Post-2015, “Open Banking” has become one of the major driving factors behind fintech sector growth. The term usually involves the usage of Application Programming Interfaces (APIs) which help third-party developers to build products and services. They also provide the customers with transparency options ranging from open to private data. In 2016, the United Kingdom Competition and Markets Authority (CMA) asked the banking biggies such as HSBC, Barclays, RBS, Santander, Nationwide, and Bank of Ireland, to allow the fintech start-ups to start working towards the “Open Banking” concept and let these players access the banking transaction data.
In 2018, “Open Banking Limited” came into existence, adding more muscles to the sector. While the Competition and Markets Authority and Financial Conduct Authority look into the regulation-related matters, as of now, there are some 202 service providers in this sector catering to the customers’ needs.
Apart from the United Kingdom and the EU countries, Open Banking is expanding its wings in the United States as well, where Financial Data Exchange (FDX), came into existence in 2018 and now consists of the country’s premier financial institutions. FDX has the goal of establishing a common, shared Open Banking via a market-driven method, where the institutions will engage with the financial market players via a consortium approach.
While COVID saw a massive jump in digital banking since 2020, the number of customers ready to share their data via Open Banking has tripled in the same period of time. As per Experian stats, data-sharing requests reached 188 million in February 2021 from 47 million in February 2020. The study also said that 57% of lenders have adopted the Open Banking method since the COVID outbreak.
In the United Kingdom itself, Open Banking has seen successes in the mortgage market and now eyeing the letting industry as well (a sector that deals in forming agreements between landlords and tenants ahead of residential property sales). Now Open Banking is even streamlining the referencing process for the tenants, thus allowing them to use online banking sans daily manual process payments.
Now we will discuss how Open Banking is proving itself as a game-changer in the property market.
Early identification of potential frauds
Right now the United Kingdom property market is going through some tumultuous times, due to COVID, Brexit, inflation, and the cost of living crisis. Thanks to the ‘Zero Stump Duty’ reforms, the sector is witnessing volatility in the form of rising mortgage rates. While the market predictions are not putting out a rosy picture for the £1.4 trillion worth sector, the situation looks ripe for the fraudsters to do their things. Recent media reports have spoken about a massive hike in fraudulent applications for rental properties. This is also known as tenancy fraud, where these scammers will put up false IDs, income statements and employer references. This type of incident has increased by 71% in the last two years.
Here comes the crucial role of open banking. Rental technology platform Goodlord has reported that in 2022, it identified one in five applicants as fraudulent ones through its specialist team. The whole process has saved the United Kingdom landlords some £1 million. The estate agents can also verify the applicants’ income records and earlier rent payment stats through Open Banking. Not only are the agents getting quick, transparent data about the renter’s income, but the tenants can also complete the referencing process on short notice, without massive volumes of paperwork, which in a normal method, stretches to several months, as the customers have to provide bank statements, reference letters from past employers and landlords.
Hassle-free and secure experience
Open Banking generally uses Application Programming Interfaces (APIs) for fast, yet secure data transfers. These APIs even allow the users to regulate the shared data they share, without password sharing. Data transfer can only happen once the customer gives his/her consent. The businesses wanting to connect with their customers through Open Banking must have UK FCA authorisation, which in turn requires these players to meet a number of technical prerequisites, apart from submitting regular audit reports.
As per the latest data, there are some 15 million renters in the United Kingdom who move from one property to another every 12-18 months.
While they do this, the process also involves a lengthy period of submitting bank statements, payslips, utility bills, credit card bills and many other details, while applying for mortgages, followed by a thorough customer reference and background checks from the bank’s part.
What Open Banking does is that it cuts short that tedious process. The banks can approve the loans in minutes and seconds without getting indulged in heavy paperwork. The mortgage applicant needs to connect Open Banking platforms to his/her online bank accounts, so that these tools, with user permission, can access the data and pass them to the financial institutions within a few minutes. Real estate agents and property landlords can also enjoy the benefits of automated and real-time payment management through open banking.
Enabling faster loan approval
In Open Banking, lending institutions can share customer data with estate agents. It also streamlines ad automates mortgage-related paperwork. It’s all about giving customers the hassle-free services they deserve. Things like verifying the mortgage seeker’s previous rent payment records or whether the submitted reference papers are genuine or not require a lot of time in the traditional banking methods, as the staffers have to perform a massive amount of paperwork, making calls and sending faxes. What open banking does is automate this mundane process, as the computers take over the job of cross-verifying the home buyers’ details, finding anomalies in the papers and data submitted by the mortgage applicant.
A recent study report from Tata Consultancy Services laid out the roadmap for Open Banking. While it identified that Open Banking is cultivating unconventional data sources for full proof of customer creditworthiness before proceeding with the loan approval process, the report also suggested that lenders use consumer information like social data, utility payment records, e-commerce transactions, and conventional credit repository report to not only get understanding about customers’ creditworthiness but also to know about his/her consumer behaviour.
The study even pointed out that Open Banking is helpful when it comes to verifying customer income data and completing other KYC procedures. The APIs can contribute to this process by indulging in cross-checking employment records, title and appraisal details and credit history. While the paperwork gets eliminated here, the above-mentioned API-enabled verification processes can simplify the months-long mortgage approval procedure as something which can be completed in just a few minutes. TCS also predicted that the mortgage application and approval cycle will be reduced to a four-step mechanism in the near future (property search and finalize consent, settlement, and possession).
However, the report said that most mortgage companies are still using old, outdated paperwork methods. While it batted for heavy investment in the area of data collection and storage for an effective Open Banking solution, it also pitched for more attention in the API area.
“Data recipients need to connect to different API sources while collecting data from any data holder, making it readily available for the lenders. The faster and more reliable these APIs deliver the data, the better the user experience. For this, the APIs related to all banking segments like retail, corporate, and wealth and products such as banking, loans, insurance, and investments need to be extended to the entire mortgage and housing ecosystem,” the report observed.
“We recommend super apps to act as a one-stop solution for property search, home insurance, title verification, valuation companies, credit repositories, mortgages, and mortgage insurance. These super apps can cater to the broader ecosystem by integrating an end-to-end value chain into the home buying process. However, building and implementing the new technology required to comply with data holder obligations would be crucial. Data recipients also need to keep upgrading and building their platforms – an ongoing developmental activity for data holders, recipients, and lenders,” it added further.
The above-mentioned TCS report shows the future for the mortgage lending industry, i.e. embracing Open Banking as soon as possible. Apart from cutting the costs down on the paperwork field, this method will also help a mortgage company to stand tall above its competitors, in terms of offering customers a hassle-free loan approval mechanism.
Promising future for Open Banking
As per ResearchAndMarkets.com, European countries like Germany, France, Sweden, and the Netherlands are making progress on the open banking front. In Germany, the foundation has been laid to develop a strong open banking ecosystem, with the country having the second-highest number of home-regulated third-party providers as of June 2022.
“The number of passport third-party providers in Germany reached a triple-digit count during the same period. As of 2021, a majority of the third-party providers in Germany offered both account information and payment initiation service, with this share being higher compared to the entire EEA region. Furthermore, the share of countries in the European Economic Area (EEA) that are approved to provide third-party services in Germany also saw a slight increase from 2019 to 2021,” the study remarked.
“The number of third-party providers in Germany reached a triple-digit value as of June 2022, thereby reducing the gap between the EEA and Germany. More than three-quarters of countries in the EEA have the authority to provide third-party services in Germany, with Lithuania at the top of the list, followed by France and the Netherlands. One challenge that remains is providing stable and standard APIs,” it stated further.
In the region of Asia-Pacific, countries such as Australia, Hong Kong, and Singapore have been the early adopters of open banking.
“In 2022, Australia aims to implement consumer data rights for the energy sector that will ensure further growth of open banking in the country. Singapore has robust and dynamic legislation in place for the development of open banking. New Zealand also plans to launch a similar consumer data rights initiative in Australia by the end of 2022. Moreover, countries such as Indonesia and the Philippines are also making progress in the development of open banking initiatives,” stated ResearchAndMarkets.com.
The open banking industry will continue to gain traction in 2023 as well as more solutions are adopted by the sectors like financial services, healthcare, retail, insurance, and education. The growing use of digital payments and mobile wallets, along with increased consumer awareness, will drive the market growth of open banking. However, the sector needs to be careful against online fraud and data breaches.