Imagine you’ve been retired for a few years. You’ve paid off your mortgage, you don’t have other loans, and you’re financially secure. Now you want to borrow some money to help one of your children purchase a home.
And now consider a different situation: You’re a recent immigrant, and you need a loan to open a business.
In both cases, a lender could sometimes reject you—not because you have any blemishes on your credit report but because there isn’t enough up-to-date information in that report. In the traditional credit-scoring system, if you haven’t borrowed money recently, it’s almost like you don’t exist.
Taking root in the financial world is a simple concept that could change how you interact with your money—and, yes, in both these cases it could help you gain access to that loan, too.
It’s a concept called “open banking.” At its core, open-banking tech is software that lets you give lenders or fintechs access to some of your banking data. It’s akin to the privacy permissions on your phone that allow an app to use your camera or storage. And, as with app permissions, you’re in control of how your information is shared. You may be using open-banking software already, since it’s the tech infrastructure powering some of the most popular financial apps, including Dave, a money-management app that helps customers avoid overdrafts, and Robinhood, the stock- and options-trading platform.
This technology is part of a revolution in commerce and banking, with consumers embracing digital payments more quickly than ever before. That trend was already in motion for years and was sped up by the pandemic, which forced a huge shift in consumer adoption of online shopping and contactless cards. In this new digital world, open banking empowers consumers to make the best financial choices for themselves and can bring more people into the global economy by making it easy for them to save and send money.
Open banking will ultimately help just about everyone with a credit card or checking account get more out of their relationship with their bank. It gives you the ability to take the financial data that’s usually housed at your bank and have it start working a lot harder for you. It should also build more trust with millions of consumers by giving them more control over their information.
For instance, you probably have accounts with a variety of banks and apps. Open banking could eventually let you move the information for all those accounts into one real-time dashboard of your choosing, so you can see all your money in one place, in an atmosphere where your financial information is well protected. With all that data brought together, personal financial management tools can be overlaid atop that information to give you deeper insights into your spending and savings.
The potential for that kind of simplicity and convenience will encourage financial services companies to keep innovating to make sure they are providing you the very best user experience—knowing that you may start using a different service if you aren’t satisfied.
Added to that, open banking will increase access to credit to help a lot of people who couldn’t previously get loans for home down payments, school tuition, or new vehicles. If you decide to use an open-banking service in applying for a loan—and millions of people already have—you allow a lender to verify your income and look at your cash flow details, including cash balance and spending patterns. Those details, together, can offer a far better picture of your creditworthiness than a single credit score.
Oftentimes, credit scores don’t offer an up-to-date picture of your finances if you haven’t borrowed money recently. These open-banking services fix that problem.
I find this kind of technology so exciting because it helps people take advantage of valuable financial tools that before were just out of their reach. It’s with these kinds of services that our hypothetical excluded borrower—a retiree or a new immigrant or, really, anyone else—can secure a loan. That kind of work will bring many more people into the digital economy, strengthening it and making it a more equitable place.
I know this greater convenience and broader access can’t be achieved without trust. As tech companies and banks develop ways to put your financial data to greater use, there must be controls, there must be transparency, and there must be a system where data gets used only when consumers grant permission.
That means the consumer needs to be at the center of what we do as we create this new ecosystem. Done right, it can create more financial opportunity for everyone.
Craig Vosburg is the chief product officer of Mastercard.
