Equifax saw an early opportunity to demonstrate that open banking could have a positive impact on its clients’ lending. Solution Design Consultant Bis Das says its proactive approach has paid off.
Open banking in the UK has arguably yet to shake up financial services as dramatically as some expected, but one area in which it has certainly made an impact is credit scoring.
The open banking rules, which came into force for nine major UK banks and building societies (the so-called CMA 9) two years ago, are all about data; more specifically, acquiring and sharing data. By allowing their financial information to be shared between banks and third-party providers, customers can manage their money better.
But while there is much written about the impact of open banking – and the related EU revised Payments Services Directive (PSD2) – on customer choice, there is somewhat less discussion about the benefits it offers when it comes to determining risk scoring and affordability for credit. In fact, one of open banking’s key benefits so far has been to provide those customers with little or no credit history – so-called ‘thin file’ customers
– greater access to credit by broadening the ways in which their reliability and affordability can be assessed – through third-party apps, for example.
You could be forgiven for thinking that open banking’s promise of enabling more nuanced decision-making threatens to put credit reference agencies out of a job, but that’s far from the case, says Bis Das, a solution design consultant at leading credit scoring agency Equifax.
Rather, he says the company believes there are a host of benefits to using open banking transaction data when determining credit affordability and risk – and it’s right at the front of providing those services for financial institutions.
“Allowing access to credit to thin-file customers – such as those new to the country and young adults, who have minimal credit history, is a major advantage,” Das says. An additional impact of this, he adds, is that open banking helps to improve financial inclusion by increasing customers’ access to better products and services and making the market more competitive.
Having permissioned data, such as salary and disposable income, removes the need for manual processing of wage slips and bank account statements, while better authentication at the point of application, through digital ID verification, reduces the risk of fraud. In addition, open banking allows for specific transaction alerts to be sent to customers or companies who want them.
Equifax has been staying ahead of the game by teaming up with other service providers to deliver these better customer outcomes.
In July 2019, Equifax formed a strategic partnership with AccountScore and its account information service provider (AISP), consents.online. Equifax’s clients can use consents.online’s solution to enable their customers to allow and control third-party access to their data, then use AccountScore’s technology to obtain and understand this information.
Equifax and AccountScore chose to partner after successfully collaborating on early stage open banking projects.
“We wanted to be an early adopter of open banking. So our challenge was to ensure that we could implement innovative and agile solutions for our clients, through a trusted partner, to access open banking data. We could also offer a complete and transparent consent management portal to comply with PSD2 regulations,” says Das.
The company took multiple factors, such as accuracy, consistency and speed, into consideration and found AccountScore’s categorisation engine to exceed in all areas. Its experience with transaction data prior to open banking’s launch also gave AccountScore an advantage over rivals, Das adds.
The partnership has proved incredibly successful. Indeed, it ensured that HSBC, one of Equifax’s biggest clients, achieved its goal of being first to market in using open banking data in this way, according to Das.Key was collaboration and a willingness to learn on all sides.
“The fact that it was a completely new source of rich data, we felt was important – for us to learn and grow, as we use transaction data in order to develop long-term sustainable solutions for our clients,” says Das.
But the biggest achievement was speed, he adds. Historically, a customer would have been required to supply paper copies of bank statements, which breaks the flow of a digital application process and adds significant amounts of time as the customer has to find their statements or request them from their bank and then pass them on to the lender. There is an additional time lag when the statements are received, as the lender would then typically use an underwriter to manually go through the transactions and categorise the data to identify the payments of interest relevant to a credit and affordability assessment. Open banking allowed Equifax to streamline this significantly by enabling consistency and stability, as well as speed, and giving the company a competitive edge, Das says.
“Working with AccountScore, we enabled access to live transaction data across the CMA 9 banks, where the first solution was implemented within six weeks. HSBC achieved this by working collaboratively with Equifax and making a focussed investment to explore the benefits of open banking.”
In addition to the project with HSBC, Equifax has been working with a number of other clients to prove the value of open banking to their customer journeys. For example, it is working with M&S Bank to enable it to become one of the first mortgage providers to offer customers an open banking-assisted application process.
“Within the debt sector, we are also helping to improve the experience of customers struggling with debt,” says Das.
Equifax is doing this by enabling the auto-population of the income and expenditure form, while also aligning it to the standard financial statements. This, in turn, makes the data gathering process of both customers and clients much easier. But all this is just the tip of the iceberg, according to Das, who hints there is far more to come.
“We are already working with a lot of other clients, in various sectors, to prove the value of having open banking as part of the customer journey,” he says.
So, what has Equifax learned about open banking through such partnerships?
“The key is to ensure strong value exchange, to ensure consent from the end customer. Without this, you simply won’t get customers to engage with you,” he responds.
But the learning process hasn’t always been easy and keeping an open mind and being agile is important.
“We discovered gaps in the account opening process, such as ID verification, which we have found solutions to by creating a reverse look-up, comparing the sort code and account number taken from the customer’s online bank account to Equifax’s extensive current account database,” says Das. “This enables a seamless ID verification as part of the customer journey. We encourage clients to learn and understand the commercial importance of this data, before taking the leap with a fully-integrated solution.”
He warns that this is not something that can be learned with retrospective data and instead relies on being trialled on live data.
“Our recommendation is to start soon, but start small,” says Das. “Setting up the technology behind capturing the user’s data is costly, time-consuming and requires specialist analytical capabilities to release the value in the data. It’s one reason why banks enter into fintech partnerships.”
With regard to the future, Das stresses that, open banking as a service alone will not provide all the answers.
“It is important to harmonise open banking data with other external data, such as bureau data, to make sure that you have a complete picture of the customer. This will improve financial accessibility, consumer choice and customer experience.”
But he adds that the services that will continue to thrive are those that give customers best transparency and control.
“Customers need a compelling reason to share their data, and it is up to the business to make sure it enforces a strong value exchange to ensure that happens,” says Das. “It is all about making sure there is the right balance between what data is being looked at, versus what data is being used for decisioning. For instance, if someone missed a single payment, it does not necessarily mean they’ll miss payments in the future. It’s important to ensure that any kind of data used for decisioning does not treat the customer unfairly.”