New Frontiers in Lending: Transforming the Borrowing Experience in Europe

Smart lending needs more than open banking. Plaid streamlines the borrower experience and helps lenders to reach more customers without taking on more risk.

The lending industry in the UK is facing a number of challenges, from rising interest rates to increasing financial pressure on consumers as part of the cost of living crisis. Despite these challenges, the UK lending market remains large and growing, with consumer credit growing 7.7% annually, the highest level since November 2018. Differing needs of borrowers and the macroeconomic conditions create challenges for lenders to get a single, real-time view of their customers.

The digitalisation of lending

The last twenty years have seen a complete overhaul of the way users interact with financial services. Lending may have been slightly late to the party, but we now see onboarding taking place predominantly online, with 75% of loans now originating digitally.  

Lending is also a diverse market. The process required for a newly-arrived immigrant to the UK is different from the process for a “thick file” accountant who has a steady income and job, and different still for a local electrician to receive an operational loan to continue their business during a macroeconomic downturn. This is before we factor in the differences for different credit products, depending on the tenure, size, structure and purpose of the loan. 

Therefore, even where the lending journey is digital, a successful loan process involves significantly more than just credit scores and underwriting. Every step in the lending lifecycle is important, and a failure in one of those steps breaks the entire, lengthy process:

1. Onboarding and verifying the applicant 

2. Understanding affordability and the right financial product for the borrower

3. Getting the borrower the approved funding and funds dispersed, as fast as possible 

4. Enabling easy repayments whilst avoiding defaults 

The above is the bare minimum, and while thanks to the digitalisation of financial services all of those steps can happen smoothly, they don’t always do so today.

Why alternative data is no longer a nice to have

Nearly all consumers have heard of credit scores, but they aren’t the only way loans are approved or refused. Many lenders also rely on other data sources, beyond credit holdings, repayments and utilisations. This data includes things like County Court Judgments, Electoral Roll and applicant identity information (e.g. name, date of birth). These data points provide a sketch of a person, but not a full colour photograph. They are vital, but in the high flux world of today are not enough. 

With the current economic context, defaults are beginning to rise (Bank of England, Credit Conditions Survey), whilst demand for unsecured credit is likely to increase, putting lenders who rely on basic data points at higher risk. 

To get photograph level visibility, several key aspects can add the colour required today, such as:

• Reliable real-time and historical income data

• Savings and investments reports

• Granular spending habits, including discretionary and non-discretionary spend

• Bill payments (e.g. rent, council tax)

This is where Plaid can help. Find out more about our views on alternative data here.

How Plaid supports lenders

Plaid has a track record over the last five years for supporting lenders with the tools they need to manage their lending lifecycle online, as smoothly as possible for the benefit of both borrowers and lenders, with high quality and high fidelity data. On top of existing capabilities, we’re focused on bringing new products to market, to enable lenders to increase approval rates and increase the proportion of approved loans that are high-quality.

The first (and best) step in this process is often to go to the centre of the applicant’s financial life — their bank account. Plaid makes it easy to get that data in a consumer-permissioned way, without the need for applicants to manually go to their online banking, print-to-PDF, save, upload, send, and so on. 

However, digitalisation isn’t enough. For consumers or businesses to access the credit they need, lenders need better data, insights and experiences. With Plaid you can get all this from one API, going beyond open banking to supplement lenders existing data across the credit lifecycle.

• Identify and verify new users. Match data provided by the applicant with verified data sources (name, DOB, Address) and bank account data with minimal customer interaction. 

• Verify income and assess affordability. Verify borrower’s income directly from their bank account and evaluate spending patterns over time. 

• Document Verification. Document verification and liveness checks, if required.

• Easy repayments. Collect instant and flexible recurring payments, with no ongoing action required by the user. 

• Live Monitoring. Track financial health over time and screen against relevant PEP and sanctions lists for on-going due diligence.

Summary 

Open banking has improved the lending process by bringing in additional, high-quality data points for lenders; but now it’s key that lenders look across the credit lifecycle to improve borrower experience to increase conversion, approval rates and reduce risk for lenders and borrowers alike. Companies like YouLend, Canopy and Metamo rely on Plaid to better serve their borrowers, and know this is our top priority.

Stay tuned for more lending announcements coming soon!