We’re in a challenging credit cycle today, but more financial institutions will be lending over the next four-five years. Since the average bank is concerned about regulations, we’re mostly seeing alternative lenders use cash-flow underwriting. But the landscape is changing fast. Thanks to Section 1033 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, essentially the first step to introducing Open Banking to the US, cash-flow underwriting will become more sanctioned by regulators to increase competition and improve services for customers.
The future of American finance is on the way
The UK is home to the world’s first open banking implementation. Of course, there were some technical challenges and data standardization issues at the start, but everything improved fairly quickly through the testing of APIs and updated regulations. It’s likely the US will also need to update regulations and standards after Open Banking launches stateside, but they’re in a better position. Modern banks have come so far from 2017. American and British banks were monoliths back then — they didn’t use microservices-based architecture and they still needed to migrate to the cloud.
Now US regulators are talking to regulators around the world in Europe, Australia, South America, South Korea, Japan and other places where Open Banking has already been put into place. They’re seeing the good, the bad and the ugly to set the US up for success and to uncover more opportunities for faster deployment.
Start using data to offer greater value to your customers
To avoid losing your customers to competitors, your best bet is to start using their data in more strategic ways today. Think of it as a war for time and attention — and the only way to win is to offer more assistance and create more value than ever.
First, use data to understand your customers better:
- Are you offering the right rewards for these segments of customers?
- Do they have the right budgeting tools on hand?
- Do you offer personalized services?
These aren’t game-changing actions, but they are necessary if you’d like to defend your data. Otherwise, when Open Banking arrives, it will be all too easy to persuade your customers to redirect their data elsewhere with the narrative that you simply do not do enough. And not doing enough can mean not supplying sufficient or relevant financial advice, worthy rewards, personalized service or even the right caliber of financial products.
In the UK’s Open Banking environment, most lenders are using bank data to offer secured and unsecured lending products. With the exception of a few holdouts, it’s just the way business is done today. In fact, some lenders in the UK only look at cash flow, which helps them understand a customer’s true financial standing. For example, instead of offering an unsecured loan and then discovering a customer has multiple, active Buy Now, Pay Later (BNPL) agreements — as late as 60 days later, traditional lenders would know about them early enough to factor them into their underwriting decisions.
American banks and lenders can use transaction intelligence to start making similar, better-informed decisions today. Data sharing and data passporting allows you to work with companies like Bud to enrich your data, while reducing your costs. In a marketplace of loans, the better you understand your customers, the better the odds that you’ll win them over from the competition. Gaining deeper insights into their risk profiles can also lead to better outcomes for both you and your customers. For example, imagine one customer has a 600 FICO® score, but transactional data paints a clearer picture. You might notice they have a healthy amount of cash on hand, and see their credit score took a major hit back in college and simply hasn’t had enough time to recover. Factoring in this new information, the same customer might look more like someone with a 700 FICO® score. Now you can offer a better rate for the loan they need while laying the groundwork to earn their loyalty. This is a great way to gain an edge before the arrival of Open Banking.
- Start analyzing your transaction data. How would it affect your loan book?
- Use transaction data to better understand your customers. Will they default? How can they be segmented?
- Model what it will look like to transition to cash-flow underwriting in the future.
Predictions and trends: what to expect in the early days of Open Banking
We expect to see a lot of activity in app-to-app redirection — data sharing will be as easy as logging into your iPhone. The payments space will also see significant changes, and there should be major disruption in account-to-account (A2A) payments. And while we still haven’t seen a great replacement for card payments, they should eventually enter the picture. Until then, we’ll also be on the lookout for interesting offers for digital wallets, such as opportunities to skip interchange fees.
Transactional intelligence can help you decrease defaults, increase wallet share and deliver better outcomes for your customers. It’s the lenders that will take the initiative while they still own customers’ data that will be in the best positions to reap the greatest rewards.
