Capgemini: How does Open Banking simplify the world of credit?
Based on our research PSD2 (Open bank) Market Observatory, the use of PSD2 licenses has paved the way for such a change, paving the way for the simplification of life for the consumer and the lender. Use cases revolve around automated risk assessments, improving credit scores, and instant loans. In this blog, we dig deeper into some innovative services.
Automated credit risk checks and ratings
To assess a credit applicant’s creditworthiness, lenders may use information provided by external companies. These companies, such as Experian, may collect a customer’s credit-related data (e.g. identity information, credit card and account information, payment history), enabled by their PSD2 license, and assign a credit score. Based on this score, lenders decide on approval, loan size and interest rate. Customers may therefore be interested in sharing their payment data to improve their personal credit score. Experian provides customers with an overview of their score and options to improve it.
Loan offer within the hour
These automated credit checks are not only beneficial for lenders, but also for consumers. Consumers who have ever tried to get a mortgage or other credit facility will most likely remember the amount of paperwork to fill out and return to their bank. The same goes for business owners applying for a loan for their new business ideas. Qred is one of the fintechs that combines automated credit scoring with small business lending services. Their PSD2 license allows them to optimize their processes by including customer account information. The all-digital application process allows for very fast conversion: they promise an offer within the hour and same-day payment once the offer is accepted.
Buy now, pay later
Short-term consumer financing is reinvented by the concept of “Buy now, pay later”, which allows consumers to make purchases and pay at a later date, primarily without interest or fees for consumers. Klarna is probably the best-known provider of these point-of-sale installment loans. The approval process takes seconds: a customer opts for the BNPL option at checkout when ordering, for example, a new sofa from a participating retailer. Behind the scenes, the customer is authenticated and their data undergoes a (simple) credit check. Once approved, the BNPL supplier pays the full amount of the purchase to the retailer, but also charges a certain percentage of it. Retailers are always in favor as customers tend to spend more when BNPL is offered. Additionally, the retailer does not need to authenticate the customer, which has become more difficult since the introduction of strong customer authentication requirements in 2021.
With the rise of e-commerce, BNPL’s popularity is growing rapidly, especially among millennials, and is expected to continue to do so. With this, concerns are also growing that consumers may be spending more than they can afford. New regulations should be put in place to prevent people from accumulating debts with multiple BNPL providers while defaulting on their payment obligations.
Many fintechs and traditional banks rely on technology from lending and credit platforms to power their service and assess the financial health of their customers. The account information data now available as part of PSD2 can greatly benefit these platforms. With automated credit checks being the leading provider of eligibility verification to initiate loans across the world, these platforms have the potential to become global credit giants. And while banks are trying to enter the BNPL space, Klarna is already locking in customers with its new end-to-end shopping app, where users can buy directly from any online retailer, collect points loyalty and pay later.
Read the blog ‘Everyone is banking’ here.
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Alexander Eerdmans is Vice President and Head of Financial Services (FS) at Capgemini Invent Netherlands. With a background in finance, he has extensive experience leading projects on Open Banking, FinTechs and financial services. Alexander is still working on “What’s Next” in FS and encourages global collaboration, which allows for limitless possibilities.
Joost van Putten
Joost van Putten is a senior executive at Capgemini Invent Netherlands Financial Services. He has a background in innovation and strategy and has done extensive work in Open Banking and Payments. He has supported pan-European banks in the implementation of the Payment Services Directive 2 (PSD2) and led several research studies on related market developments.
Titia Meijburg is a senior consultant at Capgemini Invent Netherlands within the Data, Finance, Risk & Compliance team. She has a background in banking and innovation. Titia has experience in projects on Open Banking strategy, sustainable financial regulation and risk reporting.