In this article we look at what open banking means for you and how it can help people looking for a loan to get approved, even if they’ve had bad credit or are on a low income.
First, let’s start with the obvious question: what is open banking?
When you boil it down, open banking is incredibly simple. Ask yourself, who owns the information in your bank account? Information like your balance, overdraft, income, outgoings, and so on. The answer is you own it. Not your bank. It’s not their data, it yours.
Open Banking is based on a law that means if you want to share this information with other companies (outside of your bank) so they can see your real financial situation, you can. The bank can’t say no, because you gave permission for it to be shared with companies you trust.
So, what does that have to do with getting a loan?
A major part of being approved for credit is being able to prove that you can afford to take out and repay the loan. The goal is to help people borrow ‘within their means’, but many of people who apply for a loan have no formal way to verify their income and expenses digitally. This is because all too often the credit bureau doesn’t have the right data about the applicant.
Lenders can’t approve a loan application if they can’t verify this information, even if they want to. Open banking means lenders can see when you’re able to afford a loan, instead of that information being locked away by your bank.
Why’s this happening now?
In the past, many lenders asked customers to send in copies of their bank statements and/or payslips to verify the data needed to make a decision. This was difficult. Bank statements were sent in different formats and it took a long time for someone to go through the statements and calculate income and outgoings.
With open banking, a loan applicant can securely and automatically share their data (which belongs to them) with the lender. The lender can see straight away that the income and outgoings are as expected and can assess whether the applicant can afford the loan – then the lender can easily and quickly assess the application and make an informed decision whether to lend.
Sharing my banking data with a lender sounds extreme!
We know. It takes a bit of getting used to, but it’s a totally secure and regulated process and avoids all the hassle of sending in bank statements or payslips The lender only sees the data. It’s not able to change anything or access your account. It’s like getting a report from your bank showing your transactions – money in, money out.
As the applicant, you have to give permission for a lender to access your bank data and this is done via a secure open banking partner. In our case, we use Credit Kudos to do the checking for us, meaning we only see the end report.
So how does it work at Oakam?
When you apply for a loan at Oakam and we’re not able to confirm your information via the credit bureau, we’ll invite you to use open banking. Then we’ll send you to your online banking website and your bank will ask you to log in to your main bank account to confirm that you would like to securely share your data with us.
It’s important to know that it is your bank that asks you to log into your online banking account – not Oakam or Credit Kudos, so we never see or have access to your login details. These should always be kept safely between you and your bank!
Open Banking is only an option for lenders and providers that are authorised by the Financial Conduct Authority (FCA) in the UK. This is what allows trusted lenders like Oakam to get a clearer picture of your circumstances and offer the right loan for you.
Is my data safe with Open Banking?
When you’re asked to use open banking, make sure the lenders are authorised and registered with the FCA. It is mandatory that providers comply with the data protection rules including the GDPR Regulations.
The provider must inform you of the data they will use and for how long. Make sure to ask questions if you have any doubts before you give permission for open banking to be used. If something feels wrong, do not share your details.
The people at Money Advice Service have a great article all about Open Banking if you want more information.
Remember, you don’t have to opt in, if you don’t want to.
We’ve answered some of the most common questions our customers have about open banking on our website here. Let us know if you have any other questions we’ve not answered – drop us an email to firstname.lastname@example.org
Having a bad credit history is not the same as being in financial difficulty. If you think you are in financial difficulty or are finding it difficult to pay your bills on time you should seek an alternative solution. To get debt advice information, we advise seeking independent advice from an impartial service like Citizens Advice or a qualified Financial Advisor.