What will the new normal look like? It is a constant question in all areas, including financial. Thanks to technology, many businesses have been able to continue their activities. One of these technologies is open banking, which is of great help when it comes to approving credits, during and after the pandemic.
Open banking is a recent model that allows people to share their financial data with other institutions. Previously, the financial institutions that obtained information from their clients were the custodians and owners of that information.
Now, users own their financial information and are the only ones who can authorize who to share it with, in order to obtain added value in the products and services they use or intend to contract.
The pandemic has prompted people to use digital financial tools, while banks, fintech and other financial entities have strengthened their digital channels so that people and companies can carry out their economic activities without going to a physical branch.
However, there are still challenges to overcome, one of the most important is in the area of credit. During the pandemic, existing loan portfolios have been affected. According to a study carried out by iupana, in the surveyed fintechs the percentage of portfolio overdue for more than three months doubled, from 4% last year to 7% in April 2020.
For this reason, many fintech companies have tightened their client approval criteria, to select the best profiles and reduce the risk of delinquency. Other measures they took were to give their clients more time to pay their debts and freeze the accumulation of interest.
This shows that credit institutions and, mainly, fintech companies do not have enough information about their clients to authorize a loan to suit them. In this sense, open banking can help reopen the door to new lending.
Open banking: A lifesaver for credit institutions
Open banking offers various solutions to fintechs and credit institutions. First, it allows them to verify a person’s identity in real time. The user only has to link her bank account on the platform she wants to use; and the company will get the full name of the account holder. Then, automatically, the identity of the client is verified, which allows for a much faster and smoother user experience.
Also open banking services can obtain account data, such as the unique deposit key, to verify that an account exists. For example, often mini deposit is made and with this, a user’s account can be verified. In addition, payments companies can be linked to authorize transfers from third-party applications – something that in Mexico is not yet in the regulation, but is in other countries, such as Brazil or the European Union.
On the other hand, with open banking integrations, it is possible to verify income and review the user’s day-to-day transactions. Banks usually have information on their users’ payroll deposits, for example; however, they do not always have the complete picture. In Mexico, people have an average of 2.4 bank accounts according to the National Survey of Financial Inclusion, 2019.
When it comes to income verification, fintech companies have even more of a disadvantage than banks, since they do not have, for the most part, verified information on their customers’ income. Consequently, it is more difficult to grant a loan in these moments of uncertainty.
Both banks and fintech can connect to their clients’ banks, and complement their information and that of third parties, to have a more complete picture of their users’ finances and, thus, offer personalized credits according to a client’s risk profile. In addition, they can give a more efficient service to their customers, with online approval processes in minutes.
With financial data, financial service providers can offer their clients creative solutions to help them make better financial decisions, not only in credit, but also in monitoring their personal finances and in investing, to reach long-term goals.
From my perspective, open banking is here to stay and is likely to be integrated more quickly in Latin America, thanks to specialized providers. Undoubtedly, open banking promises benefits in the new normal, in which the use of agile digital tools will take priority, with all the necessary functionalities to manage finances from home.
Article written by José Luis López Amador, CEO of Finerio Connect, in collaboration with Nick Grassi, COO of Finerio Connect.
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