How Open Banking Will Augment the Credit Approval Process

A majority of Americans say they experience financial hardship at least occasionally, and roughly 22% of Americans, or 50 million US adults, don’t even have FICO credit scores. 

These numbers represent an enormous opportunity to bring these individuals from the outskirts of the financial system to a place of long-term financial strength — bringing returns for financial services companies that know how to act on the opportunity.

One way to do this is to optimize and augment the credit-approval process via open banking. By using tokenized, credential-free API connections, financial services companies aggregate bank account and transaction data from a variety of sources, enabling financial services companies to get a better understanding, when combined with credit reports, of who is creditworthy and who isn’t.

These insights can help the unbanked take consistent steps toward becoming creditworthy. For example, Chime uses transaction history over time to gradually help people build their credit without initially checking their credit. This concept can be amplified even further by aggregating a wide range of account types via open banking, so a company can see total spending in all of a user’s accounts, getting a far clearer picture of each person’s total financial picture.

Financial services companies that access these insights will be well on their way to edge out the competition with this large market segment. As JB Orecchia, CEO at SavvyMoney says, “There’s a direct correlation between consumers starting to track their credit, do financial literacy courses, budget, etcetera and financial improvement. And you can start to get ahead of the score and take a risk on those folks because they're going in the right direction.” He adds that there is power in gathering transaction data and traditional credit score information. He says, “I think there's an opportunity to combine that information and to really get a more comprehensive picture of that consumer.”

Brent Chandler, CEO at FormFree, sees similar possibilities. He says, “With new data, we can do different things. We can look at residual income, discretionary income. We can understand a consumer's ability to pay. We can add vectors against component analytics that understand ability to pay. We can algorithmically use intelligence to understand how much you can afford and do it safely, and allow banks to have transparency into consumer risk. This whole thing is just about risk, it's understanding where the risk lies and then how to effectively work with that. It doesn't necessarily mean everybody's going to get the loan they want, but they're going to get a loan. By empowering people to have access to credit, we can create a much more democratized lending environment.” 

The key for financial services companies is to lean into innovation. For instance, in our Open Finance Fridays series, Jacob Kossof, Head of Model Risk Management & Validation at Regions Bank, says that there are “interesting ways to do credit approvals for thin-file people” with open banking. Because of this and many other reasons, he sees open banking as an urgent priority for financial institutions. “We believe that a bank will be at risk if it's not adapting,” he says. “For instance, if your bank doesn’t have remote deposit capture for checks and your competitors do, you're going to be worse off. We in risk management recognize both the risks of implementing new initiatives such as open finance and the risks of not implementing new initiatives. Adaptability is really key here.”

Major players in the industry are already moving in this direction, setting the standard for what’s to come. As Jane Barratt, Chief Advocacy Officer at MX says, “Global banks like Citi and BBVA are using APIs as a commercial strategy. They’re exploring what they can do to build out revenue streams and better customer experiences on top of their APIs. I think that's where the industry is going, and you'll hear a lot about embedded finance and banking as a service, which is the natural progression of having a more robust modern architecture.”

With this more robust modern architecture, built with open banking APIs, the possibilities to help customers enter the banking system increases, giving people opportunities they’ve previously never had and opening up new revenue streams for financial services companies that act boldly.