SME lender iwoca now allows Lloyds Bank account holders to share their account data via Open Banking API, with the four other major banks soon to follow.
The rollout makes iwoca the first business lender to connect with any of the UK’s nine largest banks under the Open Banking initiative, launched in January 2018.
What’s Open Banking again?
Open Banking is a secure, standardised way for consumers to give third-party access to their financial information. It enables regulated third-party providers, with a customer's consent, to access bank account information and/or request payments.
It sounds like a small thing -- but it is a big deal: Open Banking transfers the ownership of transaction data from the bank to the customer. In other words, your banking data is yours to do with as you please, and the major banks have been forced to play nice.
Open Banking had its genesis in the anxiety over the lack of competition in the banking sector. By cracking open the banks’ data monopoly, it’s thought, it’ll open the field for a new wave of up-starts to innovate.
Overseeing this process is OBIE, the Open Banking Implementation Entity, created by the Competition and Markets Authority to create the software standards and industry guidelines for Open Banking.
Where does iwoca fit into this?
Iwoca is precisely one of these third-party providers that the CMA hopes to nurture. In a statement, OBIE’s chief, Imran Gulamhuseinwala, called iwoca’s integration a “milestone” and said that it “will help revolutionise the way small businesses access financial services”.
Now, the sharing of bank data isn’t new in and of itself. As iwoca’s Anna Karina Nava explained to AccountingWEB, customers were already able to provide their transaction history during the sign-up process. But it was cumbersome and far from comprehensive, involving either PDF statements or other sources like Yodlee.
“These weren't easy enough for customers to provide their entire history of transactions,” said Nava, who leads iwoca’s Open Banking team. Indeed, many banks limit how far back statements go, requiring a special request for more records (which can take weeks).
“This lack of depth means we can’t offer the most accurate credit decision because they weren't able to provide enough bank transactions.” When businesses need a loan, they aren't necessarily in the best financial position. So to judge an application on just a few months worth of applications leads to less generous terms and higher interest.
“Long-term bank transaction data is one of the most reliable ways to assess an application,” said Nava. The difference now is that Open Banking makes it easier for the customer to provide long-term information (in three clicks, according to Nava) and it gives iwoca the ability to construct a more nuanced credit picture.
“We can see things like seasonality and give a more accurate credit decision," said Nava. "It also means better interest rates, because the uncertainty is minimised.”
According to Nava, the simple answer is that they were ready. The plan is to roll out integration with the four other major banks soon, but Lloyds was “100% ready”.
“We were thinking of going with the top five banks simultaneously because that's 80% of our customers. This was at the very beginning when OB was released. But the reality was that some banks weren't ready and we didn't want to give bad experience to our customers. So we did it the other way around: build all the infrastructure on our side for one bank -- and then add the other banks later.”
The careful approach is because there can’t be any surprises for consumers, said Nava. The initiative’s adoption will depend on a flawless, almost low key integration. It just has to work at this critical onboarding phase, especially since iwoca has big ambitions for the integration.
“In a year's time, we don’t want to need an alternative way to provide statements. It should be as easy as booking a plane ticket. That's our main goal. And then we'd also want to incorporate this into our automated credit decisions.
“But even beyond that, we want other third-party providers to accelerate their use of Open Banking, so users begin to trust it,” said Nava. “Then we can build a whole network of products that integrate all of us together.”
About Francois Badenhorst
Francois is a writer, editor and broadcaster specialising in business.