Will COVID-19 impact Open Banking lending?
Will COVID-19 impact Open Banking lending?

Will COVID-19 impact Open Banking lending?

By George Parks Davie.


A recent report across sixteen countries by McKinsey & Company found that each month, more and more consumers expect the economic impact of COVID-19 to worsen. As a perfect storm of salary reductions, mass unemployment, and a backdrop of economic decline continue to squeeze financial decision-makers, the demand for lending is on the rise.

Whether it’s a homeowner struggling to cover mortgage payments or a small business requiring a cash injection to adapt to the ‘new normal’, banks are on high-alert to ensure they make smart lending decisions in uncertain times.

While uncertainty and lending don’t go hand-in-hand, the growing adoption of digital banking and the latest applications of Open Banking present exciting opportunities to improve financial transparency, boost visibility over borrowing options and bring clarity to a disjointed marketplace.

Join us as we explore how consumers can harness the power of Open Banking to access fair and affordable finance when they need it most. Despite the devastating social and economic impacts of COVID-19, times of necessity can accelerate innovation and prompt new opportunities to shape an era of progressive change.

The link between Open Banking, lending & COVID-19

The biggest challenge for both lenders and borrowers during COVID is overcoming uncertainty. The lack of control associated with a global pandemic is extremely unsettling as consumers lack the confidence they require to make informed financial decisions.

While financial forecasting relies on data interpretation to spot patterns, monitor growth and spread risk, a turbulent economic backdrop leaves both consumers and financial institutions in the dark.

That said, the introduction of the revised Payment Services Directive (PSD2) by the European Commission in 2018 has promoted growing interest about the ways Open Banking could bring much-needed clarity to the lending market over the coming months. Crucially, consumers can opt-in to Open Banking services to access new lending opportunities and accelerate drawn-out lending procedures to find the best deal that fits their individual circumstances.

How does Open Banking support lending services?

The ultimate goal of PSD2 is to incentivise innovation across the finance sector by empowering smaller financial institutions with highly-valuable data. Customers are given a choice as to whether they wish to share their data with approved third-party lenders, and the big banks are obliged to grant their request.

There are two key functions of PSD2 that can help to improve financial access to consumers during COVID-19:

1. Window Shopping: Account Aggregation with Account Information Service (AIS)

Window shopping for loans is an incredibly slow and painstaking process for consumers. While almost all financial institutions will claim they have the perfect solution for their financial needs, consumers can spend hours completing applications, only to learn they are ineligible or unable to afford the repayment plan.

Not only is this extremely frustrating and potentially damaging for the consumer’s credit score, but it can also tarnish brand affiliation with the lender due to unsatisfactory user experiences.

Account Information Services (AIS) through Open Banking has the potential to address this issue by Third Party Providers (TPPs) retrieving information from multiple accounts to create a consolidated account dashboard. Aggregating information in a safe and secure manner means consumers can make use of their data by searching hundreds of borrowing options through lending providers and identify personalised lending solutions to meet their specific needs.

From the lender’s perspective, access to consolidated account information provides real-time oversight into a consumer’s financial position — giving them the visibility and confidence they require to offer competitive lending options. Crucially, access to meaningful data means lenders are less likely to urge on the side of caution.

As COO and finance Director at Leap Lending, Daniel Napon, explains: “Open banking provides a detailed, real-time view of the situation, showing whether people have lost their job or even borrowed a separate loan in the past couple of days. A lender would also be able to detect any income shock such as total or partial loss of income.”

Not only does this enhanced visibility help TPPs manage risk, but it also means end-customers have a greater chance of receiving a fair and affordable loan based on their current financial position. While traditional lenders would be reluctant to part with their cash if an individual is experiencing financial uncertainty, Open Banking provides the transparency they need to make informed and equitable lending decisions.

2) Silky Smooth Transfers with Payment Initiation Service (PIS)

Another powerful function of Open Banking is the increased sophistication of payment methods for online shopping. As consumers become more and more dependent on e-commerce during the pandemic, we need an online payment infrastructure that is fit for purpose.

PSD2 helps payment providers receive open access to accounts without compromising customer security. Instead of asking customers to jump through hoops with account creation processes, additional authentication layers, and negotiating delays between multiple third-parties, Payment Initiation Services (PIS) allows users to pay directly from their bank account.

A recent McKinsey study found a growing number of consumers rank “seamless transactions across all banking services” in their top three considerations when looking for a financial service provider. E-commerce businesses must therefore capture a similar experience for online payments to earn customer loyalty.

Crucially, security is vital during these turbulent times to provide consumers with complete confidence that they’re providing banking access to a trusted provider. Now more than ever, confidence is critical to protect individuals in vulnerable financial positions.

Open Banking in a post-COVID era

While the immediate applications of Open Banking are helping to empower borrowers with access to improved visibility and financing options, preliminary survey findings on consumer sentiment in the wake of COVID-19 suggests digital banking will grow in popularity in a post-COVID world.

Changing consumer behaviours and a growing appetite for financial transparency is set to increase reliance on remote banking. With the likes of South Africa, Brazil and India predicting a 30% increase in digital banking uptake once ‘normal life’ resumes, European nations are also set to follow suit in the coming months.

We hope the successful implementation of Open Banking through PSD2 will support the consumer benefits of digital banking services across Europe, incentivise FinTech innovation and serve as a positive driver for the finance sector as a whole.

Lead the charge with Klarna Open Banking

Here at Klarna, we believe PSD2 will bring clarity to a world of uncertainty and empower TPPs with fair, transparent, and real-time financial services. Open Banking innovation sets the tone for a new era of digital banking that puts the consumer in the driving seat.

We’re excited to lead the charge in building a highly-connected banking ecosystem and simplifying Open Banking to empower individuals and smaller financial institutions. Klarna connects TPPs with the fastest-growing banking network in Europe with a single API and just a few lines of code.

Learn more or request API Credentials for Playground

Navigate through our Klarna Kosma website to learn more about Open Banking, schedule a demo or request your API keys for our playground environment. Let’s connect and get started.