The UK is set to spend a whopping £84billion this Christmas on gifts and celebrations, a £5billion increase on last year as they seek to make up for last year’s locked down celebrations. However, after a challenging year it can be all too easy to overspend, particularly with such a varied range of credit options available like Buy Now Pay Later. According to MoneyHelper.org, a quarter of people in the UK are worried about going into debt this festive season.
Nathan Spiteri, Head of Marketing at Plend, a social lending marketplace, shares his thoughts on how open banking can alleviate financial stress, and remove reliance on payday loans:
Increasingly, people want that sense of security and confidence that they have enough money to meet their needs. That financial security is closely linked to mental wellbeing too. In fact, according to the Money and Mental Health Policy Institute, 46% of people in problem debt also have a form of mental illness. This was pre-pandemic, when BNPL was not stirring the pot further, but that’s a whole other topic.
It’s understandable that money can cause such stress given that it is used to buy food, pay bills, look after dependents, basically to live, so if people can’t fulfil these core duties in life, they end up stressing or worse, turning to alternate, short-term solutions. Unfortunately, short-term solutions such as payday loans (which can literally be defined as high cost, short-term credit) can likely worsen the root cause of the problem, and further place pressure on individuals with another bill due – with an extortionate interest rate.
People turn to payday loans because they are generally considered invisible to most lenders who offer affordable rates. The reasons they are invisible vary, but commonly it’s because of scuffs and dents (missing a bill payment for example) on their credit file, or just a complete lack of credit history full stop (think immigrants, recent graduates or even students) – this is often referred to as a ‘thin’ credit file. What makes this worse is that some of these ‘red flags’ can last up to six years, well after the incident took place and most likely relevant to a person completely different to who the individual is right now.
It doesn’t seem fair that some people who technically can afford a loan, and probably have enough income to pay it off in time and then some, are unable to because the traditional credit scoring system says so, a system that was established decades ago when we had a drop in the ocean of technology compared to what is readily available now.
Although open banking has been around for a while, its use in lending applications is still relatively new when providing third parties with access to financial data – such as 12 months transaction history outlining incomings and outgoings. This information has the potential to paint a clear picture of who an individual is today based on the activity of their main bank account. Easily identifiable are the level of income and outgoings, giving lenders a true figure of discretionary income; which is ultimately the clearest indication of determining lending affordability.
Another part of the decision making process that can be assessed, and potentially one of the most important (and more controversial) “5 C’s of Credit” is character – information that builds the individual’s profile. Through access to open banking data, lenders can clearly paint a bigger picture of what the individuals outgoings are, whether that be charitable donations all the way through to more red-flagged spends like gambling and alcohol. Not only is this information crucial for assessing affordability, but it also gives third parties the opportunity to more intimately look after their customers by offering solutions that they need now.
Ultimately, open banking allows people who deserve access to affordable credit, but currently don’t have, the ability to actually achieve their goals and alleviate financial pressure. By assessing an individual on their financial position now and not penalising them for missing a phone bill payment back in 2017 for example, open banking can have a significant impact on a large group of individuals struggling to live more financially secure.
According to a PWC report pre-pandemic, roughly 14 million people in the UK fall into this bucket of individuals considered ‘near-prime’ by the traditional lending market. This is not a new problem but is definitely one that fintech’s using open banking are trying to solve.
Hopefully, in the coming years, lenders using open banking will be able to identify the true effect that these new methodologies have on the financial, and mental, wellbeing of the UK.