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Open Banking For Consumer Loans

Enhance your customer experience and understand how to transform your consumer lending with the help of a better payment and payout process.

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What you need to know about open banking and consumer lending

The days of customers waiting too long for funds and verification processes being too cumbersome are over. Thanks to open banking, speed and data accuracy are set to change consumer lending for the better. Download our latest explainer to discover:

  • Why now is the time to adopt Instant Payments
  • How Instant Payouts helps make the borrowing process faster
  • The benefits of open banking for consumer lending
  • What AIS is and how it saves lenders time and money
Open banking for consumer lending and consumer loans.
Open Banking for Consumer Loans mobile

What is the potential impact of open banking on consumer lending?

Open banking adoption within consumer lending is still relatively low, but there’s potential in a number of areas:

  • Faster consumer lending payouts
  • Tailored credit scoring
  • Personalised loan offers
  • Flexible recurring payments

How are open banking loans changing the consumer lending industry today?

Open banking loans (and the technology they rely on) bring a range of added benefits to the consumer lending industry, such as:

  • Standardising income statements and minimising fraud: Open banking is fully digitalised, meaning lenders don’t need to rely on highly variable income documentation that could be tampered with.
  • Making account information more accessible: Borrowers can grant direct access to their financial data during applications, helping lenders gain new insights into their financial well-being and credit eligibility.
  • Enhancing credit scoring: With direct access to borrower data, credit bureaus and lenders can assess applicants’ creditworthiness more effectively.
  • Making application processes easier: The fully digital processes streamline applications, making them easier and faster to complete.
  • Enabling more personalised loan offers: The added account insights mean lenders can deliver tailored open banking loan offers to applicants.

Why are open banking loans better than traditional consumer loans?

Open banking loans outcompete traditional consumer loans on a variety of fronts, including:

  • Income verification and decision-making: Traditional consumer loans rely on static and sometimes paper-based income documents, which limit lenders’ decision-making.
  • More competitive loan rates: Traditional consumer loans usually bulk applicants into risk pools, which means some borrowers receive less-than-ideal rates on credit products.
  • Faster processing: Open banking doesn’t just help the application process. Once approved, open banking can also ensure consumer lending payouts are nearly instant. 
  • Smoother borrower experience: As a fully digital and integrated process, borrowers can benefit from highly convenient and intuitive digital interactions. 
  • More accessible financial services: Open banking loans can limit financial exclusion by ensuring applicants are judged on their own merits rather than a theoretical risk pool. See here for more information.

How do open banking loans provide better personalisation?

By working directly with customer bank account data, lenders can:

  • Gain a deeper understanding of applicants’ financial health.
  • Assess creditworthiness directly rather than indirectly.
  • Offer a loan rate that reflects who they are as a person rather than as part of a wider risk pool.

How can open banking loans enhance the potential number of loan applicants?

Open banking makes applicants’ financial history more accessible. So, rather than categorising people into risk pools, open banking technologies can help lenders assess applicants directly.

Here, lenders can identify potential borrowers who may otherwise be excluded from traditional assessment techniques. For example, relying on demographic data like addresses that correlate with certain financial behaviours but don’t guarantee them. In turn, lenders can identify responsible borrowers who appear as edge cases and offer financial services to more applicants.

How do credit bureaus use open banking?

Credit bureaus can use open banking to collect and aggregate borrowers’ financial data before loan applications. This can include things like transaction history, account balances, credit utilisation and more.

All this data then goes into a credit score, which expresses an individual's creditworthiness - somewhere between 0 and 700. A high score indicates a low-risk borrower, while a low score indicates the opposite.

Credit bureaus then offer this data (along with other information about borrowers) to lenders during applications to help guide their decision-making. Overall, open banking helps make these data more accurate and reliable.

What do borrowers need to know about open banking loans?

Open banking loans will feel almost identical to most other credit application processes. Applicants already share their bank details since that’s where principal sums and future consumer lending payments will go to/come from.

However, applicants will be asked to grant permission to share extra data from their bank account with either lenders or credit bureaus (depending on how they prefer to apply for credit). All lenders and credit bureaus need to do is let borrowers know their details are being used to generate personalised loan offers and credit scoring solutions.

Are open banking loans limited to a certain area of finance?

Open banking technologies can help credit bureaus and lenders assess borrowers’ creditworthiness.

Open banking loans have lots of potential in the payday lending industry because of their speed and efficiency at gathering applicant bank account data. However, there's no reason why consumer lending payouts should be limited to one type of credit project. For example, a credit card over a car loan.

Instead, open banking loans can help lenders offer any and all types of credit, from personal loans and other kinds of unsecured debt to debt explicitly tied to assets. Best of all, the same is true for business-focused lending, too. Consumer lending AIS providers can pull data from personal and business bank accounts, meaning the potential of open banking on consumer lending is limitless.

How can open banking facilitate easier consumer lending payments/payouts?

So far, we’ve focused on how consumer lending AIS helps credit bureaus and lenders assess creditworthiness. However, open banking technologies can also help streamline consumer lending payments and payouts:

  • Consumer lending payouts: Once approved, lenders can use instant A2A payment rails powered by open banking to deliver principal sums to borrowers in mere seconds.
  • Consumer lending payments: Lenders can also let consumers pay via the same method, eliminating the need for other payment processing solutions for credit or debit cards that eat into profit margins.

How are recurring payments, in particular, improving open banking loans?

Recurring payments, sometimes called ‘variable recurring payments,’ are a new initiative from the UK financial services industry. Recently identified in our article on 6 Essential Open Banking Trends 2024, we think VRPs are set to be the “next big thing” in finance, and we expect to see similar schemes launched in Europe in the coming years.

The feature gives borrowers more control over consumer lending payments on debt, subscription services, and other regular expenditures. For example, borrowers can amend and even cancel payments right up to the point of payment, giving them more control over their outstanding open banking loans.

Download Consumer Loans Explainer

Learn how to improve your payout experience and discover the benefits of Open Banking for your consumer lending.