The world is undergoing huge changes. With coronavirus pushing the economy to the limit, people are questioning the role of established institutions.
And if finance doesn’t work to enable the economy, businesses or individuals, then who is it for?
Before the digital revolution, financial experts were seen as a necessity. They knew how things worked, what everything meant and could provide good advice from the heart of the financial sector.
But now trading can be done by anyone online, with a wealth of information available to hand.
Traditional banking models are already being upended by technology. Through Open Banking, challenger banks are able to connect services digitally, cutting inefficiencies and costs while speeding up transactions.
Open Finance is seeking to build on this model to connect financial services via technology, potentially making the existing financial model obsolete.
Open Finance has the potential to transfer power back to individuals. Not only would this benefit society, but it would help minimise the boom-bust cycles that cripple entire economies.
No individual would be too big to fail, and bailing people out would cost far less, having minimal impact on the economy overall. With more information available to them, Open Finance businesses will be able to use technology to make better decisions instantly.
While it is still very early days for Open Finance, there seems to be an endless raft of possibilities to benefit individuals, businesses and national economies. Faster, more secure, and less risky access to credit can help grow the economy, transforming finance from something that benefits a few wealthy capitalists to something that enables growth in the real economy.
So how else could Open Finance benefit society?
Most working people pay income tax, either via self-assessment or PAYE, and we all have tax records with a wealth of financial information that has been verified, at least in part, by HMRC.
This centralised repository of financial information could be put to better use, such as allowing credit reference agencies to better understand an individual’s risk profile or helping to prove income as part of a mortgage application.
Unfortunately, HMRC is a black hole of information ‒ its sheer size and power sucks information in, but nothing comes back out again.
However, with Making Tax Digital (MTD), HMRC are effectively allowing individuals to keep validated tax records on the software of their choice.
Software providers may then be able to use this information to enable certain aspects of Open Finance. The information doesn’t need to be protected by HMRC, it is the individual’s choice and responsibility over how to use their own information.
As MTD software develops, we will see it connected to Open Banking, allowing self-assessed taxpayers to connect their business account directly to the software, leaving the taxpayer to simply check the details, add any adjustments, and click submit.
MRC would then validate the records, providing assurance for any financial institutions using that financial information. (want to keep up to date with all things MTD – Join the APARI Community here)
More growth, lower risk
With access to complete and validated financial information, lenders would be able to more quickly and accurately assess individual risk when considering a loan application. This would speed up the process of applying for a loan for a property purchase.
Take residential landlords, for example. They may own a few properties already, with equity coming out of their ears.
If that landlord wants to obtain another property, they’d need to get their accountant to pull together their paperwork, complete an SA302, and send everything off to their mortgage advisors who would then validate the information before submitting the mortgage application.
The application can then take months to approve, slowing down the process and potentially leading to missed opportunities. Since property sales usually occur in a chain (the owner of the property you are purchasing is usually purchasing another property, and so on), these inefficiencies slow the process down for everyone and can have major impacts.
If, however, mortgage applicants could simply share validated financial/tax records, mortgage providers could use that information to make quick decisions with reduced risk. What’s more, applicants could share only relevant, high-level information, rather than expose their entire financial history.
Individual risk management
Currently, individuals can manage their credit score/risk profile via third party providers like Experian, Equifax and TransUnion.
These credit reporting agencies use limited information, such as credit cards, store cards and loans to assess risk. Individuals need to understand what factors each agency uses to ‘game’ the system.
For example, someone who has always been careful with their money, kept to a strict budget and never taken out a loan or credit card will have a far worse credit rating than someone who regularly uses debt to finance their lifestyle. So, even though they may have amassed a good deal of savings, they cannot get a good deal on a loan or mortgage. With Open Finance, these individuals would be able to quickly prove their earnings, spending, and savings, decreasing their risk profile in line with reality.
MTD software providers will be in a unique position to develop a two-sided marketplace for finance, allowing credit providers to match products to individuals’ risk profiles. When a customer needs a loan, credit card or mortgage, they can simply browse products for which they have already been approved, applying and receiving finance instantly.
Ultimately, Open Finance has the potential to help the UK and other nations recover from the seemingly unending series of crises that have plagued the early 21st century by allowing people to access finance quicker in order to grow their business and personal finances while reducing risk, inefficiencies, and costs.
Want to find out more about Open Finance and how MTD could help make finance more accessible? Submit your questions for the APARI webinar, in conjunction with LandlordZone (30th November 2021) and get the answers you need!
The potential of Open Finance and the digitisation of tax records is written by Sudesh Sud for www.landlordzone.co.uk