Unlocking the Future of Credit Assessment: How Open Banking Transforms Risk Evaluation
When discussing Account Information Services (AIS) in the context of open banking, one of the prominent use cases is enhancing credit risk assessment. I often encounter questions such as, "Isn't all the information available in credit reports?" or "Can't central bank APIs verify salary information? Why do we need Open banking?"
Well, banks have long required bank account statements as part of credit applications. Open banking digitizes this process, making it faster and more secure.
Credit risk reports and scores are fundamental to any credit assessment, whether for individuals or businesses. These reports outline a borrower's current obligations and repayment history, while credit scores reflect their debt management behavior.
However, there are limitations to credit scores and reports:
This is where open banking's transaction data becomes invaluable. AIS not only covers accounts but also includes credit/debit card transactions. Combined with advanced analytics and clustering algorithms, this data paints a detailed picture of a consumer's financial position:
领英推荐
For instance, a new graduate with a thin credit file might appear financially responsible based on their transaction history, despite lacking traditional credit history. These nuances are often missed in conventional credit reports, which makes them less effective in assessing risk, especially for businesses.
This Infographic from FICO explains the idea very clearly
Open banking doesn't replace credit reports; rather, it enriches them by providing a holistic view of consumers' financial behaviors and lifestyles. As computing power and AI continue to advance, alternative data sources like utility bill payments and buy now, pay later (BNPL) schemes are gaining traction in risk assessment models globally.
The financial landscape is evolving rapidly, with diverse earning and spending patterns. Open banking's transaction data is crucial for enhancing risk assessment accuracy and fostering inclusivity in the financial ecosystem.
Join the conversation! Share your thoughts on how open banking is shaping the future of credit risk assessment in the comments below. #OpenBanking #CreditRisk #FinancialInclusion #Fintech #AI #BankingRevolution.
Data & Analytics / Delivery / Project Management
4 个月Good one Saurabh Jain More financial inclusion and Improve customer experience is the key. Adding a point close to my data world. “Open banking can provide real time data for more up to date credit assessments and fraud detection”
Fighting fraud | Credit scoring | Credit risk | AI | Analytics | Fintech | Regtech | BFSI | SaaS | Startups
4 个月Comment # 2 of 2: Now, as regards Open Banking vis-a-vis credit bureau: here are my views. Credit bureau data in the initial stage of one's credit lifecycle reflect "Ability to Pay", however as one accumulates more credit, "Intent to Pay" assessment is also enabled because of performance data on incremental credit lines becomes available. However, Open Banking data can more reliably be used to assess "Ability to Pay" but not so much predict "Intent to Pay" because Open Banking data includes income and expenditure, but doesn't include credit performance data. Now, finally, I am of the view that economies that have attained maturity and penetration/coverage of open banking data should bring in regulatory controls that encourage/enforce usage of Open Banking data in credit underwriting especially for new to credit and big ticket size credit. Unfortunately, most markets make credit bureau checks mandatory whereas open banking checks are not.
Fighting fraud | Credit scoring | Credit risk | AI | Analytics | Fintech | Regtech | BFSI | SaaS | Startups
4 个月Hey Saurabh Jain - an interesting issue indeed. This one is close to my heart, so here goes: Comment # 1 of 2 Bank statements as you rightly point out are important because they provide insights into income and expenditure, therefore enabling assessment of "Ability to Pay" - even if there are zero debt obligations. However, bank statements become indispensable especially if: a. There are zero debt obligations - because in this case there is no insight about "Intent to Pay" from credit bureau data/scores as there is no bureau footprint b. Bank statements are also indispensable if the size of credit being underwritten is large, and therefore relying solely on credit bureau data/scores is risky. E.g., Mortgage: Home loans or Loan Against Property.? Because although there is security/collateral, there will be costs of repossession/recovery including legal, logistics etc., Which is why although normally in one's credit lifecyle (consumer), the home loan comes in at an advanced stage and there is thick credit bureau data, credit underwriting will rely more on income and not just base the decision on obligations which are visible on the bureau any way.
Product Leader | Open Banking | Fintech I Providing customers with transparency and control of their own financial data.
4 个月Saurabh Jain great article! Very succinctly states the benefits of OB and how it enriches, not replaces existing credit reports. ??
AVP & Business Head for UAE & Oman | Ex-Experian
4 个月Good one Saurabh. Open banking's ability to provide a comprehensive view of a consumer's financial behavior through detailed transaction data surpasses traditional credit reports, which focus only on borrowing and repayment. By integrating insights into cash flow, income sources, and spending patterns, AIS can offer a more accurate and inclusive evaluation of creditworthiness, especially for individuals with limited credit histories. This approach not only streamlines the process but also enhances the precision of credit assessments, ultimately benefiting both lenders and borrowers.