Neil Williams, managing director at LendingMetrics, argues that the arrival of Open Banking means motor finance providers no longer have an excuse for delaying the switch to automated underwriting.
The reality of underwriting is that many motor finance providers are stuck in the Stone Age.
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Think about it: how many still rely on paper bank statements and manual processes when making lending decisions?
In the age of Big Data, when terabytes of information are being accumulated on a daily basis, manual examination of utility bills, credit card bills, bank statements and so on still persists.
Why is this? The short answer is that expert IT is not in plentiful supply. To move to software utilising Open Banking, and then rolling it out to dealers, is not something you can do in-house overnight, and who can blame some CEOs for hesitating when everyone knows of IT switches that have gone wrong.
Well, such delay cannot continue for much longer, given the seismic improvement in underwriting and massive cost savings that Open Banking delivers.
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By GlobalDataUntil recently, lenders have had ‘credit history’ and not really much else to look at when an application for car finance is first made. They may then get ‘historic’ proofs of status – a printout of a recent bank statement, a payslip, and proofs of address – but these ‘indications’ are time-consumingly produced by the applicant, and worryingly vulnerable to fraud.
Thankfully, Open Banking means an end to all this. No more over-reliance on credit history and paper proofs. And, significantly, no more need to estimate a person’s ability to afford the loan for which they are applying.
Open Banking requires banks to share their line-by-line detailed customer statement data with other parties. This treasure trove is now available to all lenders – with the agreement of the finance applicant – via FCA-authorised Account Information Service Providers, such as LendingMetrics.
Read-only data comes directly from the bank that holds the current account to the ASIP in real time. Someone applies for a loan, agrees to limited-timeframe and read-only access to their accounts, and thousands of lines of transactions can be analysed. In milliseconds, this can pull out salary details and all financial commitments, to then be tested by algorithm to determine whether the loan should be granted or not.
Lenders, for the first time, can make an affordability assessment that is extremely accurate – no small thing given that the FCA is doubling down on ‘affordability’.
Accurate Insights
In the past, the problem has often been that the borrower has had a rose-tinted or incomplete view of their finances. With real-time data to examine, this is not an issue. The data and subsequent analysis provide insights of which the borrower will often be ignorant. The technology can even pick up patterns that might lead to budgeting problems, such as a gambling habit.
There is either a ‘decline’ or ‘referral’ outcome; with referrals, instead of the underwriter having to go through a long list of standard ‘tasks’, only those tasks relevant to the applicant are flagged. Automated decisioning means mistakes can be eliminated.
Loan management is also made much easier. A borrower’s bank transactions are usually obtainable within a 90-day timeframe, so, if a first payment on a new car is missed, the account can be ongoingly interrogated so a request-for-payment call can be timed when there are sufficient funds in an account.
Signs of stress can be picked up straightforwardly; payments can then be reorganised rather than missed.
This automation brings big cost savings. Underwriting that used to require a team of people no longer does, and the loan book can increase year on year without the need for any more ‘heads’.
Automated decisioning removes the need to pay for credit searches. Given that each credit search alone can cost more than a pound, the total savings made are considerable.
Ah, I hear you say, the downsides of potential miss-steps remain. Well, this does not need apply. There are platforms – such as LendingMetrics’ OpenBankVision – that are available off the shelf and already in use. They can be ‘white labelled’ and working on the day a contract is signed. The platform could even be free – OBV is.
So, for those in motor finance who have yet to make the most of Open Banking, all I can say is, can you really afford not to?
by Neil Williams
