Discover how Open Banking helps to enhance and improve current credit scoring models to offer more loans at a lower cost.
Table of Contents
- Open Banking as a complement to risk models
- Analyze consumption patterns to provide better credit
- Practical Fraud Avoidance
- Provide offers to your rejects
As we have discussed previously, the credit placement process in Latin America continues to be inefficient. There are major technological shortcomings and there are no homologated standards for evaluating people who are applying for credit. Until now, the status quo of credit systems has made it impossible for more people to have access to credit.
Thanks to Open Banking technology solutions, which provide automated and secure access to banking data through APIs, companies can now directly verify the income of their potential customers. In this way, they can get an instant picture of their real financial stability and ability to pay, generating substantive financial inclusion. They can also rely on credit metrics based on up-to-date transactional data to obtain insights and improve their risk assessments processes or include them in their credit scores.
Which brings us to the central question: should we discard traditional credit scoring models, in some places known as credit bureaus, and replace them with Open Banking solutions? The answer is no.
Open Banking as a complement to risk models
The idea that Open Banking is the natural proposal to replace credit bureaus is a bit misleading or confusing. Open Banking solutions should not be interpreted as credit scoring, but as a tool that feeds and provides additional analysis factors for current risk models.
From this perspective, Open Banking will facilitate the validation of information due to automation and will eliminate all manual processes of document collection, reducing human errors. All this, as soon as the user provides access to his bank accounts, always from a secure platform and with his consent.
Undoubtedly, the first benefit provided by Open Banking is practicality.
With this access to customer information, the possibilities of providing a greater number of loans increase considerably. This is based on new variables and with the help of secure and transparent technology such as Belvo’s risk insights product. It provides a series of easy-to-integrate metrics to quickly assess a consumer’s risk profile. And even if this set of features can be used by lenders and financial innovators into their credit scoring models, it doesn’t replace a risk model solution.
Analyze consumption patterns to provide better credit
One of the great possibilities offered by Open Banking, and solutions such as Belvo’s, is the ability to identify those small transactions that will help you better understand the health and financial behavior of a potential customer.
Some of these solutions, such as income verification, are based on a data science model that analyzes the movements of users’ accounts to find patterns in the frequency and amount of transactions, as well as the combination of certain keywords that indicate whether they correspond to income or not, all of this being updated information that is probably not provided by the credit bureau.
In addition to income verification, Open Banking allows us to analyze other risk factors present in transactions such as identifying if there are any other payments that limit an applicant’s ability to pay, whether they are other credits or if the current expense is too high to acquire a new financial responsibility.
Also, this information will also help you in the collection process, since you will initially know the customer’s financial outlook and whether it is convenient or not to provide an offer, and their consumption patterns will let you know if they are overspending, preventing them from making the corresponding payments.
Practical Fraud Avoidance
One of the biggest problems faced by credit companies is fraud. According to El Economista, in Latin America, Mexico is the country with the second highest incidence of digital fraud in terms of volume, after Brazil. Financial services companies in Mexico lose 3.8 times the amount of the value of each fraudulent transaction, since the cost related to the transaction is added to the expenses derived from the investigation of the illicit, as well as the interest generated and others.
An Open Banking solution will help you prevent fraud from the beginning, since it has the capacity to validate that the deposit made by the credit company is made to a bank account that matches the data of the person who is requesting it, reducing the probability that the applicant is lying or is impersonating others.
Provide offers to your rejects
Another of the great benefits that you can find in an Open Banking solution as a complement to a traditional credit scoring, is to take advantage of all the traffic rejected by the traditional model.
There are two trends in this. The first one is the companies that modify their current process to include an open banking solution and thus begin to provide a greater amount of credits, since they have more information. Transaction history or income verification can be considered as positive information as lenders can use them to help customers improve their credit scoring and increase loan eligibility. The second is lenders setting up a second credit decisioning system to accept some customers they initially rejected.
This second aspect is quite simple: after the traditional model discards a user as eligible, you have the possibility to run their application through a bank aggregation solution such as Belvo’s, where you get a complete view of an account balance, consumption and payment patterns and, in general, the user’s financial capacity.
Thus, you have the ability to know more about the user and you can make decisions about what type of loans to provide and know perfectly the payment capacity shown.Joaquín Coitino, Product Manager at Belvo
With this, your acquisition costs will also benefit, since fewer and fewer users are rejected and you have a greater capacity to identify new factors or information that will help you place more loans. You are also feeding your risk matrices and business intelligence with new data.
This is how a lending company can create a product mix and have better tools to place more and better loans. At the end of the day, the open banking solution will help you to have a much more reliable and clear picture of the financial health of potential customers.