Luna Connect Blog

Automate Credit Decisions with Digital Lending and Open Banking

Apr 13, 2021 9:53:05 PM / by Brian D'Arcy

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Luna Connect and Yapily outline how to automate loan origination and credit decisions with online loan origination and Open Banking

Are document reviews slowing down your credit decision process? In this 30 minute on-demand webinar we outline how the Luna Connect digital lending software has implemented Open Banking \ PSD2 in partnership with Yapily using their banking API connectivity platform.

Topics Covered:

  • What is Open Banking? An introduction to Open Banking & PSD2 including Regulation, Security and User experience
  • Use cases for Open Banking and Open Finance, for example, bank data aggregation, transaction categorisation, affordability and income detection
  • Open Banking examples and user experience demo

Also, check out the Luna Connect Blog for more great content on Open Banking in Ireland and the UK.

Access Webinar Recording

Webinar Transcript

Fergal Geraghty: My name is Fergal Geraghty. Some of you might know me. I'm financial director with Luna Connect. For Luna Connect, some of you might know us. Some of our customers have registered our online this morning.

Those who don't know us, Luna Connect is a financial technology company. We specialize in origination and processing journey for which open banking is part of. Some of our customers are non banks, acid finance, SME finance, credit unions.

The webinar this morning is about 30 minutes long. We'll get to let you back to work, but 20, 22 minutes of content. I want to leave a section at the end for Q&A, about five minutes at the end. We're going to record the webinar this morning. It'll be available on the Mound.

As I said, please, I'm just trying to get forward to the screen through yes. Please put any questions in the Q&A window. I will answer them at the end.

Introductions to this morning, our presenters, delighted that Matt Sweeney from our open banking partner, Yapily, has joined us this morning. We have Brian D'Arcy CEO of Luna Connect.

Brian D'Arcy: Good morning, everybody. First of all, we're just going to set the context around financial services and digital transformation. We're all moving towards online services and every part of our lives and financial services are no different. A key part of successfully delivering these services online is the ability to respond to customers quickly and also to continue to provide the level of support or the level of customer service that become a customer from their financial institutions.

This is particularly important to lending, where the expectation is now that you can get faster decisions, and this is a challenge. For organizations, it's the need to make sure they can not just make faster decisions but also make better decisions. 

We're going to talk about now, just briefly, set the scene of what is open banking and PSD2. Open banking and PSD2 are regulations that were first introduced in the UK and then introduced across Europe. Now we're starting to see them also being introduced in other countries across the world. As you can see, countries like Australia, Canada, Mexico, Singapore, all these other regions now starting to see what has happened in the UK and across Europe and introduce the similar initiatives themselves.

What it really means is that banks are now mandated to make the data they have about their customers available to third parties with their customer's consent. There's a few things around that.

First of all, anyone who wants to access the data must be registered with the regulators, whether that's the Central Bank in Ireland or the FCA in the UK. Then from the customer's point of view and from a security point of view, the customer must explicitly give their consent or give their permission for their data to be accessed.

This is done directly with their bank. The user goes through, logs in to their bank, and provides that consent. There's never any credential sharing with the third party or the person who's looking for access to the data.

Once that consent has been provided, the data can then be securely transferred via APIs directly from the bank to the third party. There's a lot of checks and balances, I suppose, in place there to make sure from a regulatory and a security standpoint that all the correct processes are in place to make sure that everything is secure.

Then, just to take a look, the UK have been ahead in this space. They were about a year, a year and a half ahead of the rest of Europe. They also gather a lot of stats around open banking adoption and how it's actually impacting the economy.

If you look over the last three years it's been used in the UK, you're looking at 2.5 million customers have used open banking in some way. There's been six billion API calls from third parties into banks.

There's over 300 fintechs or third parties using open banking services. You can see that the adoption, while may have been slow at the start, has started to ramp up as it becomes more mature.

Do you want to move on, please Fergal? Now that we're talked about open banking, we want to move on to the next. Where does it fit, or how does it solve a problem for a lender?

Anyone who has been at our previous webinars will be familiar with this slide. It just outlined on problems that lenders face today and the challenges that they face as they make this change to a digital organization. This includes this competition from the digital-first alternatives who are growing.

There's still an over-reliance on face-to-face or phone-based meetings, sending things via email. This then causes incomplete data, which ultimately delays decision. I just spend a lot of that time back and forth, gathering more information from the borrower.

A lot of the times, what you see is that there is existing tech in place, but it can lack the agility to respond as quickly as lenders and customers would like in this kind of rapidly changing environment.

Let's just move on to the next one as well, Fergal. Then if we take a closer look at this and see, where does open banking fit in this flow, and where can it actually help? Here, we're looking at where open banking fits in the process of engaging with the customer.

From the customer's perspective at the top, what we're looking at is it's during that application stage. When they're completing this online, instead of asking them to upload documents or do something like that, you can now request for their consent to access their data directly.

Once this consent has been provided, then from the lender's point of view, it's going to help with analyzing the data because now you have access to the raw data, the same as the banks would have. You're not relying on PDFs and images and things like that being uploaded anymore.

Then that can also help automate the decisioning process, because now you can do things like affordability or income verification without actually having to go through documents. What we see is people would have a PDF. They might be going through it with a highlighter and looking for particular things.

It can even be used later in the process as well while you're maintaining your loan, or managing errors, or things like that. It can help in a lot of stages in the process.

We move on to the next one, Fergal. The next thing we're going to look at here is just walk through that process of the user providing consent. What does it look like? What's that user experience like for the user or the borrower?

Here, we're just showing some of the steps in that process. Some of these are going to have mandate. Some of these are just best practices on how you inform the user or the borrower about the process and how you're going to access their data.

The first thing is you just have to inform them about what you're going to do and what's going to happen and give them the choice. You're giving them the choice that they want to connect. This is from a data protection and also just from user experience point of view.

In our case, what we do is we will ask them, do they want to connect to their bank? If not, they can still follow the old path of uploading documents. Once you've informed them and they've made the decision, "Yes, I want to connect to my bank," then you present them with the available banks they can connect to. Then they will select which one they want to connect to from that list.

Then the next step is they're going to confirm that, "Yes, I want to proceed with this process." What you're telling them there is you're going to tell them right here, "We're going to direct you out to the bank. This is the data that we're going to access," and again just get them to confirm that they're OK with this process.

If we move on then to the next step, it's after that confirmation. Once the user has said, "Yes, I'm happy to proceed," this is a stage where they're directed out to their bank. In this case, we're showing a screenshot from AIB. You're actually directed out to the AIB site where they will then input their login information, the same as they would when they're logging into their online banking.

There's always two-factor authentications as well. If you're doing it on a desktop, for example, there will be a message or the app on their form will pop-up saying please confirm that you want to proceed with this.

All the same security measures that the user is used to working with when they're logging in to their online banking are in place. It gives them that sense of familiarity. It's a bit of positive friction, I suppose, to make sure that they're fully confident that, yes, we are interacting with our bank here and there's nothing else going on.

Then the next step is they can choose which accounts they want to share. All the accounts that they have with that bank will be displayed. Then they can select yes, I'm happy to share these accounts and then confirm that process.

Once they share, the bank will then say you've completed the process and we're now logging you out and redirecting you back to where you had been performing your other process.

Then this is the last step here, the redirect step. That's step six. This is where the user is then directed back into their loan application flow, and it's confirmed that we've established the connection and to show them the account that had been, just to confirm that the account is being connected successfully. 

Then what we're showing here, once you get that data or once the user has completed that process, that now means that, in the background, we now have a direct connection into the bank where we can start to pull in the data from their system.
What that means then is, from the lender's point of view, you can see the transactions the same as you would in a bank statement. Because you have access to data, you have much more flexibility in what you can do with that data.

You can do things like visualizations, calculations, and it will help us if there's part of the decisioning that you need help with. This is showing that lender side addition, what happens there.

What I'm going to do next is we're going to hand it over to Matt from Yapily. As Fergal said, at Luna Connect, we've partnered with Yapily to provide that connectivity into the banks both in Ireland and the UK, and across Europe. Matt will bring us through a little bit more of that process as well.

Matt Sweeney: Hi, everyone, morning. Thanks for having me. As you saw at the beginning, I'm a customer success manager here at Yapily. As Brian just said, I've been working with them closely while they integrate open banking into their solution. Where do we fit into this whole thing? We're a provider and aggregator. We take the complexity out of connecting to thousands of banks across Europe. We take that out of your hands, and we manage that for you. We're putting it all together and making sure that you can connect to them through one simple and secure API.

We're also an AISP and PISP under our SafeConnect branding, which you would have seen on the slide before that, on step six. We are regulated by the FCA, and we're also regulated in Europe post-Brexit. As I said, we enable you to access the financial data and the payment infrastructure that exists thanks to PSD2. Next slide, please?

This is how it works. Luna Connect, plug into one integration, the Yapily API. Then, through that, you get to thousands of banks across Europe. We try to minimize ourselves in the user journey. We're a technical service provider that allows our clients to take that financial data and payments infrastructure and use it in a way that adds value to your clients.

We started our journey in the UK, but now we've moved into incredible markets across Europe, like Ireland, Italy, Germany, France, Spain, and many more to come as well. Next slide, please?

These are the two main functionalities of open banking, AIS and PIS. AIS is account information services, which is what we're really talking about here today. This is allowing the user to authorize access to their financial data to a third party, so really putting the control of data back into the hands of the user.

From there, we can retrieve stuff like balances, transaction history, monthly statements, and identity information.

The other side of this is payment initiation services. Here we're able to initiate bank-to-bank payments. They're quick, secure, and don't involve any of the moving parts that a card payment would, like Visa, MasterCard, those kind of things.

We can do simple domestic single payments, but we can also do international payments, recurring payments, like standing orders, scheduled payments, and even bulk payments. Next slide, please?

To give you an idea of what we're seeing in these spaces for AIS, we have some really interesting stuff coming through. Our clients are using it for stuff like KYC and creditworthiness, interconnect included.

We also have customers using it for loyalty and reward schemes, looking at transactions and providing points or discounts to encourage repeat business. We see personal finance management, analyzing spending, helping people save or invest.

A big part of AIS is it need to be an account in bookkeeping space. Where Yapily, for example, work with IRIS KashFlow to integrate open banking to get real-time, up-to-date balances and spending reports.

In the PIS space, we don't see a diverse range of use cases, but we certainly see some innovative stuff, great online checkout solutions using bank-to-bank payments, e-wallet top-ups, like crypto sites and any prepaid card, stuff like that. Then secure bank transfers, either consumer, peer-to-peer, or even in B2B, we can initiate high-value payments, quick and easy, through open banking. 

To give you an idea of what we're doing at Yapily with this data, like I said, we want to be in the background, but obviously, with all of this data, we can add some value and enrich it in some way.
The first thing we're looking at, or we have done already, is categorization. We have incredibly accurate categorization that uses machine learning and merchant information to give each transaction one of our 16 categories and 92 subcategories.

We've paid special attention in this area for high-risk spending, anything that relates to things like short-term loans, gambling, or any other categories which may speak to a user's financial health.

We can also detect a user's income. Especially for lenders and anyone that's trying to detect creditworthiness, we've paid special attention here on any people that receive multiple streams of income or irregular streams of income. Maybe they work a gig economy. Maybe they work a commission-based job.

We're doing everything we can to be able to detect these and give you an idea of how regular and reliable this person's income is. This is already today. This is something we offer already. We're building on this. 

This is a couple of things that are coming soon. First of all, balanced forecasting. What we're really doing here is taking those two pieces from before, income section and looking at a user's transaction history and predicting where they're going to fall over the next 30, 60 or 90 days. Are we expecting them to have an increasing balance or are they going to be going into their overdraft?

Once this is in place, we'll be able to give a good idea of a user's affordability. We want to be able to offer a one kind of shot health score for a user. Looking at their spending habits, looking at their income reliability, and also looking forward at their balance, we can provide you with a good idea of is this person worthy of credit? Will they be a good person to lend to in the future?

Open banking is still something that's incredibly new. It's only around three years old. We're learning every day what we can do with this information. We're always building on what we have and improving the services. Companies like Uni-Collect are driving this forwards and making sure that we can add value to clients by using what's available to us now.

Thank you for your time. I hope that gave you an idea of what we actually do and what open banking is about. I'm happy to answer any questions in the Q&A.

Fergal: Thanks very much, Matt. Just looking at the Q&A here. Here is a question just coming in. Does the lender need to be regulated?

Matt: We are an AISP and PISP, so we regulate ourselves. We can provide these services. Now customers can work under us on our behalf and provide these services.
Noted that after you regulate themselves, we do have customers that regulate themselves and still use us as a pure technical service provider rather than a TPP as well. That now, I don't.

Fergal: Good. Another one here. How long does the customer consent last for?
Matt: Happy to say this one as well. A consent for account information is valid for 90 days. A user can revoke this at any point for their online banking app. They have full control over when they give access to the data and when they take that away as well. You as the third-party provider can reauthorize this with the customer's consent again.
It's just a rolling re-authorization that we're doing. There is talk in the UK at least about this being extended for 90 days, but I think we're still a little bit off that.

Fergal: Another question here. What data do I get on the backend?  

Brian: It was easy as when to explain that whatever you see when you log in through an online bank is the data that's generally made available. Things like the account information, the balances, and your transaction history, those types of things. Any kind of information that we choose during your online banking in a bank state.

Fergal: I think you talked a little bit about this, Matt. What country does the Yapily cover?

Matt: We have first-year coverage. Biggest market we're at the moment, we'll see UK, Ireland, France, Germany, Italy, Spain, Austria. We're looking to expand across year, Feb in this year as well. Our goal is to be Pan European at the moment. Obviously, globally eventually.

Fergal: Then, just another one relating to bank data actually. How far back is the bank data history? How far back can it go? I assume that's historical bank.

Brian: Yeah. It depends. It's usually a minimum of 12 months of data is available. Some banks make more available, but it's generally around the 12-month mark.

Fergal: I'll just take one or two more just conscious of time. Here's an interesting one. How have the Yapily prepared for Brexit, with connection with EU banks?

Matt: That's a really good question, it's incredibly complex. There's a lot of moving parts in this on a very high level, a very basic level, to work in Europe and with any usury. We needed to become regulated with any. That's exactly what we did.

Previously, we were only registered in UK, and now we have our office in Vilnius in Lithuania. We're regulated there, is a really good fintech scene, the likes of Revolut. I've also set up shop there, so we're in good company. Essentially we're regulated there now, and we've have registrations for all the banks in Europe through our registration now.

Fergal: Good. I'll wrap it at that on the Q&A. Thanks, Matt and Brian, for those answers there.
As I said, this was a short webinar this morning, just keeping here for 30 minutes of your time. I hope you found it interesting. Thank you for joining this morning.

If you have any further questions, want a deeper dive into some of the aspects we talked to this morning, our contact details are there on the screen. We will send out this webinar on the Mound, so you'll receive an email, everybody registered, everybody attended.

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Tags: Digital Lending, open banking, psd2, fintech

Brian D'Arcy

Written by Brian D'Arcy