Five years after taking off and open banking has, according to some, failed to leave the ground. The more competitive retail banking landscape it was supposed to conjure up has yet to materialise, and according to the UK government, the entire notion of open banking has fallen flat on its face.
However, such an opinion is not shared by Freddy Kelly, who has used this piece to detail why, instead of failing, open banking is flying higher than ever.
Kelly is the Founder and CEO of Credit Kudos, a company that utilises open banking to better assess consumers’ creditworthiness. According to its website, the company’s journey was born from Kelly’s lack of credit:
‘After working in the US for a number of years, [Kelly] returned to the UK. Having had no recent financial activity in the UK, he had a ‘thin’ credit file. This not only meant that he had limited credit options, but those that were available to him came with higher interest rates and restrictions.
‘After further research, it became apparent that he was not alone and that many people in the UK face difficulties when trying to get access to affordable credit.
With a vision to remove that challenge from the market, [Kelly] co-founded Credit Kudos. Since then, the team at Credit Kudos have been on a mission to provide fair credit for all, harnessing the power of open banking.’
Prior to the founding of Credit Kudos, Kelly previously held positions within Staak, Bitnami, TXN and Entrepreneur First.
AS we settle into a new year, open banking remains firmly under the spotlight for many in our industry. Having celebrated its fourth birthday, it continues to be the subject of lively debate for banks, fintechs and policymakers – but what is the real picture? Has it failed to achieve what it set out to do or is it genuinely making a difference to how the UK manages its money?
A Failure, or a Technology Bursting With Potential?
In a recent Treasury Select Committee hearing, it was claimed that open banking in the UK had been a ‘failure’, notably due to it having not resulted in an increase in account switching. While I would agree that this has not been achieved, the Financial Conduct Authority (FCA) did recently reveal that there is evidence of greater competition in retail banking as a result of innovation and talked about a lack of business models to pay for, and harness, open banking data in a way that consumers want to use. These comments are similar to others that have been made over the past couple of years, claiming that open banking awareness and uptake has been slower than expected.
To describe open banking as a failure is to ignore the innovation and adoption we have seen in the market. By what metric do we claim failure? There are now five million regular users of open banking technology, with one million users added in just four months, according to the latest official data. That’s millions of businesses and consumers who are now relying on open banking.
I firmly believe that we’re only just scratching the surface in terms of open banking’s potential, and this is a view shared by many of my peers. Our shared conviction in the transformative potential of open banking led to the Fintech Founders group submitting a letter, signed by more than 50 fintech company founders, to MPs, challenging the notion that open banking has not yet delivered on its goals.
Building From a Strong Foundation
Despite only being live since 2018, open banking has led to the creation of a raft of start-ups, which have raised vast amounts in venture capital investment to change the face of financial services. There are now over 2.5 million open banking payments a month, compared to 320,000 in the entirety of 2018.
If I look at my own sector, more and more lenders are embracing open banking to better assess risk, affordability and vulnerability. Open banking transaction data goes far beyond traditional credit data, helping lenders get a more comprehensive, up-to-date picture of an individual’s financial situation.
Our figures have shown that open banking enables an evaluation of a person’s financial situation that can lead to a 15 per cent increase in acceptance rates and a 5.7 per cent reduction in default rates. It came as little surprise then, when our recent report found that seven in 10 lenders will be using the technology by 2023.
This year will also see the move towards open finance, the extension of open banking’s data-sharing principles to enable third party providers to access customers’ data across a broader range of financial sectors, such as pensions and investments.
To illustrate, open data could be used to help people get a better deal on insurance policies as insurers can see what people’s previous premiums were and understand more about the individual’s risk profile.
Overcoming Obstacles Through Collaboration
This isn’t to say there haven’t been bumps in the road on the open banking journey and we are far from done. But I’m encouraged by how the industry is working hand-in-hand with regulators to navigate these roadblocks.
PSD2, for example, required reauthorisation every 90 days, making some open banking products clunky and inconvenient for users. A number of fintechs raised this issue, and in November 2021 the FCA modified its rules to no longer require firms to re-authenticate customers every 90 days for continued access to bank account data.
Open banking payments have also received a timely boost. The Competition and Markets Authority (CMA) recently agreed to mandate Variable Recurring Payments (VRPs) as the mechanism for implementing sweeping, which is the automatic transfer of money between a customer’s own accounts, such as moving excess funds into a separate savings account or using them to repay a loan or overdraft account.
VRPs, which will come into play in the second half of 2022, will allow consumers to safely connect authorised payment providers to their bank account so they can make payments on their behalf, within agreed parameters that offer more control and transparency than existing alternatives.
The Fifth Year
We are now in the fifth year of open banking and one thing is clear – the technology is here to stay – and this is especially important if the UK is serious about retaining its prized status as a world leader in fintech. It also needs to continue to evolve to realise the full potential of open finance – as outlined in the Kalifa Review – achieved by continuing to work in tandem with the government and the UK’s progressive regulatory bodies.
Any undermining of the progress made is not constructive and as an industry, we should focus our efforts on healthy discussion and enhancement to better serve our customers. We must continue to educate consumers about the benefits of an open environment – versus the technology itself – so the 5 million user figures can continue to increase and more people can get help with managing their finances, getting the best deals and accessing affordable credit. Then we can let the users decide if it’s been a success or not.
About Credit Kudos
Credit Kudos is an FCA-authorised credit reference agency and open banking Account Information Service Provider (AISP) that uses financial behaviour to measure creditworthiness. Through direct connections to the UK’s largest banks, Credit Kudos aggregates and interprets transaction data for use by lenders, brokers, and financial institutions. Credit Kudos goes beyond traditional scoring, providing a comprehensive view of a borrower’s creditworthiness. We transform complex sets of information in our easy-to-use, digital-first tools to help everyone make better lending decisions.
Credit Kudos built Signal, a highly accurate, explainable open banking credit score that combines machine learning and open banking-gathered transaction data to accurately predict an individual’s likelihood of repayment, enabling lenders to score all applicants, not just those with credit history.
Credit Kudos most recently won ‘Credit Information Provider of the Year’ in the National Credit Awards 2021, ‘Best Technology Partner’ at the Car Finance Awards 2021, ‘Open Banking in Credit & Collections solution’ at the Credit & Collections Technology Awards and ‘Best Credit Information Provider’ at the Lending Awards.