Open Banking – The Truth
There is a video here, if you want the wordy explanation, here goes.
Open Banking is a system that allows one piece of software to access your bank details. For many of us we do this all the time when paying online or connecting our business account to Xero or Quickbooks.
The growth area for the use of open banking is with lending and business loan applications.
I recently listened to a large accountancy firm talk about open banking and how this is being used to make applying for finance simpler and less hassle, how it was streamlining the process and how it was fast becoming the norm. How it was being used to make the borrower’s life easier.
That statement was bordering on the naïve as open banking goes so far beyond that when it comes to borrowing. Lenders are using open banking more and more, that’s very true. It does make applying for finance simpler and quicker, but not necessarily easier and that is where the understanding of open banking starts to fall down.
What the majority of businesses, and for that matter, most people, what they don’t understand is just what happens to the data that is imported when an open banking link is completed.
Traditionally, when a bank asked for your bank statements they were looking for bounced items, that was the standard warning notice that a potential borrower may be struggling and maybe that client wasn’t a great credit risk to take on. For many mainstream lenders that rule still applies, but open banking is changing that, the data is real time and the analysis is very sophisticated.
To give you a flavour and insight into this, the screenshots below are a real life report generated by a lender using open banking. The confidential bits have been redacted in true CIA fashion, the rest is a genuine example and shows you the level of information lenders obtain by simply pulling in your bank transactions.
Money Coming In
Let’s start with money coming in. Remember that all this happens automatically and instantly.
The system assesses the money coming in, it segments that into credit, grants, government funding, invoices, transfers etc. Straight away the lender gets an overview of the money coming in and where it has come from. High turnover accounts no longer signify a well run business.
On an application the borrowing business will have put down details of other creditors. The system already pulls that detail, looks at what has been received and paid out. That question about other borrowing? It is checked immediately.
Individual Transactions & Missed Payments
What about the transactions themselves? The software used will highlight significant transactions. In this case we can see the system highlighting use of the job retention scheme, of loan funds being credited. It also highlights possible missed payments. This means that the software has looked at what normally happens then identified when this wasn’t the case.
It will also look at what the business owners have taken out. In this case we can see a refund of a small milk purchase as well as some regular dividends being taken.
My point in showing you this is to give you an overview of what open banking gives the lender and why the answers you put on the application form are checked in ways they never were before.
If you think open banking is about making the life of the borrowing business easier, yes it is, but that isn’t the primary aim. This is about real micro analysis of what is happening and all done in real time.
For those businesses that don’t understand why things are changing or think it is about ease then you are going to find life a little more difficult. Open banking is a simple concept, the devil is in understanding how your information is being processed. Something that very few people will ever properly explain to you.
I hope that helps, I hope it gives you a better insight and if it raises any questions then drop me a line and let’s talk.
By Dave Farmer