How banking data contributes to financial inclusion with regard to credit provision
“Is there a right to credit?”, Maria Lissowska (Senior Expert, European Commission) asked at the beginning of the “Panel 3 on Credit”. Well, obviously there’s no written right to credit, but it’s also obvious that the opportunity for a credit is a big contributor to financial inclusion. However, the opportunity for a credit depends largely on the consumer’s creditworthiness. The question should therefore be in the future, how can creditworthiness be reflected by the financial reality of the credit applicant and thus promote financial inclusion?
Instead of often incomprehensible and intransparent credit scores for consumers, banking data itself provides the necessary data for the evaluation of creditworthiness. Because in the sense of data minimisation, the question should be which data is actually needed for the credit decision. Furthermore, the financial reality of a credit applicant is not correlated to market data as the basis for credit scores because every single person applying for a credit is an unique case.
Banking data is an appropriate way to evaluate how much loaned money a consumer really needs and how much money a consumer is really able to pay back based on current expenses. With the help of a digital account check, credit providers can get an overview of the consumer’s salary, additional income, and of course, the structure of expenses. A complete overview of revenue and expenditures for a household is possible.
So, how can banking data be used in practice for credit decisions? As a FinTech company, figo is connected to various financial sources like banks and enables its partners to get access to current accounts, including the most relevant banking data for credit decisions. By using his or her online banking credentials, the credit applicant decides to provide and use his or her own banking data for the credit decision. The figo partners get immediate access to banking data like balances and transaction history, also in a categorized format. With this information, the credit provider can apply their creditworthiness scoring and other algorithms for a direct credit decision. The credit provider is able to recognize critical expenses like high gambling expenses or existing credits which have a negative impact on credit provision decisions. As a result, figo enables its partners to offer a more digitalized credit application process to their users as an option.
From figo’s perspective, there’s a great mindset of financial inclusion behind the approach of using current banking data for credit decisions. First of all, the consumer as the owner of his or her own data decides to use the banking data for the credit application. The consent of the user for the access to the banking is always needed. Secondly, credit providers who get access to the data should always be transparent about exactly which data is used for the credit decision. Thirdly, data protection and data security should and will always be very crucial factors. The Payment Services Directive 2 (PSD2) will legally define every service which fetches payment account data as an account information service (AIS). This will create a legal framework for comparison platforms, FinTechs and credit providers and result in an equal playing field for all players processing payment banking data. Consumers’ data sovereignty will be strengthened by empowering them to use their banking data in a context outside of their existing data silo of “online banking”.
With PSD2’s ‘Access to Account’ (XS2A) requirement, banks in Europe will be obliged to provide banking data from payment accounts to regulated third party providers (e.g. account information services), making banking data accessible and more extensively usable for credit decisions in the future. This will sustainably strengthen financial inclusion in lending for the benefit of consumers: Open Banking is a good sign from Europe for consumers.
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