How open banking can aid small business recovery
By Jim Wadsworth, Senior Vice President, Open Banking, Mastercard
It’s now more than three years since open banking launched in the UK, over a year since PSD2 came into effect in Europe, and we’re seeing a mix of approaches around the world that all suggest open banking is progressing globally. For example, in Australia, the Consumer Data Right Act became law in July 2020, while in Singapore, the Monetary Authority of Singapore (MAS) recently published an ‘API Playbook’ with the hope of encouraging banks to open their services and systems. While the concept is certainly taking off, what is the future for this technology, not just for financial services but for society more generally?
Where open banking can truly come into its own, particularly in the current climate, is helping those who need it most – financially vulnerable individuals and small businesses who traditionally have been woefully underserved by the financial sector. Despite their importance for the global economy, small businesses in particular have historically often struggled to access mainstream products including loans. In fact, previous research in the UK found over half of small businesses can’t access the funding they need to grow and it’s estimated 82% of small businesses that fail do so because of cashflow problems.
Being able to access affordable credit, quickly, is crucial for both small businesses and individuals. Open banking is a key tool for enabling financial inclusion and, in my view, one of the most important – and potentially biggest – use cases of this technology globally is lending. This need is a worldwide one, but many are still not able to access affordable credit when they need it.
While some countries, like the UK and US, have credit reference agencies which compile credit reports to help lenders understand creditworthiness – such as borrowing and address history – this is not the case everywhere. Many countries might only have access to data on whether someone has defaulted and in fact even the data that is available on credit reports at present is not always helpful in helping lenders understand someone’s true financial situation.
Those with a thin credit file can often find themselves turned down for borrowing. This includes individuals who have lived abroad for a period of time, people who haven’t borrowed much recently – such as renters or those who’ve paid off their mortgage – and small businesses which are only just starting out and don’t yet have annual accounts or enough credit history.
However, open banking has the potential to allow people and businesses to access the credit they need. As part of Mastercard’s mission to enable financial inclusion, we recently acquired financial data aggregation service Finicity and this acquisition will allow us to do just that.
Finicity helps lenders streamline the credit decisioning process and better assess affordability by leveraging a more holistic data set through open banking data. This will allow lenders worldwide to make better and faster decisions, allowing them to lend to those they may previously have turned down. It is already enabling this in consumer markets in the US such as mortgages, but through our acquisition we want to use Finicity’s data analysis capabilities to help individuals around the world and ensure that small businesses also benefit from this solution.
We are already seeing instances of lenders using open banking data in both the US and UK and this has become more common during the pandemic when it has become even more important to understand someone’s financial circumstances in real-time. But this is just the beginning. I anticipate that over the coming years this trend will continue and by 2025 it will be the norm for open banking to be used in lending all over the world, helping those previously excluded from mainstream finance to access affordable and responsible credit when they need it.
Lending is clearly one major area of financial services that will rapidly benefit from open banking technology but, obviously, the use cases are far wider. And the appetite is there, with significant momentum and uptake in some countries. According to Mastercard’s State of Pay 2020/2021 report, 70% globally would now use a solution such as open banking to manage their, or their business’, finances and 75% would be prepared to use an open banking solution to get personalised offers and deals for financial products. In the UK, the number of people using open banking solutions recently surpassed two million, doubling in six months during the pandemic.
While some may still argue open banking has been moving too slow, it was never going to be an overnight success. In my mind, it will be a multi-year journey for open banking to truly fulfil its potential and I personally think we’re making good progress so far. To continue this trend, we need to focus on ensuring people feel confident and secure when sharing data with third party providers and we must showcase the benefits it will bring – for example, faster access to credit, a better interest rate on a loan, or the ability to build up a savings pot.
Everyone produces data and they should have the right to understand and control how their data is shared and used. By following this principle, Mastercard together with our customers and industry partners, will drive towards a future where individuals and small businesses are not only in control of their finances but they are able to use their own data, for their own benefit, so it works for them.