Open banking grants millennials credit choice.
Under a third of millennials own a credit card. Instead, according to recent research, Millennials prefer more sustainable financing options, such as interest-free buy now pay later (BNPL), which helps consumers stay on top of their payments with structured payment plans.
The people in these age brackets often have good salaries, few commitments, and a healthy disposable income. But they do not always find it easy to access the credit products they want. That’s because the credit information market does not currently operate in their favor. It’s a vicious cycle - those that are reluctant to get a credit card find it difficult to build a credit score and, without a credit score, it is difficult to be approved for a credit product. This is evidenced by the market for ‘credit builder’ cards, which are specifically designed to help users build a credit file (often at fees of 30%+ APR).
Consumers should not feel pressured to take on high-interest credit. Thankfully, open banking underwriting helps break through this exclusivity to create a more inclusive market. Open banking is revolutionizing affordability checks by using real-time financial data to better understand a consumer’s spending history.
How can open banking help?
Lenders have traditionally used credit information from external providers to perform eligibility and creditworthiness checks. For a responsible BNPL lender, these checks occur at the point of every transaction.
This approach works for members of the more ‘traditional’ consumer sets, who may have got a credit card when they were 18 years old, repaid it, and built up a healthy credit file, explains Luke Seaman, Klarna’s Head of Public Affairs for UK & Ireland. But what do you do when consumers have thin or no credit files, which is increasingly the case?
“Consumers coming through the system now are not always using the traditional tools that are used to build a credit file - so how do you make a responsible lending decision for them?”
He described how open banking can enhance BNPL offerings:
“As a credit lender, one of the best use cases where open banking has really changed the game for us is in credit decisioning and credit underwriting.”
By allowing read-only access to consumers’ bank accounts, open banking enables lenders to gauge creditworthiness by assessing potential customers’ overall financial position - including spending habits and savings – not just their credit score. All incoming and outgoing data is accessed in real-time. In contrast, external credit checks are based solely on six-week-old credit commitment information.
For Klarna, turning on account information services through Kosma’s open banking solution has allowed it to build a more rounded picture of its (potential) customers. This means the company can extend credit to responsible consumers - those who can afford a purchase but would otherwise be denied access to credit because traditional credit reference agencies have insufficient information on them.
“Otherwise, perfectly creditworthy consumers could be locked out of the system because they don’t have the right type of files,” explains Seaman. “We’ve been able to bring a whole new realm of consumers into our product set because of the power of account information, powered by Kosma.”
Millennials are the first generation to begin their adult lives in the digital age – financially savvy, they have the power of research at their fingertips and are conscious of their choices. Many millennials are also just reaching the stage in their lives when they want to make larger purchases.
For lenders without open banking connectivity, not offering these young consumers what they need could mean missing out on substantial growth opportunities.
Hear Kosma’s Conor Tiernan and Klarna’s Luke Seaman discuss this and more in the full interview below.
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