Open banking allows financial institutions to share financial information with each other securely.
Discussions about open banking are usually about using fintech for money management, consumer rights and payment processing. But how about debt management? From the research I’ve done, open banking could be a pretty big deal for those managing their debt.
In the UK alone, 12.7 million are “financially squeezed”(that’s 1 in 4 people), meaning they have debt obligations and wouldn’t be able to cope if there was a sudden financial emergency. More and more fintechs are tackling the issue of debt – especially in the US where it’s a huge problem – and with better regulations, it seems that open banking could have an essential role as well. In what way? And how could debt management Fintechs use open banking as a tool? Let’s do a little bit of digging. 👇
How can we use Open Banking for good?
I love Fintech because I honestly believe it’s an industry that is out here to do good. It’s an industry that is helping people take control of their finances, pay fewer fees and reach their financial goals. It’s also an industry that can help people get out of debt, which can be pretty life changing. Here are three ways open banking could help with debt management:
1. Credit scoring: Open banking is mostly about data and privacy, and this opens many doors to the number one way of gathering data on debt: through the credit score. More and more Fintechs are approaching big companies such as Experian and Equifax and introducing credit scoring into their own products. This means customers don’t need to pay an arm and a leg to find out what their credit score is, are able to track it more easily and therefore work towards a higher score. In the long run, a better credit score means a more favourable APR, lower mortgage interests and better overall options. In other words, good.
2. Budgeting apps: More and more budgeting apps are popping up in the UK, with many helping people budget their expenses, save for their retirement and learn some financial tips. Now, with open banking, these apps can also help users manage their debt and learn how to get rid of it. Not only does this help people who feel stuck in their debt management situation, but it also builds financial records for those who don’t have any. This could be helpful for the individual themselves, or to other organisations who may offer financial products (through the credit score).
3. Financial literacy: Sean Hawkins from Ascentric says so himself:
“If you make things more efficient, it makes it easier to reach people who might otherwise ignore their finances. People leaving university with debts might simply think their finances are bad and ignore the issue. Open banking makes advice more inclusive.”
By making open banking the norm, bank accounts and other financial institutions can help people in debt be aware of their issue and help them pay it all off. This could be through better deals as well as more financial control. It also builds a virtuous cycle: the more people benefit from an open banking feature, the more trust they have in the system and the more data they are willing to share – which then means the opportunity to provide hyper specialised debt management services (see my take on data driven innovation).
What are some examples of organisations doing open banking for good? Here’s what I found:
Example: Money Advice Scotland
Money Advice Scotland is a charity that helps citizens in Scotland manage their money, specifically their debt. Recently, they announced they were launching a web chat service that uses Experian’s open banking tool, something called the “Affordability Passport”. This tool allows the charity to gather data on income and expenses as well as any consumer debt the person may find themselves in.
Thanks to this tool, the charity can gather all information needed in a few minutes and offer personalised debt advice much more quickly. Guess how long it usually takes to gather all this information? Weeks, sometimes even months. Gathering data more quickly means consumers are able to get a debt plan much faster, which in turn could mean a shorter debt plan and fewer repercussions. Pretty cool, huh?
AccountScore is a Fintech that recently launched the first ever Open Banking solution for people in debt. It’s a platform that gathers data from the consumer’s current account as well as debt they may be in. This information is then offered to debt advisors, who can instantly get a full picture of the client’s situation and offer very specific debt advice. All this information will be accessible to insolvency practitioners and debt management advisors, who will all be able to offer their own service to help the client manage their debt. Do remember that we’re talking about open banking, where the data shared is secure, in real time and all in the required format. This means that the customer is the one who chooses what to share and what not to share (see: Wait, what’s Open Banking?).
Once again, this is a data gathering solution. When it comes to managing debt, customers usually have to go through several lengthy and complex loops before getting any debt advice. With this type of open banking solution, the customer assessment is done in a matter of minutes and a plan can be put into action quickly.
As we can see, the current open banking solutions are mainly to do with data gathering. Are there any other ways open banking could be used for debt management? I didn’t find any examples in the UK, but I’m quite sure there could be plenty of uses in the US. This could be an app such as Undebt It, an online calculator that displays all your debt on one screen, educates you on debt payoff strategies and helps you create a debt plan. Or maybe a Fintech that can gather all the debt data, crawl various financial institutions and offer the best deals to people who are looking to get into a better debt situation (this already exists for people looking to pay off student loans in the US). As you can see, there are many possible solutions to using open banking for debt.
I’ve talked about purpose driven banking before, and how Fintechs are the new wave of banking solutions that work with a purpose. Debt management is part of that purpose, and open banking is a tool Fintechs can use to do good. Once we look at all the different ways we can help people take control of their money, I’m sure we’ll find even more tools that could help drive that purpose. Personally, I find it incredibly exciting.
Check out the resources I used to write this article 👇