Can open banking help the credit invisible to be seen?

Open banking is here … or at least on its way. The Consumer Financial Protection Bureau’s final Rule 1033 establishes new standards for managing and transferring consumer financial data. As with any change, there is friction, pushback and concern—but is there also an opportunity for credit unions to live their mission and help the credit invisible to be seen?

Let’s be clear, Rule 1033 is not without its issues. On paper, the amended Dodd-Frank Act ticks all the right boxes: Placing consumers in control of their personal information, removing junk fees, enhancing competition etc. In practice, however, credit union bodies have raised some valid concerns—primarily around data security and governance, and the potential costs required to increases standards for both.

This could seem moot when less than 10 percent of credit unions fall under the rule’s remit (only institutions with more than $850M in assets must comply) but the reality is, legal obligation or not, credit unions can ill-afford to lag further behind on digital capacity.

Instead, credit unions should consider these financial implications as an investment rather than a cost.

Solving the credit system’s Catch-22

Traditional credit scores rely on a limited, specific set of financial data to assess borrowers' worthiness. This model excludes those who pay their bills on time, in addition to a wide swath of alternative data points, such as rent, utility bills, and/or streaming subscriptions.

Similarly, immigrants to the country often find their credit history doesn’t move with them and, upon arrival in the U.S., cannot access new lines of credit to re-establish their score.

In total, more than 45 million individuals in the U.S. find themselves excluded from mainstream financial services, often despite being reliable, liquid, responsible borrowers. This vast cohort—the “Credit Invisible”—represents some 13 percent of the nation, and faces significant barriers when trying to access loans, mortgages, and other financial products; the very challenges facing the very people credit unions were established to solve.

Embracing open banking could change this.

Increasing access to credit

Despite Rule 1033’s shortcomings, open banking does have the potential to significantly enhance credit access for the credit invisible. Foremost is the ability for lenders to use broader, deeper credit data than those reported on traditional rails.

Utility payments, cashflow data, banking transactions etc. can all come into play now, thickening the credit file for millions of consumers.

Of course, this helps credit unions reach, engage, and support millions of potentially net-new members, but it also opens up (if not outright demands) the opportunity for innovative product development.

Now, lenders can more intentionally develop solutions and programs that could have been deemed too risky previously—at least at scale—safe in the knowledge that there’s additional information available to make informed decisions about borrowers.

Personalized financial guidance

Better yet, that same information can be used to personalize financial planning and counseling tools.

Of course, the concept of personalized financial advice is nothing new: Credit unions have positioned that personal insight as a differentiator for generations, while mature and nascent fintech alike are no strangers to claiming the same. However, access to real-time data from a plethora of new sources—filtered through an endless supply of increasingly sophisticated AI solutions—is fertile ground for providing truly personalized financial advice.

A call to action for credit unions

Yes, there are risks. Yes, there are still unknowns. Yes, change is always difficult. But the opportunities for credit unions (and fintech) to embrace open banking and markedly improve financial lives is clear.

Instead, it becomes a question of mindset: Are credit unions enthusiastically investing in new technologies that enable them to live their mission, or are they begrudgingly complying with a contentious regulation?

In fact, credit unions don’t even need to ask the question. Instead, educate overlooked, underserved communities on what could be possible, and let them tell you whether they want to be seen or not.

If you’re looking to rethink your strategy, make financial access and inclusion a more prominent part of your brand, or just up your game when providing financial solutions, reach out— we’re here to help.