What is Open Banking?

Open banking refers to a financial system in which banks and other financial institutions securely share their customer data via standardized APIs (Application Programming Interfaces). This happens based on the customer’s consent and enables third-party providers to access banking data and offer innovative financial services. This data may include transaction histories, account balances and other relevant information.

The adoption of open banking has been largely driven by regulatory initiatives such as the European Union’s Payment Services Directive 2 (PSD2). PSD2 requires banks to give third parties access to their customers’ account information, provided they have given their consent. The aim is to promote competition, drive innovation and make financial services more transparent and accessible for consumers.

Use of data to optimize risk scores in banking

The use of open banking data to optimize risk scores represents a significant innovation in the banking sector. Through the so-called “account view”, i.e. the detailed insight into a customer’s account data, banks and credit institutions can assess customers’ creditworthiness and risk profile more precisely and holistically evaluate.

Standard scores and usual market procedures

There are established standards and procedures for calculating risk scores in banking. These scores are critical for assessing creditworthiness and managing credit risk. The most famous include:

1. FICO Score: A widely used credit score that evaluates the creditworthiness of individuals. It takes into account factors such as payment history, debt ratio, length of credit history, new credit inquiries and loan types. The score ranges from 300 to 850, with higher values ​​indicating better creditworthiness.
2. Schufa Score: In Germany, the Schufa score is one of the most important indicators of creditworthiness. It is created by Schufa (Protection Association for General Credit Protection) and is based on the person’s credit and payment history. The score ranges from 0 to 100, with a higher value meaning a lower probability of failure.
3. VantageScore: An alternative credit score developed by the three major U.S. credit bureaus. Similar to the FICO score, it takes into account payment history, credit utilization, loan type and length, and new credit inquiries. The score also ranges from 300 to 850.

Use of open banking data to improve risk scores

The integration of Open Banking data makes it possible to supplement traditional credit scores with additional, detailed information and thus refine risk assessment. Here are some specific approaches:

1. Advanced income analysis: By looking at the account, banks can better understand regular income streams and their stability. This includes not only salary receipts, but also other sources of income such as rental income, freelance fees or social benefits. A stable and diversified income stream can significantly reduce the risk of loan default.
2. Detailed Spending Patterns: Analyzing spending provides insight into a customer’s financial discipline and spending habits. Account data shows regular obligations such as rent, utilities and insurance, as well as discretionary expenses. This allows banks to paint a more accurate picture of a customer’s financial resilience.
3. Payment history and liabilities: By accessing account data, banks can view the history of payments and existing liabilities. Regular and punctual payment behavior improves the risk score, while late payments or frequent overdrafts can be identified as risk factors.
4. Cash flow analysis: Analyzing cash flow is crucial, especially for self-employed people and freelancers. Open banking data makes it possible to take seasonal fluctuations in income into account and assess financial stability over a longer period of time.

Examples for optimizing risk scores

1. Lending to freelancers: Traditional credit checks are often based on fixed salary receipts and permanent positions, which can put freelancers at a disadvantage. With Account View, banks can analyze freelancers’ actual income streams and financial obligations and make a more informed decision about their creditworthiness.
2. Personalized loan offers: Based on the detailed account data, banks can create tailor-made loan offers that meet the customer’s individual financial needs and risk profile. For example, a customer with a stable income stream but high monthly expenses could receive a loan offer with a longer term and lower payments.
3. Early warning systems for financial difficulties: By continuously monitoring account data, banks can identify early signs of financial difficulties and take proactive measures to minimize credit risks. For example, in the event of unusual debits or a sudden drop in income, a bank could contact the customer to offer preventative solutions.

Conclusion

The use of open banking and the associated account overview to optimize risk scores in banking offers numerous advantages. Banks gain a more comprehensive and realistic insight into their customers’ financial situation, resulting in more accurate credit decisions and improved risk assessment. Customers benefit from individually tailored financial products and a fairer assessment of their creditworthiness. Overall, this represents a significant advance in banking, bringing significant benefits for both banks and customers.

Acceleraid@OpenBanking

As experts with over 10 years in the financial industry, we have already carried out a wide variety of project implementations with various financial institutions, issuers and finance companies.

Contact us if you would like to find out more about how Open Banking can be used for your company and which data can be used to achieve which goals and assessments can!

Further link:
BaFin Federal Financial Supervisory Authority – Open Banking & Open Finance: https://www.bafin .de/DE/Aufsicht/FinTech/Geschaeftsmodelle/OpenBanking_OpenFinance/OpenBanking_OpenFinance_node.html