Open Banking and Open Finance – producing and selling good

Which are the use cases focused most on improving the consumer’s financial wellbeing and driving the power of doing good? Oana Ifrim, lead editor at The Paypers, shares insights into this topic

The article was originally published in The Paypers` Open Banking Report 2021.

Open Banking isn’t just about finance, it’s also about improving and benefiting society. Actually, one of Open Banking’s key facets is its ability to address issues related to accessibility, vulnerability, and environment.

Some think that all the regulatory and investment efforts that went into developing and delivering Open Banking haven’t yet made clear any concrete benefits for consumers; in earnest, they do have a point.

According to Consumer Priorities for Open Banking, there is limited availability of other types of products in Open Banking that would drive actual financial value for consumers. The authors point towards a future of Open Finance and Open Everything and talk about an industry that uses new technologies to take a better and more complete view of a customer’s situation and circumstances. This represents a good source of inspiration for developing valuable fintech propositions.

The American Psychological Association considers financial stress to be one of the top stressors in America and research shows that financial stress and economic hardships link to a variety of very negative physical and mental health outcomes. Improving financial health improves health in general and refocusing the sector on delivering financial health and greater social good is key, especially during stressful situations, such as the pandemic - which has also severely affected people’s finances and the global economy.

For this, financial health providers will need a better picture of individuals and their circumstances and transaction records from their checking account, mortgage, pension, etc.

Open Banking to the rescue

The question is: which are the use cases focused most on improving the consumer’s financial wellbeing and drive the power of doing good? We will discuss the most exciting ones below.

Building the credit score 

Very often, traditional credit checking systems let people down because they don’t have access to enough data to understand their financial life or simply because the customers haven’t generated enough information for a credit checking bureau to give a lender confidence in their ability to repay. COVID-19 has only underscored just how inefficient traditional loan processes are.

Open Banking can drive improvement in lending processes. Consumers can use their financial data to build their credit score, proving their ability to repay loans without having to rely solely on what banks and credit agencies know about them.

By accessing financial/non-financial data, lenders’ credit scoring and risk assessment processes are intensified. As a result, more insight is provided, and lenders are allowed to make borrowing eligibility assessments more precisely. Performing a credit check with Open Banking will supply all the required data. For example, it will show consistent salary payments, rent payments for a specific period, it could compare income versus spending etc.

Open Banking is pushing solutions that enable to verify customer details in real-time, which makes the process easier for the user and significantly increases the chances of applications being accepted. CreditLadder, for instance, helps to improve the credit scoring of people in the UK, based on rent payments (traditionally excluded from credit score) retrieved through Open Banking.

Solutions for gig workers – financial inclusion

Many workers in Latin America are turning to gig economy platforms (such as Uber and Rappi) as a source of income; however, in most cases, they don’t have bank accounts and they end up excluded from traditional banking services and often have difficulty getting approved for loans.

Usually, a traditional bank has no way of accessing the financial history of these workers (who are paid through wallets that are exclusive to those apps). Thus, going to a bank as a gig worker amounts to nothing.

Fintech providers began to tackle this market by building products tailored to the specific needs of these workers who often still lack access to banking services.

Some companies have created API offerings that allow developers to build financial and non-financial solutions in Latin America to extract their clients’ financial data from several sources and connect them with their apps. This includes both banking and fiscal information, but also data from gig economy platforms like Uber and Rappi.

The goal is to allow workers to have at hand their entire financial history and have opportunities to work for another gig economy platform if they wish to. They could upload their financial data for services and switch between gigs. For instance, if they worked for Rappi and switched to Uber, they could use their track record with Rappi and apply for a loan.

Identifying vulnerable customers

…meaning sharing financial information with people or organisations you trust, so they can be notified when it looks like you’re in trouble. Or monitoring customers’ activity and responding to patterns that indicate unwanted spending, by alerting an authorised friend or family member.

Elderly individuals are usually the most frequent targets of fraud scams. Companies like Kalgera, for instance, help to improve the relation between money and older people. The company uses third party money alerts, based on Open Banking capabilities, to spot unusual activity on accounts without sharing account details by connecting to bank accounts across institutions. 

Savings/pensions

There is no understating the impact that mental and physical health can have on the overall happiness of an individual, especially later in life, when pensions weigh the most in ensuring their state of wellbeing. Considering the scarcity of proper information and guidance in schools and early adulthood regarding pension plans and adequate financial education on this front, it is no wonder that many adults end up struggling with understanding the - at times - complex nature of the pension system.

The emergence of players with solutions and apps to help unlock spending data and see a complete picture of finance and financial health is no doubt revolutionary.

Take pension providers such as PensionBee, for instance. Open Banking has allowed them to create pension calculators and retirement forecasting tools to help customers plan ahead, enabling them to build a clearer picture about what they should be contributing. Users of the PensionBee app can also spot pension scams and move their money from pension to pension. Before Open Banking, customers were required to go to great lengths to take a look at their data because pension providers would have kept it at arms’ length.

Mercer and Moneyhub also created an app allowing individuals to manage all aspects of their finances in one place, including connecting investments, loans, mortgages, savings, bank accounts and more. Users have a view of both their current wealth and future wealth, which can significantly improve an individual’s financial wellbeing. 

But Open Banking could do a lot more on the savings department. It can also fix the loyalty penalty headache, where companies penalise longstanding customers by charging them higher prices than new customers or those who renegotiate their deal. Consumers could use services offered through Open Banking which help monitoring the market and advising customers when they should switch to a better deal.

Open Banking apps can analyse the customer`s accounts to move them away from all the high-charging services. Alerts for better products can help consumers choose lower interest rates, overdraft charges or better deals.

Greener portfolios

Open Banking can be an important tool in the fight to reduce carbon footprint and behave more sustainably. 

Open Banking-based services allow both people and businesses to be more aware of where they invest, what they buy, and their behaviour, enabling them to have a better impact on the planet.

Sugi, for instance, an app powered by Moneyhub’s Open Finance data and intelligence API, is the first platform in the UK allowing users to check the carbon impact of their investments and compare with industry benchmarks to help them build a greener portfolio.

Also, French carbon tracker Greenly automatically tracks the impact of every expense a person makes and puts this into a dashboard to show them what to focus on to reduce their carbon footprint, made possible by aggregating transaction data from bank accounts across Europe. 

According to Greenly, Europeans have an individual carbon footprint of around 15 tonnes of CO2 a year on average. To meet the EU goal of being carbon neutral by 2050, the figure needs to be more like 3.5 tonnes.

Charity

Traditionally, donations made on charity websites or online fundraising pages use credit or debit cards as the payment method. However, they are often cumbersome for donors. Moreover, they add extra fees to transactions and the processing fees can cut the value of the donation by 2% or more. To support this idea, research found that of GBP 10.1 billion raised for charities in 2018, at least GBP 101 million went on transaction fees. 

As the use of cash continues to fall, a trend exacerbated by the current global pandemic, many charities have begun to implement contactless donation boxes to adapt to changing behaviours. Open Banking offers to make the process more cost-effective for charities because until recently, contactless donation solutions have been subject to expensive card processing fees.

One good example is the Pudsey Bear. In 2019, for instance, Nuapay partnered with mobile technology platform Thyngs to help charities tackle the decline in donations due to reductions in consumer cash use. The two companies partnered to support fundraising for the BBC`s Children in Need campaign. They have created a Pudsey Bear with an NFC chip on its ear, enabling passers-by to tap their phones to make Open Banking donations to the campaign.

Another powerful example is Kynder, which allows donors to support causes by turning every purchase and payment into a donation. The user links their account to a chosen charity and sets a percentage donation level. 

Conclusion

Given all the people and businesses that are struggling financially nowadays, the financial industry has to be a leader both ethically and on the market. Setting up a good environment for Open Finance includes leaders who can see the benefits of opening up for both the community and the economy. Enabling access to a bigger display of financial data is the way to allow people and businesses to have control over their financial health.

So far, Open Banking has shown us that the financial industry can welcome fresh players, tackle disruption, and bring new value for the consumer. 

As economies around the world struggle to return to pre-pandemic efficiency, solutions powered by Open Banking can be seen as a way to improve people’s financial lives regardless of their backgrounds, if they come from a developing country or a highly developed one. From lowering fees on utility bills to improving financial management and from applying for loans to better tools for savings, Open Banking holds the ability to support millions of people all over the globe.

About Oana Ifrim

Oana is a Lead Editor at The Paypers. Her research, industry engagement, and content-related activities revolve around Banking & Fintech innovation, Open Banking, Open Finance, B2B fintech. Oana is involved in diverse tasks ranging from content editing, planning & carrying interviews with key experts, representing The Paypers at various banking & fintech events to content research & production and strategic planning and coordination for large-scale, industry-specific research, reports, and projects. She can be reached out at oana@thepaypers.com or on LinkedIn.