CM December 2023

CONSUMER CREDIT
AUTHOR – Emma Steeley
around sharing of personal information with
third parties, there are many benefits that open
banking provides across multiple industries.
Real use cases continue to arise, such as offering
personalised shopping recommendations and
tailored insurance policies, which are helping to
grow confidence in data sharing.
However, the real and transformative potential
of open banking can be found in the lending
industry. By allowing lenders to view an
individual’s financial data, they can get a much
clearer picture of the consumers’ financial habits
and circumstances. For example, mortgage
providers and landlords can use open banking
data to assess the creditworthiness of potential
buyers or tenants more accurately – and even
speed up the credit approval process.
With improved risk assessment, lenders can
offer loans to borrowers with a higher likelihood
of repayment. This can result in lower default
rates and reduced losses for the lender. This
opens the doors to a whole new world of credit
products, enhancing competition in the market
and giving rise to more innovative and tailored
financial products that will better serve the need
of consumers.
All the while, this will help level the playing field
for those looking to access credit. Ultimately, open
banking puts the power back in the consumers’
hands, as they gain more control of their financial
data and expands opportunities for those who
have been historically underserved.
The hidden biases in accessing credit
Financial inclusion stands as a pivotal aspect
of reshaping the credit landscape through
open banking. Its implications resonate most
profoundly among financially underserved and
marginalised communities, where access to
traditional credit can feel like an elusive dream.
It offers an opportunity to break down longstanding
barriers that have perpetuated financial
disparities.
Take for example, gender biases when it comes
to accessing credit. If we go back to the 1980s, it was
not uncommon for lenders to require a husband's
or male relative’s signature, or consent when a
married or unmarried woman applied for credit.
This practice was rooted in historical gender bias
and societal norms that considered women as
financially irresponsible and dependent on men.
Fortunately, laws such as the Equal Credit
Opportunity Act (ECOA) in the United States,
passed in 1974, made it illegal for creditors to
discriminate on the basis of sex or marital status
in any aspect of a credit transaction, including
during the application processes. Though ECOA
and similar legislation in other countries marked
substantial progress in eliminating overt gender
bias in credit applications, discrimination still
exists and there can still be instances of implicit
bias or lingering gender-related challenges in the
financial industry.
It’s about time we removed
rigid credit evaluation processes
and harnessed open banking
to assess creditworthiness. By
allowing for more accurate
insights into an individual's
financial behaviour, these
innovations can provide a more
nuanced and fair assessment.
In the world of credit, data reigns supreme,
but many credit scoring systems continue to rely
heavily on traditional credit data, which may
disadvantage individuals, especially women, who
lack extensive credit histories.
Addressing these issues requires a concerted
effort by governments, financial institutions,
and a revamp of how we assess affordability with
a system that promotes fair lending practices,
eliminates gender bias, and considers open
banking for assessing creditworthiness.
Final Words
While most people are conscious – if not anxious
– about their credit score over their lifetime, the
system is not without its flaws. The enduring
cost of living crisis and the challenges it poses
to individuals and households have shed light
on the urgent need for a fairer, more inclusive
credit landscape. The outdated models, which
have hindered countless creditworthy individuals,
must give way to a more comprehensive,
data-driven approach.
It’s about time we removed rigid credit evaluation
processes and harnessed open banking to assess
creditworthiness. By allowing for more accurate
insights into an individual’s financial behaviour,
these innovations can provide a more nuanced and
fair assessment. The potential for open banking to
level the financial playing field, foster economic
equality, and provide opportunities for all is
boundless. It's a transformation that can redefine
access to credit, improve financial inclusion, and
create a future where individuals can seize their
financial goals with confidence. In this evolving
landscape, open banking is the bridge to a more
equitable and prosperous financial future for all.
Emma Steeley is CEO at Aro.
Brave | Curious | Resilient / www.cicm.com / December 2023 / PAGE 30