Open Banking adoption in lending set to hit 70% in next two years

One in four lenders (26%) now use Open Banking technology, with 51% of those who haven’t yet used the technology planning to do so in the future. Nearly nine in ten (87%) of those say they plan to adopt it within the next two years, meaning that by 2023, seven in ten lenders (70%) overall are expected to be using Open Banking.

A new report published today by Open Banking credit reference agency, Credit Kudos, demonstrates the seismic impact of the COVID-19 pandemic on lenders’ appetite to invest in technology that gives them a comprehensive view of a borrower’s financial situation to enable better lending decisions – including affordability and creditworthiness.

The impact of the pandemic on lenders’ ability to operate as usual was profound. Credit Kudos’ report shows that around eight in ten (78%) lenders changed their rules about who they could lend to in the pandemic. Almost half (46%) of these lenders changed their policies because it was too difficult to verify borrowers’ income, for reasons including furlough and redundancies.

With 11.7 million people furloughed at some point during the pandemic, and unemployment at 5.2% in Q4 2020, more than a third (36%) of lenders changed their lending rules in order to avoid those deemed ‘higher risk’ customers during a period of huge uncertainty. This meant that lenders were missing out on new business, with 30% of those who changed lending policies during COVID-19 experiencing a loss of revenue from new customers.

Freddy Kelly, CEO of Credit Kudos, comments: “From national budget deficits to individuals’ current accounts, the colossal impact of COVID-19 on the nation’s finances was felt by all. In times like these, individuals and businesses look to their financial partners for support, but without up-to-date, accurate information on borrowers’ financial situations, many lenders struggled to continue to lend as they could previously.”

The study goes on to examine the role of the pandemic in changing lenders’ attitudes towards the way they equip themselves in the future to make the best lending decisions on behalf of their customers and themselves. 34% of lenders that changed their lending policies during the pandemic saw a knock-on effect in the form of an increased need to adopt new technologies across their business, and 30% saw an increased need for new data sources. Nearly half (47%) of all lenders surveyed believe that Open Banking could help their organisation save time and cut the cost of credit decisioning in the future.

Kelly continues “The seismic shock of the pandemic has forced a period of refocusing among lenders on the need for better sources of data, and greater technology integration to help them leverage newer data to enable better decisioning. Open Banking technology is helping lenders to move beyond the limitations of traditional credit data and open the door to better financial behavioural data, all of which creates more rounded assessments, increased acceptances and reduced defaults.”

Stuart Mogg, Associate Partner, Corporate Finance, EY, comments: “COVID-19 caused a lot of worry across both the consumer and SME lending sectors, and many lenders went into survival mode, increasing credit score cut offs and pulling higher risk product ranges. Thanks to various factors, including government schemes, increased vaccine roll-out, and the return of consumer confidence, both the consumer and SME lending sector have nearly returned to pre-pandemic norms and in some cases have pushed risk beyond these levels. But stability has not lasted long – already we’re seeing further COVID-19 and geopolitical volatility, and it is my view that we should not expect any less of a challenge during 2022 then we did in 2021. Periods of volatility such as this is when Open Banking insights become even more valuable for lenders, going beyond traditional credit bureau data to give a real-time feel of consumer and SME behaviours.”