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4 effective ways in which lenders can leverage open banking

February 5, 2024
min read
open banking for lenders

Most people tend to think of open banking as a way to make their lives just that much easier – they get rid of the paperwork and the time that comes with accessing financial information in a more traditional way. 

But especially for lenders, the benefits of open banking go beyond the surface. There’s a real benefit for lenders to adopt open banking methods, starting with cutting down on fraud and ensuring they really know their clients, to simply making themselves more competitive on the market. 

Here are 4 practical ways lenders can leverage open banking tools to help their business

Reduce identity fraud and data manipulation

Prior to open banking, ensuring that the customer your company is working with is actually who they say they are was a lot more difficult and time-consuming. Often, it would require a customer to get physical documents from their bank to help verify their identity, but those documents can easily be manipulated and tampered with, leaving the entire process open to fraud. 

The last thing any lender wants to do is conduct transactions on behalf of the wrong person. 

However, by implementing open banking tools, lenders can avoid those headaches., helping to speed up the process of identity verification. A TPP like Kontomatik will extract the identifying information – including the customer’s first and last name, account information, transaction history and in some cases, address – from the bank. This information a lender can then easily compare to information directly received  from the client to confirm their identity. This process takes seconds and gives lenders confidence that they are communicating with the correct client. 

“With open banking, lenders can rest assured that they know exactly who they’re working with and that they have a full, accurate picture of that client’s financial capabilities” - says Dominik Wolski, VP of Business Development at Kontomatik 

Speed up income verification 

Just like identity verification was a laborious process before open banking, so was income verification. If a lender wanted to consider whether to work with a particular client, the client was often required to show physical copies of their bank statements and/or a copy of their salary from their employer to verify their income and give lenders an idea of whether they could repay their loans.

However, that was a time consuming process that was left open to fraud because physical bank statements and pay stubs are more easily tampered with. 

Fortunately, open banking has changed all of that, making the process much more seamless for lenders. 

Now, if a lender agrees to use open banking tools, they can request banking information from a client right on their website. After a client enters their banking details and agrees to share their information, a TPP like Kontomatik can access their financial history and identify all of the client’s forms of income. 

This method cuts down on fraud because the information is coming straight from the bank, with little involvement from the potential client, meaning a potential client can’t tamper with their income information. It also cuts down on time, because lenders know that when they request income information they can have it in a matter of minutes, rather than waiting days for a client to request and turn over a paper bank statement. 

Better understand customer needs

In addition to the speed and fraud reduction that open banking tools allow, there’s another benefit to open banking that can put one lender above many others in the eyes of a client. 

The information that’s returned about a customer’s income and spending habits under open banking is far more comprehensive than it would be in a simple bank statement. With open banking, lenders get access to information about how much money a client receives every month, the actual monthly balance number, how much they’re already spending on loans and bills, and how they decide to manage the remainder of their finances. 

Companies like Kontomatik can work with lenders by accessing that information from a bank and then analyzing it using our Machine Learning Solution, which assesses each transaction and assigns them different labels. What a lender receives is a full understanding of a client’s bank transactions with easy-to-read labels that indicate where they spend their money and how frequently: 

  • That comprehensive, analyzed collection of data easily allows lenders to paint a picture of their client and their client’s finances. With that understanding they can make much more informed decisions about whether to lend to a particular client, or how to tailor an offer so it better fits a client’s financial needs. 
  • In addition to saving lenders headaches in the long run because they can be more sure than the clients they work with are able to repay, this process also makes a lender much more competitive. Clients prefer to go to lenders that can personalize their offers and can truly understand their financial needs. 

Make the onboarding process easier and faster

"We know that open banking makes the process of sharing banking and identity information easier and reduces fraud, but it can also be a big selling point for lenders who want to attract and keep clients. Making the client feel at ease is key and no one is happy when they have to spend time filling out paperwork and gathering their personal documents" - says Dominik Wolski, VP of Business Development at Kontomatik 

In fact, the traditional method can be such a pain that some customers delay their application for a loan or decide not to go through with it altogether.

But with open banking the process is simple – the lender gets those personal documents directly from the bank and fills in the details.

No additional involvement from client is needed. Apart from the benefits we described above (fraud reduction, simplicity) this can be an advantage for lenders by ensuring clients stick with the process. Clients are much more likely to go through with an application if they know the onboarding process is seamless and not time-consuming. Additionally, if given the option between a lender with a seamless process and one with the traditional paperwork method, most clients will choose the former. 

In short, apart from just being easier, open banking makes your business more competitive. 

For more updates and analysis on open banking, follow Kontomatik on Twitter or LinkedIn

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