What is Open Banking? And how can it impact credit and lending?

NB: This is not advice. Late repayment can cause you serious money problems. For help, go to moneyadviceservice.org.uk.


Have you seen the term ‘open banking’ but have no idea what it actually means? Well, you’re not alone! We’ve teamed up with Plend to break down what open banking really is and how it affects you. But first, we’ll answer the question you are asking - ‘what is Plend?’


Launched in 2022, Plend is a social impact personal lender on a mission to create a financially inclusive world where everybody can achieve their goals. Using new methodologies, Plend provides affordable, long term loans to people who potentially don’t have access to them. At the moment, how much credit you (or a business) can be loaned is determined by a little thing called your ‘credit score’ — which takes into account things like how you repay back your existing loans, if you have a mortgage, how many times you’ve changed address, and even if your electoral roll matches your current address. Plend are doing things slightly differently. They use a person’s transaction history to offer a loan rather than solely looking at credit scores. But how do they do this? By something called ‘Open Banking’.



Open Banking gives Plend a unique understanding of an individual's finances to make more insightful, informed, and personal lending decisions. It’s a new way of sharing data (it’s just over 3 years old) that gives organisations outside your bank access to your financial information. This means, with your permission, they can pull up to 12 months of transaction data from your main bank account.

The great thing is you, ‘the customer’, own all of the data that shows you where you spend your money , banks are just the custodians of that information (it’s written in law). So when a customer gives their permission to any third party (such as Plend), that third party is able to request and download that data. This helps organisations that are designed to increase your financial well-being whether that’s through helping you budget, or allowing you to see all your bank accounts in one place, or to do their job.


So, how does it work?


There are two ‘tokens’ that are generated when you grant access to open-banking data. One is an access token, which allows access to 12 months of transaction data - formatted in a very similar way to what you’ll see when you view your bank transaction statement.


The other is a refresh token - which means for up to 30 days, the company you’ve given the token to can pull the latest snapshot of your transaction data again.


It’s so important to make sure the company you are giving your open-banking data to is clear on what they will use the data for and how long they will store your data for. Usually, it’s limited to the service the company you’re providing your data to is offering i.e consolidating all your bank accounts. What you don’t want is a clause in the agreement that allows them to re-use your data with third parties for monetary benefit - or at least, if you don’t mind, know what your data might be re-used for!


Now that we know what it is, how does open banking benefit me?


Access to open banking data allows banks and financial services providers to do so much more to help our financial well-being.

Open banking data has the potential to transform who can access affordable credit in the UK, as well as other cool things like increasing the efficiency of payments. But let’s go with the credit element. At the moment, traditional credit scoring is based on historical information from the big three credit agencies (Experian, Equifax and TransUnion). These agencies pull in information such as whether or not you have a mortgage, if your electoral roll matches your current address, how many times you’ve moved address, and whether you’ve taken out and repaid credit products to determine your ‘credit score’. This can put you in a tricky situation if you don’t have enough information, maybe because you're too young to have built up enough credit history, or you’re new to the UK. Not having enough information can reduce your access to low-interest loans. Equally, if your credit score has room for improvement, maybe because you’ve had problems replaying loans or bills in the past six years, it will be hard to gain access to loans and products you may need to buy a car, get funding for education or a loan to do up your house, to access the best rates.


When companies look at the last 12 months of transaction history, it gives a modern, up to date and accurate picture of what you can afford to repay, regardless of problems you’ve had in the past or if you’re young or new to the UK. They can see your monthly salary, how much leftover allowance you have in your account at the end of each month, and whether or not you pay regular items like rent or utility bills - these often aren’t picked up by the credit reference agencies. They can also look at how much is spent on eating out and other luxuries to see where you could cut back spending.


All this means companies can give you a financial product that genuinely suits your needs, lifestyle and affordability.


Remember, any loan should be considered carefully depending on your financial situation and this article should not be taken as advice.

Fempire Finance


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