be put in place to prevent people from accumulating debt across multiple BNPL providers while missing payment obligations.

The Future

Many fintechs and traditional banks rely on the technology of Lending and Credit platforms to power their service and assess the financial health of their customers. Account information data now available under PSD2 may greatly benefit these platforms. With automated credit checks being the prevailing eligibility check provider for initiating lending across the globe, these platforms have the potential to become worldwide credit giants. And while banks are trying to enter the BNPL space, Klarna is already locking in customers with their newest end-to-end shopping app, where users can buy directly at any online retailer, collect loyalty points, and, pay later.

Find out more

• Read the blog ‘Everyone is Banking’ here.
• Watch the video series ‘Banking Insights’ here.
• Do you want to continue this conversation to learn more on the latest developments in Open Banking and how banks can respond to stay relevant?

Author

Alexander Eerdmans Alexander Eerdmans is Vice President and Head of Financial Services (FS) at Capgemini Invent Netherlands. With a background in Finance he has a wide experience in leading projects on Open Banking, FinTechs, and Financial Services. Alexander is always working on “What’s Next” in FS and encourages global collaboration, which enables unlimited possibilities.	Joost van Putten Joost van Putten is a senior manager at Capgemini Invent Netherlands Financial Services . He has a background in innovation & strategy and has completed extensive work in the area of Open Banking and Payments. He has supported pan-European banks implement the Payment Services Directive 2 (PSD2) and has led multiple research studies into related market developments.	Titia Meijburg Titia Meijburg is a senior consultant at Capgemini Invent Netherlands in the Data, Finance, Risk & Compliance team. She has a background in banking and innovation. Titia has experience in projects on Open Banking strategy, Sustainable Finance Regulations and Risk reporting.