The era of ‘Open Banking’, which arrived in the UK in 2018, kicks off officially in September 2019 in the EU. Amongst the many reasons to embrace this big regulatory shake-up, is its power to boost financial inclusion for the many ‘hidden’ EU adults who lack financial services. Open Banking Expo Platinum Partner Experian is leading with innovations and solutions that can help with financial inclusivity.
Access to credit and financial inclusion across Europe are vital for individuals, families and business alike. Financial inclusion is critical to driving day-to-day financial wellbeing, buoyant economic growth and job creation across the EU.
40 million EU adults lack access to financial services
As it stands now, the numbers speak for themselves. Despite credit’s broad prevalence, it’s estimated nearly 40 million EU adults still lack access to formal financial services, while an average of around 10% of European households are estimated to be over-indebted. At the same time, the move to digital channels is allowing wider access to credit and lowering costs for borrowers – but it also naturally poses questions around responsible borrowing, the potential for further over-indebtedness, financial exclusion and fragility.
Transforming the nature of available data
If we want to win business benefit from PSD2 we need two things: getting the right analytics expertise, and access to as broad data sets as possible. These two elements inform very accurate credit-scoring techniques that drive greater financial inclusion because they underpin the most accurate lending decisions – all of which can be delivered remotely., without having to rely on historic bureaux analysis and without piles of supporting paperwork. And this remote delivery can occur right across national boundaries, an important consideration for Europe.
The UK: proof of concept
In the UK, Open Banking legislation came into force in January 2018. The nine largest account providers in the UK are obliged to allow customers to share their data with third parties. National regulator the FCA has given Experian permission to supply Open Banking and PSD2 services to enable the exchange of bank account information between consumers and organisations. Several banks quickly signed up to use an Open Banking platform,and numerous proof-of-concepts are now underway with other institutions, enabling them to explore a range of innovative new services.
Europe: Big (and inclusive) wins from Open Banking
Here in Europe, PSD2 is in effect as of September 2019, and as our White Paper on Open Banking indicates, it offers big wins for consumers and business alike. It helps ensure more customers get the benefits of faster, smarter and appropriate access to credit, while lenders can forge ahead with winning market share and meeting their digital aspirations.
PSD2 boosts financial inclusion as it offers:
- Comprehensive introduction of online affordability– It marks a hugely significant shift to the application process with the potential to deliver faster, smarter and more appropriate credit decisions. See the Experian Case Study on Trusso to understand more.
- Better understanding of the customer– In the near future lenders will be able to run an affordability test across their entire portfolio to get an early indication of a person who may be nearing financial distress. At the other end of the spectrum, analysis can be used to understand which customers have more financial ‘headroom’ and products which may better suit their circumstances.
- Making finance more inclusive for all– Consider the potential PSD2 now offers those customers who are currently financially excluded, by moving them into mainstream lending. Because the insight from bank account data provides a more complete picture of the individual and their circumstances, lenders will be able to make far more sophisticated assessments of their affordability. It’s particularly relevant to self-employed workers, who will typically have small, frequent deposits into their bank account. Being able to identify, record and categorise the frequency of deposits will deliver a clear income pattern over time and will make lending much more accessible to this group. Elsewhere, new-to-market customers – young people who are only just eligible for credit – or new-to-country residents, will get improved access to finance.
- The value of new data variables– While PSD2 offers a seismic shift in affordability analysis, it’s unlikely to bring an end to credit scores. Why not? Because credit scores provide a benchmark of an individual’s credit risk and an indicator as to how they’ve managed their credit in the past; whereas bank transactions reflect a customer’s affordability risk and their ability to pay based on income and expenditure. The two data points complement, rather than compete against each other, with the potential to now enrich and add even more intelligence into scoring.
Welcome PSD2: Empowering EU consumers, enabling positive outcomes
Helping to empower consumers will help deliver new standards of lending and financial management – and that will continue to power the EU as a leading provider of financial services. It really is all about meaningful data, and the advanced analytics and emerging technologies that can convert that data into vital insight, to enable better outcomes for all.
Experian is proud to be Platinum Partner of the Open Banking Expo and would like to invite you to come by our stand to discuss your specific issues with our expert consultants. (Not yet registered? We are pleased to offer you 20% off on your ticket when you use the code EXPERIAN20 to register at https://www.openbankingexpo.com/amsterdam/amsterdam-booking-form/)
- Accenture predicts widespread Open Banking adoption in Canada
- Insight: The future of the working relationships between banks and fintechs
- Blog: Financial inclusion, Open Banking and PSD2
- FCA agree to SCA delay due to a lack of market readiness
- White Paper: PSD2 – How the new directive changes the rules of authentication