Open Banking: How to realise the benefit for mortgages
Prove who you are, what you earn, and your source of funds. A bank is only one part of the house-buying journey, and it’s not the fun part. Mortgage applications are typically lengthy and time consuming, eating into a customer’s most valuable asset: time.
Open Banking provides banks the opportunity to give customers some of those precious hours back, whilst satisfying their credit risk, fraud and regulatory requirements. This new technology encourages competition, empowering customers to shop around with their transaction data; potentially to be used by third parties and banks to offer better deals.
Whilst the ultimate prize for Open Banking is likely to be mortgages, these journeys are often the most complex and protected. Banks could start thinking about where they can prove the benefits of this innovation elsewhere, whilst in parallel preparing their mortgage journey and entire organisation for the embedment of Open Banking.
Why mortgages as the end goal for Open Banking?
Data from Open Banking and other available sources can go a long way towards effectively re-designing lengthy mortgage application forms. Fields can be pre-populated; customer responses verified and questions that previously relied on customers’ approximate values can be replaced by real data. The case for Open Banking to the regulator is an easy one; not only does it push adoption in a target area for increased competition, it also satisfies the Mortgage Market Review which demands greater evidence.
For a bank, the data and insights that are available through Open Banking are more powerful than relying on customer testimony. This new data source should lead to a reduction in credit referrals, whilst enabling more accurate affordability decisions, meaning underwriters can concentrate on analysis rather than chasing down documentation. The real benefit, therefore, is in reducing exposure of defaults through more accurate lending decisions. At the same time, the customer journey is simplified, with the risk removed of customers providing incorrect statements, and avoiding the requirement to repeat the process.
But banks have the potential to go even further. At the point of a customer receiving their mortgage, banks could use open APIs to point customers towards key stats for their new neighbourhood (e.g. via Zoopla), or how to identify the cheapest utility provider. By pairing transactional data with the financial information associated with the new property, banks could start to provide predicted monthly spend accompanied with tailored spending advice that would add real value.
For instance, someone who spends £30 a week at Costa might be more inclined to cut back on their coffee spending habits if they could see the correlation between the saving and their future increased council tax payments. Or what about a pre-set affordability check at re-mortgage time? This will enhance the likelihood of retaining the customer. With the likes of Habito innovating in the mortgage distribution network, these features straight from the bank will help them keep up with the competition.
Banks should also be open to the idea (or at least mindful that other players may be) of bringing the mortgage journey under one platform. Open Banking introduces an opportunity for customers to be offered tailored products and house-buying platform services which were previously completed by estate agents and solicitors. In this Open Banking world, banks should start to consider collaboration with different elements of the mortgage journey, particularly from a tech-savvy distributer. The risk of disintermediation is too great.
How long until mortgages see the benefits of Open Banking?
For large banks, the mortgage journey is probably the most cumbersome and significant work is required to digitalise the journey. Open Banking itself is new and the industry is still learning. APIs are becoming more stable but are not necessarily ready for a large amount of traffic. It is expected to be another one to two years before adoption picks up and it is more commonplace in the industry. Due to this, stakeholders may not be willing to invest significant changes until they have witnessed the benefit of Open Banking from smaller pilots.
What can banks do now?
- Test Open Banking concepts with unsecured products. These journeys are more mature and ready to be tested. Valuable insights can be gained from transactional data, as well as understanding of customer adoption (e.g. how to word/brand messages to improve adoption). Learnings from pilots in this area could easily be translated to mortgage journeys and then embedded into BA U . There is a lot to be learned from FinTechs here, who are already partnering with many of the CMA nine banks mandated to provide Open Banking.
- In parallel, improvements to the mortgage journey can be made to prepare for Open Banking. Over recent years, technical development has focused solely on embedding regulatory change. Banks should now look at using regulatory changes as an opportunity to re-invent and fully digitalise their journeys.
- Make the journey easy to test on: prepare the Mortgage journey and underlying architecture to test concepts and ingest new data. This is no small feat with an entirely new ecosystem such as Open Banking. Many banks have complex legacy architecture that cannot easily be unpicked, making it difficult to quickly test concepts on different parts of the journey.
The immediate benefit of these initiatives will be to learn the possibilities of how Open Banking can be transferable across an organisation. The longer-term challenge will be to change the mindset of senior stakeholders and to demonstrate that these pilots are not inherently risky and are more beneficial that not doing anything . As Open Banking becomes increasingly prevalent, adoption will pick up and those who have tested and learned will stand ready to reap the rewards.
The future for Mortgages and Open Banking looks exciting and the two should go hand-in-hand to help improve the customer journey and enable a bank to make better credit decisions. A natural place to start is unsecured products, proving the benefit of Open Banking data in the card and loan journeys before extending to Mortgages and then considering how to become more than just a Mortgage provider. In parallel, as Open Banking expands, and adoption picks up, banks should be preparing their organisation for its arrival. The end goal should be mortgages, but there are achievable steps to take now before we get there.