H2: Is It Here To Stay Or Simply A Pandemic-Prompted Fad?

Of the many economic consequences unleashed by the pandemic, the accelerated adoption of new technologies for SMEs and financial services institutions was one of the most impactful.

It has driven greater digitalisation of financial services and led to an explosion in data. And this has been particularly meaningful for financial firms as it has gone hand-in-hand with the emergence of open banking – both as a way to cater to the needs of consumers, and as a means of meeting operational responsibilities.

For instance, while most of the UK’s banks were closed for the first lockdown, there were still mandatory aspects of the credit lending process – such as ID verification and payment tools – that needed to be met. Many of these procedures had to be adjusted to better fit a digital world and open banking played a significant role in facilitating that, by powering new forms of verification.

More than a year on, open banking technology has proved itself as not only an effective tool but the key to unlocking a digital-first future for financial services. As a result, many businesses are now interested in using that technology to better integrate data into their decision-making processes.

Evolving consumer expectations are fuelling a new era of B2B demand for financial services, and open banking’s popularity is spreading into other types of businesses. However, while open banking may represent the future of the industry, is the trend here to stay for B2B professionals? Or will this end up as just another pandemic-induced fad?

How credit providers benefit from open banking

The pandemic was undoubtedly a catalyst for open banking adoption, but so too was the value it held for credit institutions. Open banking gives lenders real-time abilities, which in turn improves their customer satisfaction and retention levels.

Because open banking allows for better control of data, credit providers can seamlessly and securely engage with third-party service providers and ultimately improve customer service satisfaction. As a result, open banking can elevate the experiences of both customers and B2B professionals alike.

And with better data insights, open banking enables better analysis of credit risk, which drives faster decision making and reduces the number of customer drop-offs open banking providers experience.

Open banking also eliminates many of the time and resource-consuming manual processes that credit providers need to undertake. And with greater, more detailed data analysis, not only can they improve their access to thin-file credit customers who usually struggle to get accepted by traditional lenders, but that data can also be used to garner a better understanding of Covid-19’s true scope of impact.

Armed with that knowledge, credit providers can better prepare for the future, anticipate trends, and be first movers when it comes to taking advantage of new opportunities in the market. But this doesn’t stop with lenders – any business’s finance department will soon be able to benefit from improved access to data.

Better commodification of data

With the rise of third-party service providers, more and more organisations are granting greater access to their data, thus transforming these forms of data into a valuable commodity. However, getting hold of data isn’t the whole story for most businesses – the real challenge is the fact that most of the data held by businesses is not well-structured, and therefore needs to be categorised.

Categorised data is a powerful tool for credit providers, as it can give them the important context which they need to make decisions. For instance, if most of the payments a person makes is on gambling sites, they are likely much riskier than one who spends largely on groceries or school fees. Similarly, if all a person’s incoming payments are regular and from a single employer, a lender would view that person differently to one who receives irregular payments from contractors.

Context is important, which is why this mindset is no different from how credit providers view B2B customers. To best predict how a business may perform in the future, lenders tend to first consider how that business has performed and behaved in the past.

This is all the more important when considered through the lens of recent UK government mandates that have compelled banks to enable greater access to SME customer data (as it did with the Commercial Credit Data Sharing scheme) to give SMEs better access to finance. And with the anticipated adoption of PSD2 for commercial lending and underwriting and not just for consumer, finance analysts such as those at Dun & Bradstreet will soon be able to turn that data into analytics that can help businesses predict the riskiness or affordability of any entity.

Driving a new era in lending

The commercial impact of developing open banking in the UK really can’t be underestimated, which is why the Financial Conduct Authority (FCA) is placing increased focus on ensuring responsible lending for both traditional and new credit products.

With the widespread adoption of open banking, credit providers will be able to execute more accurate lending decisions through better credit risk comprehension, and to conduct enhanced collections and recovery procedures through automated income and expenditure assessments. These capabilities will help improve their estimation and verification of income, which will help to further protect customers and credit providers alike.

Bank data was once the only chink in Dun & Bradstreet’s analytic armour. But with the emergence and acceleration of open banking, it’s unlikely that will remain the case for much longer. Till then – watch this space.