The global financial landscape is changing at an unprecedented rate, driven by technological advancements, consumer behavior, and regulatory reforms. Despite these developments, banks face a continuing challenge: accurately assessing borrowers' affordability and creditworthiness. A considerable gap in affordability insights frequently leads to increased repayment risks, which affect both lenders and borrowers. However, the rise of open banking technology, presents a new chance to revolutionize the way creditworthiness is assessed.
Lack of Affordability Insights and Its Consequences
Traditionally, banks used limited data points to assess borrowers' affordability and creditworthiness. These assessments are based on credit reports, previous transaction data, bank statements, and, in certain cases, self-reported expenses. However, this information only provides a partial picture of a borrower applicants financial situation. It disappoints to reflect the intricacies of day-to-day expenses, commitments, or sudden changes in spending behavior, all of which can have a substantial impact on a person's ability to repay debts and potentially contribute to risk on bank operations.
Several risks may emerge:
- Inadequate Estimation of Financial Pressure: Borrower applicants may appear financially solid based on past data, but without knowledge of their daily financial commitments and expenses, banks may underestimate their genuine financial strain. This can lead to over-lending, which increases repayment risk
- Over-reliance on Credit Scores: While credit scores provide an overview of a person's repayment history and liabilities position, they do not always reflect current financial circumstances. A borrower may have a high credit score but be overburdened with new financial responsibilities. This overreliance on historical data ignores current affordability challenges which a borrower might be undergoing.
- Increased Default Rates: Lack of proper affordability insight might lead to greater default rates. Loans made to those who cannot afford them raise the likelihood of default, which harms both the bank's balance sheet and the individual's financial future.
- Missed Chances for Financial Inclusion: Many individuals who manage their finances responsibly might not possess high credit scores due to a limited credit history, or might be an applicant in the new country, despite being highly capable of managing loan payments. The conventional credit system often neglects these consumers, restricting their access to credit. For example, many self-employed, gig economy workers might possess good affordability but remain excluded from bank led financing
Here’s how Credability use cases can significantly improve creditworthiness assessments:
- Real-Time Access to Financial Data: Credability Creditworthiness use case can provides banks with up-to-date information on a customer’s financial activities, including income, regular payments, and expenses. This real-time view offers insight into not only historical trends but also the current management of the customer’s finances. It enables banks to identify potential repayment risks early, such as unexpected spikes in spending or drops in income.
- Improved Cash Flow Analysis: With the use case, banks can track daily, weekly, and monthly cash flows. This allows accurate affordability assessment by understanding how much residual income a borrower applicant has after accounting for essential living expenses and other obligations. It offers a far clearer picture of financial health insights than a static credit score.
- Personalization: Credability enables a tailored approach to lending. By gaining detailed insights into a borrower applicants’ financial condition, banks can personalize the disbursements such as adjust loan terms, interest rates, and repayment schedules to align with the true affordability to repay. This minimizes default risk and enhances customer satisfaction. The predictive affordability supports personalized loan offers to the approved applicants.
- Including the Underserviced segments: Many people, especially self-employed pr gig economy contributors are classified with limited credit histories, face difficulties in accessing bank led financing credit despite managing their finances responsibly. Credability use cases enables banks to utilize alternative data, such as regular payments for rent, utilities, or subscriptions, to assess affordability and include these additional segments thereby contributing positively to banks balance sheets. This approach allows financially responsible individuals who are often overlooked by traditional credit systems to gain access to credit.
- Proactive Financial Distress Detection: Credability enables banks to monitor real-time financial activities, allowing for the early detection of financial distress. If a borrower experiences an unexpected drop in income or a significant rise in expenses, banks can take preemptive measures, such as restructuring loans or offering financial support, to lower the risk of default thereby managing the customer lifecycle efficiently.
The Future of Lending in MENA: Data-Driven and Customer-Centric
As financial technology advances, the future of lending will hinge on how effectively banks can leverage data to make smarter decisions. Credability provides the tools to move beyond traditional, often rigid credit assessments toward a more dynamic, real-time evaluation of borrower affordability. By utilizing open banking data through licensed aggregators, Credability also supports regulatory objectives for greater transparency and fairness in lending.
For banks, adopting this approach isn’t just about reducing repayment risk—it’s about staying competitive in an increasingly digital landscape, fostering stronger customer relationships, and promoting a more inclusive financial ecosystem. By incorporating open banking insights into their lending practices, banks can shape a future where lending is safer, more intelligent, and better aligned with the realities of today’s financial environment.
In a time when financial behaviors are rapidly evolving, relying solely on outdated models poses risks to both banks and borrowers. Credability addresses this by offering a more comprehensive, real-time understanding of affordability. By utilizing this technology, banks can minimize repayment risks, enhance lending decisions, and support a more inclusive and transparent financial system. Now is the moment for financial institutions to adopt open banking as a critical tool for assessing and managing creditworthiness in the future.
