FCA study recently found that 14 million people were contending with the financial issues at the end of 2020, which represented more than a quarter of the UK’s adult population. The image is considerably tough for SMEs, which have been impacted majority by the lockdowns, loss of earnings and more. It is estimated that the pandemic will cost SMEs an extra of £173,000 debt per year which is resulting in a lack of lending options for both consumers and businesses of the expensive or high interest loans or even worse, getting rejection from the lenders all together. This in turn is luring an unaffordable lending and confined consumers and businesses in an ongoing and unsolvable debt cycle at the time when they need the maximum support.
One of the major causes of this lies of the lenders relying on the credit scores and credit bureau data to base their decisions which mostly are not accurate enough to actually get the complete picture of the borrower’s situation financially. Thus the use case of Open Banking data in lending decisions have been stronger than ever. The data accessed through this system lets the lenders to retrieve the apt information about the borrower’s financial history and assessments, therefore enabling a much faired lending decisions.
Taking NHS workers as an example, in spite of working tirelessly throughout the pandemic, NHS workers made up a sizeable portion of the UK adult population struggling with debt even now. The University Of Edinburgh Business School released an independent report with the partnership of Salad Projects, found NHS workers are heavily dependent on the long term over drafts and the high cost credit, where APR is extremely high as 1,333 per cent. Approximately 93 per cent of the respondents conveyed that they use only one type of credit or loan when compared to the 75 per cent in the wider UK population. According to the Financial Lives Survey more than half, i.e., 58 per cent use up to three loan providers and 68 per cent use up to four loan providers. The situation is the result of the sole reliance on the credit scores. Each credit reference agency has a different method for calculating a credit score. They rely on the financial history of previous defaults or failed to get credit, whether or not a consumer’s actual financial position and whether they have recently got a pay raise or a new income to see how likely it is that they will be pay back the money they have borrowed. It means that if the consumer’s financial position has changed, then they are enabled t get better loans because of the previous discrepancy.
Unlike credit scores, open banking gives the real-time perception into a person’s or a business’ financial position in the present. Lenders could achieve more liable outcomes by leveraging the data which is already readily available to them. This will help both businesses and individuals by reducing the threat of loan default and lead to more responsible lending choices which can help them recover back after what has been a tough year.