In the dynamic landscape of the digital era, financial services are undergoing a rapid evolution, significantly altering the way we manage and access our money. This article, with a specific focus on Retail, scrutinizes one area that has witnessed substantial changes - lending. The traditional lending process, marked by endless paperwork and stringent eligibility criteria, is steadily giving way to a more inclusive and efficient approach known as open banking lending. We delve into the key differences between these two lending methodologies and spotlight how open banking lending is revolutionizing the financial environment. However, our exploration doesn't stop here. In the coming articles, we will extend our focus beyond Retail to dissect the transformations in SME and Corporate Lending. Keep your curiosity piqued, as we take you on this insightful journey of discovery, demystifying the future of financial services.

Traditional Lending: The Old Guard

For decades, traditional lending has been the established method for accessing credit. This process typically involves approaching a bank or financial institution, completing lengthy application forms, providing extensive documentation, and waiting for a decision. The evaluation process is often subjective, relying heavily on credit scores and historical data, which may exclude individuals with limited credit history or unconventional financial circumstances.

Challenges with Traditional Lending:

1. Limited Accessibility: Traditional lending often favours those with well-established credit histories, making it challenging for newcomers or individuals with less-than-perfect credit scores to secure loans.

2. Slow and Time-Consuming: The paperwork-heavy nature of traditional lending can be a time-consuming process, requiring multiple visits to the bank, waiting for manual reviews, and enduring lengthy approval periods.

3. Lack of Transparency: Traditional lending can be shrouded in opaque practices, making it difficult for borrowers to fully understand the terms, fees, and interest rates associated with their loans.

Open Banking Lending: A New Paradigm

Open banking lending is a modern, technology-driven approach that leverages financial data sharing through secure application programming interfaces (APIs) to assess a borrower's creditworthiness. This innovative method allows lenders to access real-time financial information directly from a customer's bank accounts, credit cards, and other financial sources, providing a more holistic view of their financial health.

Benefits of Open Banking Lending:

- Enhanced Accessibility: Open banking lending promotes financial inclusion by considering a broader range of data points beyond traditional credit scores. This allows lenders to evaluate borrowers based on their current financial situation, rather than solely relying on historical data.

- Streamlined Application Process: With open banking lending, the application process is digital and streamlined. Customers can often apply for loans online or through mobile apps, eliminating the need for extensive paperwork and enabling quick decision-making.

- Personalized Loan Offers: By leveraging real-time financial data, open banking lending enables lenders to tailor loan offers based on a borrower's specific circumstances, such as income, expenses, and cash flow. This personalized approach increases the chances of receiving loan offers that match individual needs.

- Greater Transparency: Open banking lending promotes transparency by providing borrowers with clear and comprehensive information about interest rates, fees, and terms upfront. This empowers borrowers to make informed decisions and understand the implications of borrowing.

Here is an example of how traditional lending is boosted by using open banking, and how Fintech Galaxy’s FINX Connect is leveraging it:

The challenge:

Traditionally, to make a credit decision, a lending company needs to analyse multiple financial documents that are usually prepared manually by the customer applying for the loan. Piles of documents are gathered, scanned, printed, and handed to the lender through email or to the office. Afterwards, all this information is processed by the lender, keyed in by hand, transformed into reports, and then finally analysed by the credit team. It takes countless hours for the lender to analyse, align the provided documents and build up a risk file of the potential borrower before making a well-calculated decision. Altogether, it is an exhausting and expensive process for both the lender and the borrower.

The solution:

Fintech Galaxy's FINX Connect provides a solution to your challenge. We built an Open Finance platform that offers lending companies an instant way of getting information about clients and their current financial state. Powered by Fintech Galaxy’s Open Finance platform, FINX Connect can aggregate payment account information needed for credit assessment immediately and digitally, thus empowering accurate and quick decisioning.

Let’s analyse the journey of a lending business utilizing FINX Connect to enable Instant Credit Decisioning, internally leveraging Open Banking for Data Access, and Artificial Intelligence (AI) for credit scoring:

1. Onboarding the Lending Business: The lending business approaches FINX Connect, expressing their interest in accessing our premium API for AI credit scoring services and accessing customer bank account data. They provide the necessary information and credentials to become a registered partner on the FINX Connect platform, via a fully digital KYC and onboarding process.

2. Partner Integration: FINX Connect establishes a secure integration with the lending business systems, enabling them to access the premium API for AI credit scoring and open banking data. This integration allows the lending business to retrieve customer transaction data from their bank accounts through our platform's APIs and get the benefits of automated credit and risk scoring analysis.

3. Customer Consent: The lending business obtains explicit consent from the customer to access their bank account data. This consent is typically obtained through the business’s own application or platform, where the customer grants permission to retrieve their transaction data for credit scoring purposes.

4. Data Retrieval: FINX Connect securely retrieves the customer's transaction data from their bank accounts using the established integration. This data includes information such as income, expenses, savings, and other financial activities, which are crucial for generating a credit score, all these previously authorized by the customer via consent flow.

5. Data Analysis and Credit Scoring: Leveraging AI algorithms and open banking data, FINX Connect premium API analyses the customer's transaction data to generate a credit score. The AI models consider various factors such as income patterns, spending behaviour, and other relevant indicators to assess creditworthiness accurately and is continuously improving based on analysed data.

6. Credit Score Delivery: Once the credit score is generated by FINX Connect premium API, the lending fintech receives the credit score result through the integration. This score provides an evaluation of the customer's creditworthiness based on the AI-driven analysis.

7. Risk Assessment and Decision Making: The lending fintech combines the credit score obtained from FINX Connect API with their internal risk assessment processes. They evaluate the creditworthiness of the customer, considering additional factors such as employment status and any other relevant criteria.

8. Credit Proposal to End User: The lending business formulates a credit proposal for the end user based on the credit score and risk assessment results. This proposal includes details such as the loan amount, interest rate, repayment terms, and any applicable fees.

9. Proposal to End User: The lending business communicates the credit proposal, including the credit score obtained through FINX Connect premium API, to the end user through their own application or platform. The customer can review the terms and conditions of the proposal and make an informed decision regarding the loan offer.

In this scenario, FINX Connect acts as the provider of a premium API for credit scoring using AI and access to open banking data. The lending business integrates with FINX Connect to retrieve customer transaction data, generate credit scores, perform risk assessments, and make lending decisions. By combining AI-driven credit scoring with open banking data, FINX Connect enables faster and more accurate credit assessments, empowering the lending businesses to make informed lending decisions based on comprehensive creditworthiness evaluations.

The accuracy and speed of creditworthiness determination provided by FINX Connect allow for interesting new use cases for lenders, including:

- On-the-Spot Credit: Real-time access to comprehensive credit assessment enables lenders to offer on-the-spot credit approvals to customers. This facilitates seamless and instant access to funds, such as in-store financing for purchases or quick personal loans.

- Point-of-Sale (POS) Credit for Bill Payment: Lenders can leverage FINX Connect to provide POS credit solutions for bill payments. Customers can conveniently pay their bills at the point of sale, spreading the cost over a specified period. This simplifies the management of recurring expenses like utility bills, phone bills, or subscription services.

- Instant Loan Decisioning: Integrating with FINX Connect automates the loan decisioning process, reducing the time it takes to evaluate a loan application. Enabling Instant loan decisioning can enable lenders to provide customers with quick access to funds for various purposes, such as emergency expenses, education, or business ventures.

- Personalized Loan Offers: The combination of AI-Driven Credit scoring and comprehensive creditworthiness evaluations empowers lenders to tailor personalized loan offers to individual customers. By considering a comprehensive range of factors and customer profiles, lenders can provide customized loan options with terms, interest rates, and repayment plans that meet specific customer needs.

- Risk Mitigation: Leveraging AI-driven credit scoring and open banking data, lenders can conduct robust risk assessments. By gaining deeper insights into customers’ financial behaviour and transaction history, lenders can identify potential risks and make informed lending decisions that mitigate the chances of defaults or delinquencies.

These new use cases, made possible by the accuracy and speed of creditworthiness determination provided by FINX Connect, revolutionize the lending landscape. They enhance convenience, improve customer experiences, and increase operational efficiency for both lenders and borrowers.

Reach out and let’s see how you can leverage open banking for your business!