Open banking-enhanced credit scoring risks treating borrowers unfairly, a ratings agency has warned.
Open banking is a data-sharing initiative that enables an individual’s banking and payments information to be shared securely with regulated financial companies, subject to approval from the customer, to boost competition within financial services.
DBRS Morningstar said it has noticed a new credit reference agency product designed to enhance credit scores. It works by linking the agency to the applicant’s bank account so that payment behaviour for expenses such as Netflix subscriptions or council tax can be taken into account when assessing creditworthiness. However, according to the agency – which DBRS Morningstar does not name – this can never lower a credit score, only improve it.
“The credit boosting product has been designed to help customers qualify for credit that perhaps they wouldn’t normally qualify for,” the ratings agency said. “The evidence of good repayment history and other data from their bank account helps improve their credit score. As a result, they may qualify for a higher amount of borrowing, or qualify for better terms than if the lender were to use their existing credit score.
“However, DBRS Morningstar notes that this could raise questions surrounding the ‘treating customers fairly’ norms if some applicants signing up to this product receive the benefit of an improved credit score, while others not signing up do not. This could arguably be viewed as no longer providing a level playing field and brings into question the reliability of the credit score.”
Furthermore, the ratings agency noted that applicants using the open banking-linked credit scoring product have been promised that their credit score will never go down.
“Should the Open Banking evidence show that the existing credit score for [the applicant using the credit boosting product] may actually be inaccurately high, such as regular missed payments, regularly coming close to going into overdraft, then [the other applicant] may arguably be treated with further disparity,” DBRS Morningstar said.
More than two million consumers are now making use of open banking, according to research by the Open Banking Implementation Entity.
Several peer-to-peer lending platforms have adopted open banking to boost their credit scoring processes.