Insight: Open Finance and the future of financial inclusion

Ali Hamriti,
10 Oct 2023

The financial landscape is constantly evolving, encompassing a diverse range of workers, including both ‘traditional’ employees and independent workers.

It is no secret that financial credit checks are outdated, with these systems often falling short in providing a comprehensive view of an individual’s employment and income sources.

Such outdated systems place gig workers and independent contractors at a disadvantage when it comes to accessing financial services.

Credit scoring systems today

According to findings published in Rollee’s ‘The Hidden Cost of Gig Worker Living’ report, a staggering seven in 10 UK gig workers have been denied access to basic financial products such as a loan, despite having a good credit score, highlighting a significant gap in the financial system’s ability to fairly accommodate the needs of today’s modern workforce.

The difficulties these independent workers encounter, however, are not caused by their incapacity to pay back a loan or mortgage; rather, it is because the current scoring system is unable to comprehend and take into account multiple new and evolving forms of employment. Therefore, financial institutions tend to favour applicants who have a singular source of income and who hold a long-term career.

These records represent steadiness and can be easily evaluated to determine a worker’s income and loan repayment capacity. Workers who don’t take these conventional career pathways are automatically viewed as being a greater risk.

The evolution of credit scoring

Ali Hamriti, Rollee’s chief executive officer

Credit scoring has been a fundamental pillar of the banking industry for decades. Traditionally, it relied heavily on credit reports, drawing upon payment history, outstanding debts and lengths of credit history data.

However, this approach comes with many limitations, particularly when assessing the financial viability of freelancers and gig workers, who may have irregular income streams.

Some financial institutions still conduct credit risk assessments using manual techniques. Financial institutions do not have the time to manually search down all sets of data due to the multiple data salary records being divided and spread from one platform to another. As a result, gig workers are denied access, by default, to financial services and business is lost in the process.

Each type of worker, traditional or not, needs appropriate credit scoring elements that accurately reflect their professional activity and income in order to develop more clear and fair scoring criteria.

The evolution of automated credit scoring with Open Finance

Recent regulations and frameworks announced in the EU, UK, US and Australia are advancing the global adoption of Open Banking within the financial industry.

Open Banking works by allowing customers to share their financial data securely with third party providers, empowering lenders to access a range of real-time financial behaviour and information.

However, while Open Banking has certainly made strides, there is still a critical need to refine and extend its scope. Currently, the focus is predominantly on bank-based payment data, which is crucial but only tells part of the story.

For Open Banking to be truly transformative in fairer credit scoring systems, it must encompass a broader range of data, including verifiable datapoints about a worker’s income, employment status and activity. The potential uses of Open Data could have a great impact on the future of credit scoring and provide a more accurate overview of an individual’s financial situation.

Having this kind of holistic view will ensure that credit assessments are not just based on financial transactions, but also account for gig workers’ ability to repay. Therefore, gig workers and independent workers who often fall through the cracks of traditional scoring models due to their non-traditional, and multiple, income sources can finally access the financial services they need and deserve.

Open Finance for a fairer future

For the potential of Open Banking to be fully harnessed, the banking sector must undergo a digital transformation and a shift in processes to ensure that all kinds of independent workers are being catered to.

Financial institutions need quick, easy access to alternative data sources in real-time and a comprehensive, all-encompassing view of the employment and income data for independent workers. This can be achieved through Open Data and the integration of freelance platforms and external API infrastructure. This enables automated connections to numerous income and employment platforms, while allowing for scalable data connectivity across markets and regions.

Such a transformational journey will require further investments in data integration and for financial institutions to be willing to adapt to the changing financial landscape.

However, the rewards of increased operational efficiency and most importantly, a fairer and more inclusive financial future, are well worth the effort, following significant investments in Open Banking already.

Ali Hamriti is chief executive officer and co-founder of Rollee