The front page of the finance innovation lab's report on credit unions and open banking.

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Open Banking has been hailed as a revolution in financial services. But what does it mean for organisations, like credit unions, who are at the forefront of supporting people to manage their finances and access fair services?

Download this new briefing today, Open Banking: An introductory guide for credit unions, where  Finance Innovation Lab’s Head of Programmes, Marloes Nicholls, demonstrates the importance of this question, and the need for wider debate and action across the credit union movement – and beyond. Published by the Centre for Community Finance Europe.

Lending Better, Together

Download this short visualisation today, as it brings to life three of the use cases identified in the Finance Innovation Lab’s recent report. Demonstrating the potential of open banking to transform the lending process for credit unions and their members.

View the infographic.

A photograph of Marloes Nicholls.
Open Banking: an introductory guide for credit unions is a new report published by the Centre for Community Finance Europe and written by Marloes Nicholls, Head of Programmes at the Finance Innovation Lab. In this blog, Marloes shares some background to the guide and her key findings.

To demonstrate the importance of the question, ‘What does open banking mean for credit unions?’, and the need for wider debate and action across and beyond the credit union sector, I partnered with the Centre for Community Finance Europe to publish a new guide on Open Banking for credit unions.

 Open Banking and credit unions

Open banking has reached the credit union sector. In researching for this report, I discovered that at least 10% of credit unions have formed partnerships with fintechs to use open banking. For example, Central Liverpool Credit Union (which is working with Lab Fellows NestEgg.ai) is using its members’ data to improve the accuracy of credit risk assessments and the efficiency of their loan application process. This has meant they can now offer loans to people who were previously declined on the basis of traditional, out-dated, credit data alone. As a result, in the run up to Christmas 2019 they lent £700k more than in the same period 2018 and saw their fastest ever winter membership growth rate.

Central Liverpool Credit Union’s online loan application process is also fast – capable of competing with the instant decision-making and user experience offered by many high-cost, short-term lenders, and potentially freeing up staff time for other work that is better suited to in-person meetings with members. As a part of Nesta’s Affordable Credit Challenge, they started developing an app for members which will use open banking data to help them better understand their own financial situations and the action they can take to improve their financial health and creditworthiness.

My research and analysis suggests that, combined with appropriate IT, oversight and governance, open banking has the potential to radically improve credit union operations, responsible lending decisions, and member engagement and support. However, I also uncovered and anticipate serious risks and challenges. These include using and misinterpreting open banking data in ways that lead to less responsible lending decisions, ballooning exposure to the risks of sharing members’ data with third parties, and – most importantly – heightened financial exclusion and reduced support for the people who need it most. If open banking is to contribute to shaping a future financial system that delivers better outcomes for local communities, and is not to undermine a sector that is already trying to fix the problems of our broken financial system, then it is vitally important these risks and challenges are understood.

For credit unions to harness the opportunity open banking presents, and ensure that it is used in a safe, impactful, cost-effective and sustainable way, will require movement-wide collaboration. At the Lab, we look forward to continuing to work with credit unions, including with the Centre for Community Finance Europe, and policymakers, including the Treasury financial services team who I presented the early findings of this research to.

Open banking matters

Whether a credit union decides to use it or not, open banking matters. It is set to be a major feature of our increasingly data-driven financial system – and our lives. Already, the open banking agenda has expanded to ‘Open Finance’, whereby people could share a wider set of their financial data (such as pension, mortgage and insurance data) with third parties. To ensure that this major development evolves with the interests of people and planet at its heart, the Lab will be calling for organisations like credit unions and responsible finance providers, along with debt advice agencies and other charities, to be meaningfully involved from the outset.

The Finance Innovation Lab has been working on open banking, and in particular exploring its implications for the financial system, people and planet, since 2018. Our work has included hosting a roundtable and publishing a briefing on the opportunities and risks of open banking for financial health in the UK, co-hosting the 2018 open banking convention with the Open Banking Implementation Entity, and working with consumer groups to produce the Open Banking Consumer Manifesto. In 2019, we selected data as the theme for our incubator Lab Fellowship and supported 10 data-driven, purpose-led financial innovations, including open banking powered apps like CoGo and Bippit.

If you’d like to find out more, and explore ways to build on this work, contact marloes@financeinnovationlab.org. This blog is edited from an original version that appeared on the Finance Innovation Lab website, here.