What is the Future of Credit Scoring in an Open Banking World?
This week Finance Monthly has heard from Rob Haslingden, Head of Product Marketing & Propositions at Experian UK&Ireland, who gives us an overview of global credit scoring, the right attitudes, and the evaluation of data management and governance controls.
Some industry commentators have suggested that Open Banking is a death-knell for credit scores. After all, why do you need a credit score, if you have 12 months of transactional behaviour for a customer?
This is a curious observation, some of which is based on a misconception that Credit Reference Agencies (CRAs) see the sharing of transaction data as a threat and not an opportunity.
There’s also the assumption that because credit data is a reciprocal arrangement that somehow credit providers will not be motivated to share credit data in a lending environment, where current account information is freely available.
At the heart of this discussion is the question of what additional value CRAs and other providers can add to transactional analysis that helps both lenders and customers?
Credit scoring, then, now, and in the future
Originally credit scoring was based on historic financial behaviour, in particular the consumption of credit. More recently it has included an assessment of a customer’s current circumstances which has been based on banks sharing summarised current account behaviour. Future analysis will assess a customer’s financial circumstances based on a mix of credit and detailed transactional behaviour.
Real-time analysis of transactional data will enable the provision of scoring that can more accurately reflect a change in an individual’s personal circumstances now, and in the future. This can provide organisations with a more sensitive and timely measure of a customer’s financial status.
Suddenly we enter a world where credit scores and transactional data become the data components of a new scoring regime focused on measuring affordability.
The sharing of the current account data mandated by the Competitions and Market Authority (CMA) provides an opportunity to deliver a more accurate and timely assessment of customers’ financial well-being throughout the life of a loan. It holds the promise of delivering a better and more informed view of an individual or business’ suitability for products.
Data sharing will not only provide a measure of ‘affordability to purchase’, but may soon also provide a measure of the ‘affordability to live’.
While Open Banking won’t be in force until 2018, it is important for organisations to consider how they can prepare now. Whilst there are some technical and functional changes that are essential, some areas simply reinforce the basics of a good operational and customer centric strategy.
Areas to consider a strong focus on now are:
Four out of ten customers express decreased dependence on the bank as their primary source of financial services, according to EY. If banks become less relevant to customers they run the risk of becoming ‘utilities’, leaving the door open for competitors to deliver more satisfying and engaging customer experiences.
To be successful in the world of Open Banking, organisations must ensure they put the customer at the heart of their business and create personalised services that are relevant to people’s everyday lives. Providing services that extend beyond those traditionally offered is a great way of broadening engagement and adding value. Working collaboratively or in partnership with Fintech to develop better online services is another.
Build trust and confidence
To realise the aspiration of increased competition, people must have the confidence to share their data. Organisations that seek to capitalise on the opportunity of data sharing must acknowledge their collective dependency to act responsibly. Customer perception is that banks are generally very secure. This puts established providers at a distinct advantage when asking their customers to share their transactional data.
Established banks will be keen to ensure this reputation is not undermined in the drive to open up the market and increase competition. New market entrants must find ways to build customer confidence in ways that can win the hearts and minds of customers. Being honest about the purpose for which you require data is essential. Those that remain true to their brand purpose and reflect this in their engagement with customers throughout the data sharing experience are those that will be most successful in securing customer confidence.
Leverage your brand
Brand can be a significant differentiator, particularly in a highly competitive market. Understanding how to leverage the brand to acquire customers is the key to success. Organisations with the strongest brands can capitalise on their equity where issues of trust and security will be key differentiators in getting customers to share their data.
Research confirms that those organisations who provide competitive pricing and excellent customer service are the ones that engender the most loyalty from customers. For younger age groups, the issue of brand is one of the highest factors in driving engagement, whilst the importance of customer service increases with age, Experian found.
New market entrants will have to rely on the excellence of customer experience to quickly build brand reputation and gain the trust of customers – and appeal through advertising as a means to attract and acquire.
Improve your data management
Open Banking may add to the overall confusion of ‘data’; what it means and what it is. People are concerned about the issues of data privacy, identity theft, and fraud that data sharing brings; few understand the benefits that may come as a result.
Organisations need to educate customers and emphasise the benefits of data sharing in order to gain customer trust and confidence. Organisations have a duty of care to limit the use of the data to the purpose for which the customer gives consent. Clarity and transparency are vital to securing this consent, as is the customers’ right to opt-out of data sharing. Terms and conditions for products must be simplified, and tools given that enable individuals to control and manage access to their data at any point. Failure to recognise this and abuse trust will undermine Open Banking, breach data protection and make organisations non-compliant.
Re-examine your governance model
Failing to deliver a great customer experience in a world of digital data exchange will undermine a brand and damage the business. Customers need to know who they can turn to when things go wrong.
Everyone involved in the data sharing ecosystem needs to ensure they have well-honed processes in place for resolving customer complaints quickly. Start developing your customer service model for data sharing now, and develop your scenario planning for how to deal with queries and complaints. Speed of response and commitment to customer care will be significant differentiators in a system driven by the sharing of personal information. Organisations need to focus on earning trust by doing the right thing for the customer and providing excellent customer service.
What does the future hold?
As Open Banking becomes a reality in 2018, so does the opportunity to create truly innovative services that can change the way banks interact with customers.
As with any new regime, or transformation, the future will write itself as time goes by, but there are certain elements that Open Banking will inevitably influence. These include identity verification, product comparison, better personal financial management, consent management, and risk forecasting.
Open Banking is a watershed moment in the relationship between customers and financial service providers. It creates a unique opportunity for everyone involved in the provision of services to increase relevance and trust by focusing on products that create value and improve the quality of people’s lives – predicated on the intelligent and compliant use of personal data.
Creating relationships that are transparent, honest and fair, and that enable customers’ to feel confident and secure in the knowledge that their well-being is a priority and privacy safeguarded, is what we believe is the key to creating meaningful, long-term relations that will revolutionise the way products are consumed.
In the window of opportunity between the announcement of the CMA’s remedies for retail banking and deadline for implementation, Open Banking mandated organisations should focus their efforts on building an infrastructure that supports change and generates value for customers.
Longer term, organisations should be looking to create services that are secure, engaging and personalised that deliver real-value from the intelligent use of personal data.