What is Open Banking and how does it help with credit scoring in the UK?

In 2018, the EU’s PSD2 directive was introduced in the UK, breaking the banks’ monopoly on customers’ financial data. The idea behind this change was that customers should own their own data, not financial institutions. Since then, banks and other payment account providers have had to let FCA-authorised or registered third-party providers access a customer’s online payment account data, or start payments, when the customer gives explicit consent. Many other companies have benefited from this, mainly thanks to Open Banking. In this post, we’ll explain what this system is and how it affects the process of taking out a mortgage.

Open Banking

The term ‘Open Banking’ refers to a system that lets people with an online payment account, such as a current account, share their account data and make payments through third-party providers (TPPs) that are authorised or registered by the Financial Conduct Authority (FCA).

For example, with a single click you can share your financial data with apps such as Emma or Snoop, which analyse your spending and help you manage your budget more effectively. You can link your bank account, savings account and credit card to these apps, and the algorithm will analyse what steps you could take to positively impact your household budget.

How does it work?

The entire Open Banking system is based on APIs (Application Programming Interfaces), which are secure connections that let you share data without ever giving your bank login details or password to the third-party provider. Thanks to this technology, users can freely choose which data they wish to share and who receives it – with a single click, they can decide who has access to it.

Security

Under Open Banking, a regulated provider can only access your account data with your explicit consent. In addition, there is a 90-day rule, under which you must renew your access consent approximately every 3 months – if you do not do so, access will expire. This prevents situations where you forget that you have granted a company access and, as a result, they have access to your financial data for years.

Third-party providers must be authorised or registered by the Financial Conduct Authority (FCA), which supervises them. This is the same organisation that protects borrowers from unfair practices by financial institutions and from poor financial advice.

Open Banking and creditworthiness

Some lenders and mortgage brokers may ask you to share your bank account data through Open Banking, with your consent, when they assess affordability, instead of or as well as sending bank statements. Each lender sets its own criteria and document requirements, and many still ask for payslips and bank statements. Read more about how lenders assess affordability.

Open Banking can also affect your credit score. Some credit reference agency tools, such as Experian Boost, can use Open Banking to count regular payments like council tax or streaming subscriptions towards your score with that agency, although not all lenders use this data. For example, regular streaming subscription payments may improve your Experian score through Boost, but not all scores increase and not all lenders use it. Read more about how to improve your credit score.

Seeing your actual income and spending can help where income is irregular, for example if you are self-employed, on a zero-hours contract or a company director, although how this data is used depends on the lender.

Verification of the source of funds

As part of their anti-money laundering checks, conveyancers and lenders may need to verify the source of the funds for your deposit, to confirm that the money comes from a legitimate source. Some conveyancers and lenders now use Open Banking tools to collect and review your bank transactions, which can be quicker than sending paper or PDF statements.

To learn more, see our guides to the deposit, the entire property purchase process, the cost of the entire transaction and the role of the conveyancer.

Where else can Open Banking be used?

Open Banking has a wide range of applications across many different areas of life and is increasingly used for online payments. Below are a few examples of sectors where it makes life easier for users.

Retail payments

A growing number of online retailers offer payment via Open Banking. This refers to the ‘Pay by Bank’ feature, which processes an instant transfer without the need to enter card details.

Taxes

With HM Revenue & Customs (HMRC), the Pay by Bank feature can be used to pay Self Assessment or other taxes by approving a payment through your online bank account.

Finance for Business (SMEs)

Open Banking connections can allow supported accounting software to import bank transactions. The timing of updates and any invoice-matching features depend on the bank connection and the software used. In addition, some lenders can use live transaction data when assessing business finance applications.

Summary

Open Banking is a regulated system that lets you share financial data securely with other businesses. Users have control over the information they share and can revoke access for specific recipients at any time. It can speed up parts of the mortgage and property-buying process in the UK.