Misa Han| Australian Financial Review| 13 July 2019
Two customers walk into a bank. Both are on identical incomes, live in the same suburb and have the same number of children.
Customer A, who has been saving regularly and paying off the credit card in full each month, will be able to get a $10,000 personal loan at 5.99 per cent. But customer B will be stuck with 25.99 per cent interest – thanks to making cash advances on credit cards and large bets on online sports gambling.
Having one credit card can help to improve customers’ borrowing profile – provided they pay it off in full each month.
— Bob Belan, Symple Loans
This sort of differentiation is already happening under the business model of personal loan start-up Symple Loans, which has been using customer data to make decisions about lending and pricing since it launched in January.
And with the next phase of open banking scheduled to kick in for major banks in February, details such as customers’ credit and debit cards, bank transaction and savings accounts, and mortgage accounts will become more readily available for sharing. This means customers can no longer rely on their income or postcode to access banking products at the best price possible.
So they’ve got until February to clean up their act to access cheaper rates and cut the time involved in switching home loans.
“The more data they have, the better the accuracy of the data and the greater insight they have about you,” KPMG partner Zein El Hassan says, which can in turn determine the type of product and pricing offered to customers.
Symple Loans is one of a number of fintech start-ups that already use one-time access (like a snapshot of your finances at a point in time) to banking transaction data to assess customers’ ability to repay personal loans. Symple opened its doors to customers in January and has nearly $10 million on its loan book.
“It’s never too soon to begin to apply more financially prudent behaviours,” co-founder and chief executive Bob Belan says.
Open banking to rewrite the rules of lending
Customers who apply for a personal loan through Symple are graded from A to F. An “A-grade” borrower will be able to access the loan at 5.99 per cent interest, whereas the interest rate for an “F-grade” borrower will be much higher at 25.99 per cent.
Before comprehensive credit reporting kicked in in October 2018, lenders based decisions on self-reported data and any black marks on customers’ credit history, such as a bankruptcy record, a default on a loan or a court judgment.
Comprehensive credit reporting gave lenders access to 24 months of customers’ repayment history on credit cards and utility bills.
Symple already takes advantage of customer data to monitor two “problem areas”: cash advances on credit cards, which can be a potential indicator of financial stress; and gambling activity as a percentage of customers’ income, which Belan says can raise a red flag. These are the types of data that will become readily available to share among major bank customers as of February 1.
“Gambling itself is not an issue. It’s a legal activity and we don’t penalise customers for that. What we do try to understand is whether or not we believe it would affect their ability to repay their loans,” Belan says.
Credit card use
He says having one credit card can help to improve customers’ borrowing profile – provided they pay it off in full each month.
“One of the best things a customer can do is having a credit card and using it responsibly,” he says. “If you can demonstrate you are using it as a purchase vehicle and not a lending vehicle, it can demonstrate you have been financially responsible.”
Co-founder and chief operating officer of buy now, pay later start-up Zip Peter Gray says lenders traditionally used risk predictors such as postcode to assess customer borrowing capacity. This is likely to change under open banking.
“We make a decision based on individuals rather than someone who looks like them,” he says.
Like Symple, Zip uses one-time access to customers’ banking transaction data to verify their income and expenses. The verified data is then compared to the higher of a statistical benchmark known as the household expenditure measure or customers’ own estimates to make sure their expenses are accurately reflected in making the lending decision.
Depending on their borrowing profile, customers’ credit limit can vary from $350 to $1000 a month for its Zip Pay product. (Ironically, the use of buy, now pay, later service has been linked to reduced borrowing capacity when applying for home loans.)
This means expenses are as equally as relevant as income in assessing loan applications, Gray says.
Macquarie-backed home loan provider Athena is another fintech that is ahead of the open banking timeline and already uses customer data to approve home loan applications.
Customers who apply for a home loan at Athena can consent to using a third-party provider Proviso so Athena can read and pre-populate all the expense information based on the customers’ banking transaction data.
This means there is less risk of Athena relying on conservative benchmarks such as the household expenditure measure or self-reported information from customers who can underestimate their expenses.
Easier to refinance
Athena chief executive Nathan Walsh says open banking won’t change what data mortgage lenders need to look at, but it will make it quicker and easier for customers to refinance home loans.
“In the old days it used to be really slow and only about 5 per cent of customers were refinancing each year, even though the majority of Aussies could get a much better deal,” he adds.
Walsh says customers can improve their chances of refinancing a home loan if they can demonstrate a solid savings record. They can also improve their borrowing power by getting rid of unused credit cards or reducing the limit on these cards, because lenders are legally obliged to look at their financial situation if they maxed out their credit cards.
“Plastic can be toxic. The high interest rates that get charged on credit cards can make it much hard to afford the mortgage as well,” Walsh says.
David Hyman, managing director of online mortage broker Lendi, said mortgage lenders currently don’t use customer data to make product and pricing decisions but they may do so in the future.
Already, the broker uses banking transaction data to assess their borrowing capacity. Spending items that can raise a red flag include repeat spending on gambling, payday lending transactions and regular cash-outs that customers can’t explain.
“With open banking, it’s highly probable transaction data will become more important to your loan application and customers should turn their mind to it,” Hyman said.
KPMG’s El Hassan says open banking will allow financial institutions to get a fuller picture of clients’ spending habits.
“At the moment if you go to a bank and if you’re a new customer, you fill out an application form and the bank will make a decision using their internal data about the type of customer you are – but it’s still a bit of a guessing game.
El Hassan said the customer data accessed via open banking can be a “double-edged sword” depending on what the data actually looks like.
This means customers’ records of discretionary spending habits is as important as ever.
“You may be on a very good income, live in the right suburb, work in a professional job and have a stable family arrangement, but if your spending habit paints a very different picture about you, that information can be used against you,” El Hassan adds.
How to clean up your act
- Close any unused credit cards. Symple Loan’s Bob Belan says the number of credit cards and the total limits on those credit cards will be taken into account in assessing loan applications, regardless of whether customers use them or not.
- Pay down existing credit card balances.
- Avoid cash advances on credit cards. “It can be interpreted in a number of different ways, and often not in positive ways,” Belan says. “That can be a potential indicator of financial stress and we would encourage customers in the lead up to open banking to only use cash advance for absolute emergencies, because it will affect the interest rate we offer that customer.”
- Consolidate high interest rate debts using low interest loan options.
- Save regularly. Belan says regular savings show up on customers’ transaction data and having a savings balance can affect their creditworthiness.
- Be mindful of discretionary spending such as gambling and impulsive spending.