The challenges in underwriting and how open banking can help

6 min read|Published December 16, 2022
The challenges in underwriting and how open banking can help

With traditional loan origination processes, accurately assessing an applicant’s creditworthiness is often challenging. To overcome this challenge, lenders should adopt digital tools that help optimise both the underwriting process and the customer experience. Let’s dive deeper into how open banking can help provide a smoother, safer and more accurate loan application journey.

TL;DR – Quick summary
  • Accurately assessing creditworthiness using traditional loan origination methods is often challenging as the process relies too heavily on manually collecting information.

  • Digital loan origination processes powered by open banking are often faster, safer and provide a better customer experience.

  • As assessing affordability is becoming increasingly vital in today’s macroeconomic circumstances, it’s high time for lenders to optimise their underwriting processes.

TL;DR – Quick summary
  • Accurately assessing creditworthiness using traditional loan origination methods is often challenging as the process relies too heavily on manually collecting information.

  • Digital loan origination processes powered by open banking are often faster, safer and provide a better customer experience.

  • As assessing affordability is becoming increasingly vital in today’s macroeconomic circumstances, it’s high time for lenders to optimise their underwriting processes.

Getting a holistic view of someone’s financial situation is tricky, as it requires a wealth of real-time, accurate information. But applicants’ patience is often limited, and they seldom want to answer a lot of credit-related questions or upload stacks of proof documentation. That’s why it’s important for lenders to update their loan origination process using digital tools that help them gather enough relevant and up-to-date information to accurately assess creditworthiness – without compromising the customer experience.

The problem with traditional loan origination

The main challenge in loan origination is the balance between asking for a sufficient amount of information to properly validate and assess the applicant, while at the same time offering a streamlined application process that prevents user drop-off. 

As such, assessing creditworthiness accurately at the point of application is a well-known challenge in the lending industry, with as many as 70-80% of applicants often being denied directly by traditional lenders. Usually, the reason for rejection lies in getting an insufficient amount or quality of information. The applicant could for instance forget to submit the needed documents proving their income or employment status, or their credit history may not be detailed enough to base an accurate decision on. 

Given the volatile economic climate of the past few years (or decade), it’s to be expected that banks and other financial and credit institutions feel the need to protect their assets and boost revenue by reducing the number of loans at risk of defaulting. Especially considering the often antiquated tools used to assess if a consumer loan can be granted or not. 

Common obstacles in the lending process

Today’s most common loan application assessment tools can hinder rather than help lenders grant performing loans. Oftentimes, they are:

  • Manual – Applicants have to send in paperwork such as payslips, proof of identity, and tax records for the lender to be able to assess their creditworthiness.

  • Slow – Given the amount of manual paperwork, the process is slow and frustrating to both consumer and lender. Often lenders need days, sometimes even weeks, to assess a loan application – leading to a high amount of applicant drop offs.

  • Incomplete –Payslips offer a very limited and incomplete view of income, showing only a single stream of income that stretches back three months, but does not offer the ability to assess fluctuating incomes from multiple sources, or offer a long-term view of the applicants financial status.

What’s more, manual loan origination processes also carry the risk of forgery, such as the applicant uploading fake documents like forged payslips or ID documents. Traditional loan origination also risks excluding financially viable applicants who are young, recently arrived in the country, or otherwise likely to have a ‘thinner’ credit history.

The challenges in assessing creditworthiness

The manual and incomplete quality of the data lenders traditionally use makes it difficult to accurately assess affordability. As the system is inherently flawed, many lenders experience frustration while trying to assess creditworthiness. 

For our report ‘Lending unlocked: a new era of credit’, we asked the top financial executives in Europe what their biggest pain points were when assessing applicant creditworthiness. One of the top reasons given for not being able to assess the applicant’s creditworthiness was the inability to categorise payment history to identify risk attributes (29,5%). Not having a categorised overview of the applicant’s bank transactions means missing key information such as spending patterns, loan exposure and possible liabilities. A well-enriched transaction history can give you an overview of an applicant’s spending habits and financial health as you can see, for instance, how much of their income they spend on gambling, how many days they are in overdraft, or whether they are paying off a risky number of other loans. 

The challenges in underwriting and how open banking can help

Q: What are the most common reasons why you are unable to assess the applicant’s creditworthiness? Source: Tink, 2022

The credit bureau blind spot

The inability to correctly assess affordability and creditworthiness with today’s most common loan application processes proves what’s often called ‘the credit bureau blind spot’. 

Information received from credit bureaus suffers from the issues addressed above: it’s incomplete, often incorrect, and out-of-date. Using antiquated as opposed to real-time data leads to poor customer experiences and an increased risk of rejecting creditworthy applicants and approving those who may not be in the same financial situation as they were when the data was recorded. 

In short, using antiquated data is detrimental to both lender and borrower and there’s little excuse for it anymore – modern technology capable of generating up-to-date and accurate data already exists. Open banking powered lending solutions enable lenders to overcome their biggest pain points while offering a safe, streamlined and accurate loan origination journey.

Want more insights into how open banking is transforming the lending landscape? Download the full report.

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