Online lenders primed to benefit from PSD2
In 2018, the Revised Payment Services Directive (PSD2) comes into effect in European Union countries. The directive aimed at deepening innovation in financial services will among other things, enable non-financial institutions to access consumers’ transaction data. The impact of this directive promises to be far-reaching and honestly, the whole picture is still not very clear. But players outside the banking industry whose attempts to access customers’ transaction data have repeatedly met push-backs from banks see initial benefits.
Although many reports have alluded to these immense benefits of the PSD2 directive to the consumers, a recent survey in the UK suggests there’s still a hurdle — consumers aren’t ready. An astonishing 90% of respondents are not aware of open banking. Even among those that are aware of the initiative, 60% will not consent to sharing personal data with third parties. This result has not deterred industry optimists who maintain that it’s normal for consumers to be suspicious of sweeping new regulations like PSD2. On the back of this optimism here’s how online lenders would benefit from PSD2.
Every credit decision is faced with an asymmetric information problem. Loan applicants have in all cases, every information on their ability and willingness to repay their loans. This places the lenders at disadvantage which could lead them to reach disastrous credit decisions. To get around this problem, many online lenders collect data from multiple sources which now includes the social media. Leading players in the industry have gone ahead to develop proprietary technologies that enable them to run through these multiple data points and turn in credit decisions within a short time. Most of these however remain guess works.
Without a proprietary technology, the number of data points used by these lenders will affect their ability to deliver credit decisions as fast as they should. For example, Kreditech, a Hamburg based lender uses about 20,000 data points to process credit requests and this is only possible through a proprietary technology developed in-house that enables them to achieve this. For many online lenders lacking this capability, PSD2 is here to help and here’s why.
One data point -customer financial data, contains the most accurate, up-to-date information on the financial wellbeing of everyone. Under the PSD2, online lenders will (with authorisation) be able access this information and use it to determine the financial health of prospective loan applicants. The level of accuracy guaranteed by this data throve eliminates all needs for sourcing data from other sources.
The result will not only be more accurate credit decisions but also an efficient process for arriving at credit decisions given that reliance on smaller data points would turn in within a short time, credit decisions that employed lesser resources. PSD2 is also expected to improve the competitiveness of the online lending market in the sense that reliance on proprietary technologies to arrive at accurate and efficient credit decisions would wane over time. The removal of this barrier might spur new firms to come to the market and the winners would be the consumers –now empowered to shop around for credit facility with best combination of interest rates and other repayment terms.