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15 July 2024

Open Banking and Innovation in Payments


GUEST COLUMN:

Richard Koch
Policy Director
Open Banking Limited

Against the backdrop of increases to the cost-of-living, the concept of ‘fintech for good’ has never been more important.

Open banking, where customers can consent to share their account data with trusted third parties to find cost-effective products and services, helps to put consumers back in control of their own finances.

Open Banking Limited (OBL) took part in this year’s Credit Week in Wales, the largest gathering of credit professionals in Europe. Here, a wide range of industry experts and firms discussed innovations in the credit sector, and OBL outlined how open banking technology can support the financially vulnerable and those traditionally underserved by financial services.

Welsh fintech is thriving

Wales was a fitting location for this year’s summit. Its fintech sector is thriving, with data from Fintech Wales revealing that financial and related professional services employ around 64,000 people, an increase from 55,000 last year. Alongside a flourishing ecosystem of fintech start-ups, leading digital banks such as Monzo and Starling have large offices in Cardiff, bringing jobs and investment to the region.

Although inflation has fallen to its lowest in almost three years, cost-of-living pressures remain. A total of 7.4 million people were struggling to pay bills and credit repayments in January 2024, down from 10.9 million in January 2023. While open banking is not a silver bullet, there are numerous ways in which this financial innovation can help support both consumers and businesses.

One example is by opening up access to fairer credit for financially vulnerable people. Open banking allows current account data to be used in conjunction with credit bureau data so lenders can make better informed decisions about customers’ affordability. This supports individuals with a ‘thin credit file’ who may otherwise be excluded from borrowing.

Plend is one alternative lender that uses open banking data when it assesses loan applications. This enables a broader audience to access credit, at more competitive rates, which they may be denied using traditional loan criteria. Plend aims to make loan repayments ‘truly tailored’ to each customer, and to help customers missing payments, or who are in financial difficulty, get back on track.

Welsh community finance

Plend also works with several community development finance institutions (CDFIs) in Wales and the South-West of England. These include social enterprise Lendology, which offers lending to local authority homeowners; Purple Shoots, which offers microfinance for small businesses and social enterprises; and Robert Owen Community Banking, a not-for-profit that provides loans for businesses, homes and community initiatives in Wales. By providing its open banking technology to these CDFIs, they can extend loans to a broader range of individuals, many of whom would be locked out of affordable credit.

‘Smart’ Direct Debit

Open banking has also pioneered a flexible new way to pay bills – Variable Recurring Payments (VRPs) – which work like a ‘smart’ Direct Debit. They safely connect authorised payments providers to their bank account to make payments on their behalf in line with agreed limits, offering customers more control and transparency over existing payment alternatives, such as Direct Debit and card-on-file instructions.

Open banking Payments-as-a-service company Ordo has an award winning partnership with customer-centric lender, Custom Credit, and affordable credit lender, Moneyline, amongst others. Together, they have been lending thousands of pounds to their customers. These loans are tailored to an individual’s circumstances, allowing them to repay on a schedule that suits, rather than fixed regular payments. The flexibility of VRPs means that both the timing and value of repayments can be altered to account for changes in income.

Ordo has also partnered with technology company Eviden to offer FlexiPay, an alternative way for organisations, such as utilities providers, to spot vulnerable customers or those that are in hardship or soon could be, and collect customer payments using VRPs. This enables regular, flexible bill payments from different accounts (such as a savings account) at a convenient time, for example, paying a monthly bill in weekly instalments when there are cleared funds in one or more accounts. This flexibility can help prevent people potentially entering costly overdraft facilities in the event of an unexpectedly large bill, or a shortfall in income. The technology can also spot vulnerable customers who may need assistance in planning their repayments, before the payment has the chance to fail. And if they need to be directed to further hardship help like benefits or charities, it will triage and send them directly to the right place.

Fliss Berridge, Co-founder of Ordo, said:

“The way we live, work and earn has changed since the 1960s when the Direct Debit and cards were introduced. They were a convenience revolution then, but now they’re slow, rigid and expensive. In a dynamic and constantly switched-on world where everything in people’s lives can be checked and turned on or off with the click of an app, payments and billing needs to step up to help people manage their money better. We love working with our credit and lending clients and utility partners because we see the difference having low-cost, secure and flexible payment capability, informed by banking information and AI, makes.”

Credit is a vital tool to enable people to manage their finances. Innovation in the fintech industry demonstrates new and potentially fairer and more effective ways of providing credit, and other financial services. Many of these also expand access to financial services, focusing on fairness and affordability, helping to deliver a public good, both in Wales, and across the wider economy.


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