Open Banking Enhanced Credit Could Undermine Fairness Rules

Could Open Banking be against regulator's fairness requirements?

Credit Score
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Using open banking-enhanced credit scoring tools could undermine the rules around treating all customers fairly, according to the world’s fourth-largest credit ratings agency.

DBRS Morningstar has raised concerns about how the tool could give customers who use it an advantage over those who don’t, which could contradict the strict requirements set out by regulators for firms that offer credit and other financial products.

Open Banking = Open Future?

Open banking involves the use of data sharing tools to give financial companies access to the banking and payment information of a customer. When a customer agrees to open banking, they give the financial company involved secure access so that they can see the history of payments made, missed payments and other financial transactions.

It’s designed to help give customers a more fair and reasonable credit decision. Because it eliminates some of the estimation involved in just relying on a credit score, it means that customers are given access to credit they can afford only, based on their spending.

The concerns relate to new tools that are designed to take advantage of open banking to enhance a credit score. The tools themselves aren’t really unethical – they don’t create information or paint a false picture. Instead, they work by making more payments visible to the credit supplier than normal open banking tools can see.

So while a standard open banking tool will look at existing credit payments, gambling sites and a few other utilities, these tools will also help include Netflix payments, or council tax payments, in the scoring. More successful bill payments will likely boost the applicant’s score.

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    Open banking broadly offers a more open and honest future when it comes to credit checking finance applicants. But the new concerns from DBRS Morningstar raise questions around whether this is a level playing field, or if customers who don’t use open banking-enhanced tools are not treated fairly.

    Concerns Raised

     The credit boosting product has been designed to help customers qualify for credit that perhaps they wouldn’t normally qualify for. The evidence of good repayment history and other data from their bank account helps improve their credit score…

    …However, DBRS Morningstar notes that this could raise questions surrounding the ‘treating customers fairly’ norms if some applicants signing up to this product receive the benefit of an improved credit score, while others not signing up do not. This could arguably be viewed as no longer providing a level playing field and brings into question the reliability of the credit score.

    There have been further concerns raised around this specific credit boosting tool, since it also promises that customers using it will never see their credit score go down because of the tool. DBRS Morningstar argued that this may be a false promise.

    Should the Open Banking evidence show that the existing credit score for [the applicant using the credit boosting product] may actually be inaccurately high, such as regular missed payments, regularly coming close to going into overdraft, then [the other applicant] may arguably be treated with further disparity.

    Around two million people are currently making use of open banking, according to research by the Open Banking Implementation Entity.