Open Banking risks treating some mortgage borrowers unfairly, warns ratings agency
The credit rating agency said it had become aware of a new product which promised to improve scores by linking a person’s account to subscription services such as Netflix and Amazon or taking council tax payments into account.
The agency found the free-to-use service claims it will never lower a person’s rating and just requires permission for bank account data to be shared.
DBRS Morningstar suggested that offering an enhanced credit score which is immune to falling would make those who sign up to the service eligible for products they would not otherwise qualify for.
As one aspect of Open Banking is to treat customers fairly by levelling the playing field, DBRS Morningstar said this could put borrowers who do not sign up to certain services at a disadvantage.
If lenders examine the borrower’s artificially enhanced score and find they have typical signs of being a credit risk, such as missed payments or going into their overdraft, the agency said this could lead to the borrower who does not use the service being treated as a greater credit risk.
This will be because the potentially cleaner borrower will still have a lower score than the person whose credit is unable to be negatively impacted, according to the service’s promise.
DBRS Morningstar said the product could affect lenders and said they should be cautious when using credit scores through Open Banking to ensure all borrowers are treated equally and fairly.
The agency’s report, ‘Open Banking may improve credit scoring, but risks treating borrowers unequally’, said: “This could arguably be viewed as no longer providing a level playing field and brings into question the reliability of the credit score.
“DBRS Morningstar believes that in terms of securitisation the potentially enhanced credit scores should be a neutral issue. Performance of the asset, the loan, is more important than the individual credit scores of the borrowers.”
Open Banking for self-employed borrowers will bring quicker applications – Pearson
In fact, close to 10 per cent of digitally active HSBC UK customers are using Open Banking services, with the number growing all the time.
We have been looking at how we can integrate this fantastic technology protocol.
We have seen applications across current accounts and unsecured lending products, where it has made a real difference making life quicker, easier and safer.
And I am extremely excited to now see Open Banking being integrated into our mortgage process in a small but important way that will see the time it takes to go through the underwriting process being much reduced for self-employed applicants.
It will mean they don’t have to go through the hassle of digging out and wading through months’ worth of paperwork which would then need to be submitted either electronically or by post.
After all, as the famous business saying goes “time is money”, and who wants to be doing admin for a mortgage application when you can be running your business, or utilising that time with more fun pursuits?
Let Open Banking take the strain.
We are partnering with Experian on this initiative to speed up the mortgage process for self-employed customers.
The mortgage applicant must be with one of the twenty providers that allow data sharing, a list that, as you would expect in this day and age, includes all the big names and most popular providers.
Why are we doing it?
The simple answer is that it will make a positive difference.
The effects of Covid-19 have been seen far and wide, and literally everyone, self-employed or not, has been affected in some way, shape or form.
Each industry is different and each business within them is different. The landscape for many had changed significantly, so in some cases we needed to ask for a bit more information from self-employed customers to make sure we’re lending appropriately.
This had a knock-on effect whereby in some cases we needed to go back to the broker and ask for more information before completing an assessment. That added time to an application.
When that was done the case would be ready for review and of course with the extra information required, it naturally takes more time for an underwriter make a reasonable assessment of the application. Or it did.
Open Banking provides the customer and broker with a quicker and easier way of supplying business bank statements which eradicates errors and significantly speeds up our ability to assess what those bank statements are telling us.
When you have a scale business, assessing thousands of applications every week, every minute saved in manually wading through additional statements can then be re-invested in getting to the nub of the lending decision and speeding up the lending process overall.
We are very conscious of concerns about the access to information and Open Banking is a very closely regulated process.
But we recognise that customers and brokers alike will have some natural reservations while wider adoption of the technology becomes more the norm.
With the customer’s authorisation we only extract, retain and use the data that is required for this agreed purpose and no other data is held or used by HSBC.
Priority for Open Banking cases
The benefits of using Open Banking this way are easy to see and it is absolutely vital we all embrace this new technology as it clearly signposts the future of self-employed underwriting.
But it also has much wider practical applications to simplify the way we operate.
As an added incentive HSBC will prioritise those self-employed applications that use Open Banking to demonstrate affordability.
We’ll obviously have to wait and see how the take up of Open Banking for self-employed customers goes over the next few months.
However as the technology gains traction with customers and the benefits become plain to see, HSBC will continually assess how to widen its practical development across the business.
LendInvest open banking partnership widens borrower base
The property platform says the use of open banking has allowed it to open up its loans to self-employed and sole trader borrowers, who it previously did not serve.
Credit Kudos uses open banking data to provide lenders with a comprehensive up-to-date view of the current financial situation of an individual or business.
The credit agency uses bank transaction and loan data to produce an insight into the borrower’s circumstances to improve credit decisions.
LendInvest said the time it takes to underwrite an applicant’s financial history has reduced to five minutes since it began using the technology.
Arman Tahmassebi, chief operating officer of LendInvest, said: “Getting rid of the manual documentation process has allowed us to offer a far faster and more convenient service.
“Although we have been using open banking for two years, this new partnership has allowed us to take it to the next level and really reap the benefits of the technology.
“The greater insights are empowering us to make better informed, faster lending decisions to more people.”
HSBC to roll out to whole of broker market this year
Presenting at Mortgage Brain’s Mortgage Vision Masterclass, Paul Norgate, head of north region at HSBC, said: “We have a plan to go whole of market this year. In terms of firms, we’re up to in excess of 320-odd firms now which gives us coverage to a large part of the intermediary market.
“Our plan is to roll that out certainly in the next few months to give us that whole of market proposition.”
Intermediary operations enhanced with Open Banking
Norgate also said the bank had added to its underwriting and business development team so was prepared for a busier market due to the extended stamp duty holiday deadline and the return of 95 per cent loan to value (LTV) mortgages through the government-backed scheme.
He said: “Capacity doesn’t concern us, we’re geared up to deal with it.”
Norgate also said the launch of its Open Banking proposition on 8 March would have a positive impact on case timescales and added: “This is something we should embrace rather than fear or avoid.”
Additionally, HSBC plans to prioritise self-employed clients when relying on Open Banking for mortgage applications, to keep up with changes to criteria and circumstances.
“Potentially we might see change to our self-employed credit policy, as will many lenders – I’m not saying that’s going to happen but if it does, the Open Banking piece will futureproof us.
“So, we won’t have to keep going out and say, ‘now we need this, now we need something different’ because Open Banking will pull all that detail for us,” he added.
Open Banking is key to understanding pandemic’s impact on borrower finances – Westley
Mortgage applications remained high during February with the number of ‘hard’ searches by lenders a similar level to Autumn last year and 12 per cent above the same time in 2020.
Anyone who has purchased a property knows there are still hurdles to negotiate even after you have been accepted for a mortgage, so these buyers will be pleased that they are not faced with a rapidly approaching cliff edge on March 31.
Lenders themselves have been hampered by needing to ask more employees to work from home, people who may have childcare or other family commitments to manage.
But the increased demand in the property market, stimulated by raising the stamp duty threshold, has meant they needed to find a way to keep making high-quality decisions.
All the while, the pandemic has changed the way they can interact with the public. Face-to-face meetings between lenders or brokers with prospective applicants to guide them through the process are not an option. Paperwork is not easy to share.
One of the many consequences of the pandemic is that it has accelerated the mortgage application journey’s digitalisation.
Open Banking is key, providing lenders with trusted bank account transaction data to quickly categorise people’s income and expenditure, so they can judge which mortgages will be affordable for them.
Technology such as Open Banking has also helped them pick through the financial changes of Covid-19, which in many cases are temporary.
For example, someone’s income may be temporarily reduced while on furlough, so a lender needs to understand what their salary is in normal times.
On the other hand, for many prospective homebuyers, expenditure is unusually low because opportunities to spend on food, drink and holidays are – sadly – all too infrequent.
Lenders must ensure a loan is affordable for the product’s lifetime, not just while we’re following government guidelines to stay at home.
Borrowers comfortable online
Digitalisation has undoubtedly brought lenders efficiencies, while customers who would perhaps consider themselves to be ‘digital second’ are now well practised and comfortable in online environments.
The advance of technology combined with the acceleration of confidence in using online services to navigate big moments have provided a couple of positive moments in a challenging year for us all.
As we all hope for a return to normal life in the coming months, the mortgage industry can look back with pride at the progress made to service increased demand when conditions are most challenging.
This work will allow hundreds of thousands of people to celebrate their freedom from lockdown in their new homes.
UK’s biggest lenders plan not-for-profit company to kick-start open banking
The move announced by trade body UK Finance is a bid to comply with a series of requirements imposed by the Competition and Markets Authority (CMA) five years ago, Sky News reported.
Banks including Lloyds, Barclays, NatWest, Santander, Nationwide, HSBC, Danske Bank, Allied Irish Banks and Bank of Ireland, known as the CMA9, were targeted by the order in 2016 following an investigation into the personal current account and SME banking markets.
Using customer data securely, open banking is designed to make it easier for customers to assess their personal banking deals and assess them against rival services by putting all that data on one platform.
The competition watchdog found that the biggest financial services companies were not competing hard enough for consumer business and open banking could be a better option for customers.
The new service company, which will have a slate of independent directors, could pave the way for the open banking model to be extended to a raft of products including consumer credit, insurance, mortgages, pensions and savings.
More to follow.
Big broker firms must buy-in for Open Banking to progress – Zino
With Payment Services Directive 2 (PSD2) legislation forcing banks to make the customer journey more seamless, Open Banking has seen a lot of traction within other markets.
But, the mortgage market has continued to face challenges.
Many predicted Open Banking would make a big splash in the mortgage market during 2020.
Some lenders did begin exploring Open Banking but the coronavirus pandemic forced many organisations to put their plans for innovation on hold.
And so very few are yet to move to accepting even basic Open Banking statements in place of the traditional bank statement.
While priorities shifted amid the pandemic with tech roadmaps changing to meet the demands of working in a remote world, 2020 certainly highlighted the need for the industry to embrace change. Lenders’ lack of operational resilience was exposed by the implications of hurriedly moving to a remote working environment.
This caused lengthy processing delays at a time when demand for mortgages reached an all-time high due to pent up demand following the first lockdown, as well as the stamp duty holiday.
Big brokers must buy-in
It became clearer than ever before that technologies including Open Banking have the potential to make the mortgage journey easier for customers and lenders.
With better technology integration, brokers will be enabled to more efficiently package loan application materials to ensure less back-and-forth between brokers and lenders, and ultimately, greater approval rates of mortgage applications.
The big question is whether 2021 will be the year Open Banking is adopted across the mortgage industry.
Switching to Open Banking would require lenders to change the broker document policy, which is often handled by a different department within a lending firm.
Alongside lender reluctance, there is also a lack of willingness for change among large institutional brokers.
We recently joined with other digital brokers to write an open letter calling on banks to make the move to Open Banking, but we need larger brokers to support this move if we are to ever to see it become standard practice.
Benefits for self-employed borrowers
There is also the question of consumer uptake. Open Banking has been introduced among personal finance management apps, because there is immense value for consumers who are transparent about their finances.
However, when applying for a mortgage, there is always a temptation to window dress our financial health as much as possible, which can include hiding accounts that have lots of spending.
Although Open Banking might seem to offer too much transparency, this is ultimately offset by the ease at which consumers will be able to offer more proof points.
In particular, those who struggle with the process most, like the self-employed, will more easily be able to offer evidence of different streams of income and budget management.
Open Banking offers massive potential for delivering a radically improved mortgage journey.
We hope to see more uptake across the industry, with lenders and brokers working more closely, to create a frictionless application process that provides customers with greater certainty over their financial options.
Skipton plans open banking expansion in bid to ‘blaze trail’
The mutual entered into a pilot with Experian in October last year to give its customers the opportunity to use open banking technology to complete their mortgage applications.
Without the use of open banking, it takes around nine to 10 days to go from application to offer with Skipton. Customers using the technology for affordability purposes, where they give the mutual access to their bank account data, have been able to complete the process one to two days quicker and the society expects to reduce this timescale further.
At the moment, Skipton is running a manual open banking pilot. This means it has not yet integrated the technology into its own system, instead it is running alongside its current software.
Only direct mortgage borrowers have been able to use open banking during the trial, and of those half of applicants who are eligible have consented to use the new process.
Alex Beavis, head of mortgage products, said: “We’re really pleased with both the response rate and the impact on our service and are exploring our next steps to expand our open banking usage to benefit a wider range of customers.”
Skipton’s full year results, announced at the end of last month showed a 13 per cent rise in gross mortgage lending to £4.9bn but a fall in the profit before tax of its mortgages and savings division by eight per cent from £113.2m to £103.9m. A major reason for the decline in profits was down to a £7.9m investment into the division.
Skipton’s objective is to invest in technology to underpin its growth and create a digitally joined up process.
“We’re asking ourselves questions like how can we use technology to get our mortgage proposition in front of as many customers as possible, and how will our service need to look in the future,” said Beavis.
“We’re focusing on how we get business in faster and process it behind the scenes more quickly. We’re looking at which areas of the back end of the journey could be made faster by digitally joining up the credit check, identification, valuation and conveyancing.”
He added: “We’re trying to blaze a trail in how to use open banking to buy a house, not just get a mortgage.”
Beavis said the society is not looking to replace its people with technology, rather it would assist its expansion plans.
One area where the society has already invested in its technology is execution only.
At the end of January, the society’ new portal went live that allows existing customers to carry out an execution-only product switch. The upgrade, said the society, gives borrowers a smoother and simpler log-in process, a clearer user interface and the ability to quickly and easily compare mortgage products.
It has no current plans for any other form of execution only lending.
Molo signs up to Experian’s open banking software
Through Experian’s platform, Molo will be able to access open banking technology that will allow it to build up a picture of a borrower’s financial habits.
By accessing bank statement information, lenders can assess income and expenditure using transactional data.
The software can also help lenders to identify different types of earnings which is useful for borrowers who have multiple sources of income from more than one job.
By sharing 12 months of bank statement data, borrowers can demonstrate their ability to fund their mortgage.
The lender said, the technology will enable it to grant a Decision in Principle in minutes and a completed application can be reviewed within 24 hours.
Francesa Carlesi (pictured), chief executive at Molo, said: “We’re thrilled to be collaborating with Experian. It’s another great step forward in providing an ever better, faster, more personalised service for our customers, and we expect that this technology, in conjunction with our own, will lead to far greater personalisation in the not-too-distant future.”
Mortgage lenders Skipton Building Society and Bluestone have also signed up to use the technology.
Digital revolution in mortgage market set to continue at pace in 2020 – Experian
We are already starting to the see the emergence of API-led solutions to service the broker market, while intermediaries will start ‘tooling-up’ and making greater use of the wide range of digital capabilities that are coming to the market, which will eventually bear significant fruit.
Digital services and technology are already having an impact. Eligibility and pre-qualification services are helping to create a more streamlined process, matching potential borrowers with the most suitable lenders based on their credit position and affordability. This has enhanced the efficiency of the entire mortgage journey.
Further to this, Open Banking will allow customers to share their transactional data digitally, giving lenders and intermediaries a more accurate picture of their expenditure and affordability profile.
The end point of this digitalisation journey is likely to be a ‘data partnership’ – the joining of the customer, the intermediary, and the lender based on the seamless flow of trusted data between all. These partnerships will be in their infancy this year, before likely becoming more established in 2021.
And of course, as in any healthy marketplace, competition to build upon the services should drive even more innovation, encouraging brokers to adopt these technologies to make sure they are one step ahead, or at least on par, with their competitors.
The wider market
A low interest rate environment has made it challenging for many lenders to generate healthy margins.
Indeed, there have been some notable casualties in 2019 because of this. As a result, in 2020, there is likely to be further consolidation at the prime end of the market as competition remains fierce when it comes to leading rates and the total cost of borrowing.
Because of this margin squeeze, it’s likely lenders will try to find other avenues to compete – for example on speed of service or criteria – with some lenders diversifying further into specialist portions of the market in search of a return.
Lenders heading down this road must take a measured approach in order to protect their books, with data insights helping to minimise risk and maximise upside.
On the consumer side, there will be continued interest in Help to Buy, ahead of its planned closure in March 2021.
We should also start to see the fruits of the much-welcomed action taken by the Financial Conduct Authority (FCA) in loosening affordability criteria for those ‘mortgage prisoners’ who have been unable to switch to a cheaper deal.
This will help to solve a substantial detriment which is estimated to have affected 500,000 customers – although it’s widely acknowledged that there is still a long way to go before we are able to fully close down that particular chapter of our industry’s story.
In 2020, the mortgage industry is set to continue its digital journey. The progress which has been made in a relatively short period of time has been significant and as these technologies continue to be introduced, improved and polished, all parties will feel the benefits this digitalisation can bring.