As Open Banking and bank data grow in pervasiveness, new use cases are becoming apparent across sectors and industries. One that is starting to see pronounced benefits is the mortgage industry.
There are distinct advantages for brokers and lenders in the use of bank data. From reducing fraud, enhancing customer experience to widening the prospect pool of prospective customers, there are myriad benefits to those willing to use new technologies.
Indeed, as we examine below, a number of providers are already using the introduction of Open Banking to enhance and augment their mortgage decision making.
Below we recap ten reasons why lenders need to consider why now is the time to begin using bank data.
From A Dead Pledge
It is well worth keeping in mind that the history of mortgage payments in the United Kingdom is less than two centuries old. Prior to the introduction of mortgages, most people rented privately.
Two banks recount the story of their first ever mortgages, modern-day Lloyds Banking Group (a Halifax mortgage), and Nationwide Building Society (under the guise of the Southern Co-operative Permanent Building Society).
While Nationwide’s story of Alfred Idle is more romantic - “he escaped the big stink and overcrowding of the city.... and moved to Morrison Street, Battersea with his wife and nine children”, Halifax trump Nationwide by almost thirty years in their granting of £121 to Esau Hanson in 1853.
These two examples have proven to be forerunners as the mortgage market has grown and grown in the UK. At different times there have been interruptions, technological advancements and societal changes that have pock-marked the generations, but by the commencement of the Second World War, the number of Britons owning their own home had increased to 27%.
In many respects, mortgages today are exceptionally similar to how they looked one hundred years ago or more. Indeed, perhaps the biggest change has come from the word "mortgage" itself.
The word “mortgage” is derived from the French ‘mort gage’, meaning “dead pledge”. In a ‘dead pledge’, the borrower could not use the value of the land or property to pay back the loan and needed alternate finance. This varied from a “vif gage” (‘live pledge’) in which the borrower could use the assets to pay it back.
To A Live Pledge
Beyond this, applicants for a mortgage still need to meet a bank or building society, evidencing how they will repay the loan, much as they did in the nineteenth and twentieth centuries. Today, mortgage applicants need to be able to show who they are, what their source of funds are, and what their income is. Typically, the source of funds will be a salary that can be evidenced through the production of payslips.
In line with societal pressures, and witnessed particularly in the UK, there is an aspiration for young people to own their own home. The growth in home ownership has continued unimpeded through the twentieth and early twenty-first centuries.
There are, of course, very good reasons for doing so. As well as offering somewhere to live, the rise in the value of homes throughout the country has made them a good investment. Allied to this is the possibility of resale value and opportunity to leave to dependants and children.
This does not mean that taking out a mortgage is the right choice for everyone, or that everyone who wishes one will be right for a mortgage. As has been covered elsewhere, there are myriad reasons why major lenders may opt not to offer an individual a mortgage. These, in no particular order, could be due to thin credit files; lack of, or poor credit history; limited salary; too many credit applications; County Court Judgements (CCJs) or bankruptcy; lack of deposit; time spent abroad or being self-employed.
In short, there are many obstacles to overcome to be accepted for a mortgage. As one commentator expressed recently, it requires “autobiographical levels of detail from the customer”.
And it is at this juncture that banks, building societies, brokers and other lenders would be well placed to look at the introduction of technology into the mortgage application process.
Already we are starting to see FinTechs move into the mortgage space. These companies have all seen the issues and identified opportunities where they can improve the process. Mortgage Gym, Creditladder and Habito are examples of companies working on improving the customer experience.
The opportunities afforded by bank data and Open banking are enormous, and these companies and others are working on reducing customer friction in the process. This is good news for consumers, who, as we saw above, are hindered at all points in the journey.
Some major lenders are already leading by example, improving customer satisfaction and lowering processing times through the use of Open Banking and bank data. M&S Bank and Bluestone Group (who said they found the use of paper-based bank statements “cumbersome”) are two who have implemented Open Banking for mortgages.
For banks, building societies and others, there are a wealth of opportunities available for those willing to make the investment in technology. Here are ten ways how:
1. Remove the patently unfit
We know that some customers will be desperate to get their foot on the property ladder or move house without the resource required. Possibly they will have no income, or a poor history of managing money and no amount of willingness on the part of the lender will see them ever accepted for a mortgage.
With bank data, it is possible to access these customer’s information and vet them against an algorithm in seconds. This will give a comprehensive answer, allowing an adviser to follow up. This offers genuine savings in time and money, filtering out those who are not ready to receive the dedicated time and resource of a human adviser.
2. Offer bespoke options
Brokers today can run customers details past thousands of different mortgages from hundreds of suppliers to find them the best and most appropriate deal. Using bank data however, a lender could offer a bespoke deal that does more than just “match” the customer and the offer, but tailors a deal that is of best value to the customer.
3. Reductions in time
One of the most frustrating things for customers is that the whole process can take a vast amount of time. From initially entering details onto a website, to meeting with an adviser, to preparing the documentation required and then having the information processed, can take an age.
Bank data can simplify this whole process to just minutes. By logging into their online banking, a lender can retrieve the information they require to make a lending decision and complete AML and KYC checks. With the ability to automate this, the time it takes to make a lending decision can be dramatically reduced. As well as delighting customers by allowing them to purchase a house faster, this means that lenders can begin to bill for the mortgage much sooner.
4. Physical documentation
Part of the autobiography of data that customers are required to produce includes documentation for AML and KYC checks, including passport, driver's license, utility bills and physical payslips. These take time to compile, take to the address of the lender, and finally for the lender to run them through credit reference agencies.
We have written elsewhere on the veracity of data supplied by credit reference agencies, but the data supplied from a bank is current, relevant and enough to satisfy money laundering regulations.
5. Lessen human involvement
One of the prime headaches for lenders today is the volume of human resource that is required in order to make a lending decision. Mortgage specialists need to meet with applicants to determine their veracity and suitability for a mortgage. Underwriters and fraud analysts need to review the application.
The use of bank data can streamline and quicken this process so that it involves limited human interaction. As human resource is one of the largest financial overheads for mortgage provides, the ability to save on manpower can have significant cost savings.
6. Enhance customer satisfaction
No one enjoys the long drawn out process of applying for a mortgage, the hassle of collating all of the relevant details, and the endless email chains.
Implementing the strategies that we discuss above enhances customer satisfaction, and reduces the chance that the applicant will go searching for a deal with a competitor once they have started the application process.
7. Accurate lending decisions
As we know, one of the reasons why so much paperwork and detail is required during the application process is too ensure that the mortgage terms are suitable and affordable for the customer. It is no one’s interests, including the lender to offer terms that are not suitable for the applicant, both now and for the duration of the mortgage term.
However, bank data solves this problem with details of the applicant’s bank details. Tools such as DirectID Insights from The ID Co. Illustrate up to twelve months of bank details, showing income, spending, and affordability assessments calculated from monthly disposable income.
8. Increase pool of prospective customers
Right now, there are many individuals who would like a mortgage but cannot get on to the ladder because of their limited credit history. Some may have years of paying rent behind them, but because this is not shown in their credit history, does not help them to win a mortgage.
Others may have newly arrived in the country and so do not have extensive credit histories. They may be commencing a well-paid job but with thin credit files, also cannot get a mortgage.
The benefit for mortgage providers here is that while currently, some of these applicants would be turned away, with bank data, their years of paying rent, or good income would be enough to illustrate that they can afford a mortgage. This can work to broaden the prospective pool of applicants, therefore winning new business.
9. Data security
There is considerable discussion on the security implications of Open Banking at this time - something we addressed recently. With bank data gleaned through Open Banking, data is more secure than ever before. Reliance on email and other unencrypted forms of communications is lowered, as bank data is accessed directly via API.
Mortgage fraud is an active problem in the UK with scammers coming up with more sophisticated methods of duping providers. Perhaps the simplest is in inflating their salary and then forging or altering documents that purport to back up the claim. 2016 figures from BDO Fraudtrack suggest that mortgage fraud was worth around £50m per year. Bank data can quickly and easily confirm the veracity of an applicant’s income and other details that can help to eradicate fraud.
As consumer confidence grows in the use of Open Banking, industries across the spectrum are looking at how they can increase efficiencies, improve sales and enhance customer experience. As we have outlined above, there are ten advantages that banks and lenders could implement that use bank data to enhance lending decisions.
The use of bank data has benefits across the mortgage spectrum. From widening the pool of applicants, to ensuring that they are legitimate and not committing fraudulent activity, to making sound lending decisions faster and more accurately, bank data can help mortgage providers to increase sales, improve efficiencies, reduce overheads and improve brand through satisfied customers.
Some lenders have already made the decision and are seeing the benefits. Will you?