Open banking will facilitate home loan switching

Overcoming barriers to switching to increase competition in the financial services sector was a focus for the Financial Conduct Authority (FCA) in 2019, with the mortgage market coming under particular scrutiny. In March, the FCA released its mortgages market study and concluded that although switching is relatively high, many customers don't move when they could be getting a better deal. The FCA's study eventually led to changes to responsible lending rules to address the legal barriers to switching, but the FCA also attributed customer inertia to a lack of useful tools to help customers make effective choices

At the heart of open banking is the idea that customers can control their own data, and banks should not prevent the movement of information and customers. Open banking technology can and does draw on this simple foundation to make it easier to share, compare deals and seamlessly switch from one mortgage provider to another. This is because open banking gives banks and switching service providers direct access - with the customer's consent - to the customer's financial data held in their payment account. This can be harnessed in a number of ways, and there are already a range of innovative solutions that seek to alleviate barriers to switching. 

For example in the UK mortgage onboarding services such as Habito seek to use the data they can now readily access to reduce the time taken for a residential mortgage application to be approved from weeks to just days. Others, such as Trussle and Dashly, provide live data on the best mortgages for their customers based on a range of information gathered via open banking – from the customer's house price, anticipated exit fees, repayment history and even salary projections. 

Open banking also has the potential to enhance existing automated credit decision-making processes. Direct access to customers' financial information via APIs means this data can be fed directly into decision making processes, saving banks and customers time and money. This data can also be used to speed up 'Know Your Customer' and other anti-money laundering checks, which are often responsible for slowing down the switching process. In Australia, neobank Xinja is focused on these solutions. It uses a combination of artificial intelligence and process automation to reduce the documentation requirements for account opening to a single form of ID. 

All these solutions are aimed at taking the hassle out of switching lenders – from comparing providers up to the point of onboarding and finance approval. In addition to using open banking to gain new customers, however, mortgage providers should be thinking about how they can be using these technologies to retain existing customers. For example, banks could monitor existing account information, such as repayment history or salary increases, as well as that from linked providers, and then use this to offer better deals to customers as a reward for loyalty. 

Nearly 30% of customers are happy to let a mortgage switching provider automatically switch them to a better mortgage deal. That number is as high as 40% amongst millennials, and can only be expected to rise as more young people enter the market and technologies continue to develop. Now is the time for lenders to be thinking about how they could be using open banking technology offered by third party fintechs, or developing their own in-house solutions, to respond to these demands.

Lauren McCarthy is an expert in financial services regulation at Pinsent Masons, the law firm behind Out-Law.