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Comment: taking a risk

Pricing flexibility is something that surrounds us as consumers.

Ten years ago, I might have gone into a corner shop and asked for a bar of Cadbury’s Dairy Milk. Back then, the newsagent would have known exactly what I wanted, as there was only one Dairy Milk. It was in bar form and, apart from a large or small bar, that was the limit of the choices on offer.

Today, if I go into a shop, I am presented with a never-ending array of Dairy Milk in any number of forms – bars, party bags, eggs, boxes, etc. There is even a ‘Mummy’ Dairy Milk bar for children to buy to take home to their mum.

The point is, there is an almost infinite range of price points and product packs to hit the consumer with. If the consumer is even vaguely interested in Dairy Milk, there is something there to interest them.

Such variety is proven time and again to increase sales over the previous ‘take-it-or-leave-it’ stance.

But in finance this degree of flexibility has been more difficult and quite expensive to achieve. Products have been more along the ‘take-it-or-leave-it’ model. If you didn’t make the criteria, you could not have the product. And the product was the way it was, no chance of tweaking it.

Many lenders have this sort of stance today, although they might not realise it.

But technology has moved on and it is now perfectly possible to have a ‘Dairy Milk’ product offer within finance. So-called risk-based-pricing can allow you to do the same, easily introducing a spectrum of options all under the same core brand and model.

The granularity of open banking data allows you to offer borrowers a bespoke interest rate and term, and do it automatically in seconds.

As we all know by now, OB requires banks to share their line-by-line detailed customer statement data with other parties. This data, which has always been jealously guarded by the major banks, is now available to all lenders (with the agreement of the finance applicant) via account information service providers.

With an applicant’s permission, months of transactions can be probed. Read-only data comes directly from the bank that holds the current account to the AISP, so there is no scope for fraud.

And it is supplied in real time. Someone applies, agrees to limited time frame 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 be then tested by algorithm.

Lenders – for the first time – can make an affordability assessment that is extremely accurate.

Obviously, the key thing about this is that once you have such accurate and real-time information, the automated decision software can produce a bespoke interest rate and term that exactly matches the circumstances of the applicant.

And all this is done digitally and, as mentioned, in seconds. No more paper applications, no more laborious supplying of paper ‘proofs’, no manual underwriting of loans, no more two-week wait for a decision.

The OB tech has other benefits. Mistakes are eliminated.

Loan management is made much easier. A borrower’s bank transactions are usually obtainable within a 90-day time frame, so, if a first payment is missed, the account can be constantly interrogated so a request payment call can be timed when there are sufficient funds in an account.

Ah, I hear you say, what about the question of implementation timescale and IT expertise availability?

Well, neither of these need apply. There are platforms – such as our OpenBankVision (#OBFREE) – that are available off-the-shelf. They can be white labelled and made to work within hours. We can have OBV working on the day a contract is signed.

Such platforms have the benefit of being tried and tested. The platform could even be free (as OpenBankVision is).

And finance providers that are using this sort of know-how have been able, in an instant, to move over to ultra-flexible product offerings tailor made to a borrower and, at the same time, dramatically improve their affordability checks.

So, for those lenders who are still happy to stick with the status quo, all I can hope is that they think of me when they next go into a newsagent to buy a bar of chocolate.

Neil Williams is Managing Director of LendingMetrics

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