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Why open banking creates a new landscape for asset finance

A new era in finance starts this weekend as the deadline passes for major banks to comply with new open banking legislation that promises to revolutionise consumer and business funding.

In truth, the revolution has started with a whimper rather than a bang, as many of the major banks have secured an extension beyond the January 13 deadline for the new regulations, but over the long-term, it has the potential to change how businesses and consumers source finance.

Open banking is a general term that describes two pieces of regulation: the Competition and Market Authority’s ‘Open Banking Remedy’ and the European Second Payment Services Directive (PSD2).

It requires banks to provide access to current account data to third-parties if customers give their consent.

Through open Application Programming Interfaces, banks can share data with third parties in a secure manner, without customers having to make their usernames and passwords public.

APIs are already commonly used in a range of business environments, such as insurance companies automatically retrieving vehicle data from government databases to speed up the quotation process.

Open banking carries more risks, as companies will be delving into financial data of consumers and businesses, so security is paramount, hence the request for more time from some banks.

Every company using open banking to deliver their services has to be authorised by the Financial Conduct Authority (FCA) or another European regulator.

Gavin Littlejohn, chair of fintech industry body The Financial Data and Technology Association (FDATA) and fintech representative to the UK’s Open Banking Implementation Entity (OBIE), said: “Our industry has offered services that let customers – around two million at the last count – give our member firms direct access to their accounts for several years.

“However, the method we have had to use, which literally ‘reads’ customers’ online banking screens, has never been what we would have chosen.

“We are enthusiastic about the potential of open banking, which provides a direct feed into and out of accounts using tried and tested and highly secure standardised communications technologies.

“There is a lot of work still to do to bring the full benefits of open banking to UK consumers and businesses, and we now need to work closely with colleagues in Europe to align this solution to the standards being worked on there, but this is a momentous milestone.”

Auto finance provides a good example of how APIs and open banking could change finance transactions.

Often requests for finance require substantial amounts of paperwork and scanned or printed documents from bank accounts, which all takes time to review and process.

Under open banking, APIs can make customer financial data available for immediate analysis by the finance provider, enabling in-depth reviews of their financial status to confirm affordability and support compliant sales processes in seconds.

In addition, aftersales functions such as a change of address, or a request to adjust the terms of a loan, can be carried out more quickly.

The use of APIs means that finance providers can plug this new data source into their existing systems to transform application processes.

Rob Haslingden, head of product marketing and propositions at Experian, said: “The additional data can be used on top of credit risk data to give an overall view of affordability.

“So, under open banking, the API can give up to 12 months of transactional data to reveal discretionary spending as well as regular bill payments. This can then be interrogated to iron out things like one-off payments or seasonal variations and you get an overall view of affordability rather than just credit risk – which is more for the lender than the customer.”

Therefore, APIs can take finance beyond credit scores and make the experience more personal to each customer, while also minimising risk by giving a clear picture of someone’s true financial position.

It is also important in a customer experience context too, as it potentially saves customers from being asked in-depth questions about their finances on a face-to-face basis – something that many find awkward.

Continual sharing of data will allow for better loan management.

Gareth Lodge, analyst at Celent, said: “Product providers can see how much an existing loan is, what the term left is, the rate of interest and penalties etc., and therefore potentially be able to intervene before a loan reaches term to start the conversation about renewal or other appropriate steps.

“Product manufacturers will be able to use data to hone their offering, assess affordability, improve their general service and add value via better and faster risk modelling technology at their own back-end.”

Richard Ryan, partner at Invigors, added: “Companies involved in asset finance and leasing are now seeking revenues that extend beyond just making a percentage on a loan. They are looking to use data to provide value-added services that can be effectively monetised and therefore add to the bottom line.”

While lenders will benefit because they can provide a more personal service and swift finance agreements, the use of open APIs is likely to increase competition as aggregation services step into the space between the customer and the finance company.

For example, rather than customers being offered a generic finance quote for their next car, they could receive personalised quotes from a panel of lenders in real-time.

However, this may be a key step in ensuring customers receive the service they have come to expect in many other industry sectors.

The flow of data via APIs makes for easier and better decision-making by asset finance providers.

Steve Taplin, global sales and marketing director at Alfa, said: “Allowing data to flow between customer, dealer and finance provider makes for better automation and therefore service – which leads to retention and loyalty.”

James Tew, CEO of finance platform iVendi, added: “If a dealer can key in information once but then access a number of lenders, track the process and see the likelihood of a deal being accepted all via an app that sits on their website, then that adds value to them.”

In the US, Capital One has built an open API platform to enhance the auto financing experience, which is being used by Vroom, an online direct car retailer that allows customers to order a car on their computer and have it delivered to their home.

Shishir Singhania, from Capital One, said: “The API allows consumers to get the loan for the vehicle while sitting on the computer at their house, versus having to go offline and talk to someone. That is a unique experience.

“That provides a layer of transparency to our consumers that they never had before because they had to talk to an F&I manager in a store and work with them to find out what the terms of the loan would be.

“When the customer is buying a car, they are trying to figure out the rate they need to pay, what their monthly payments would be and they want to have the flexibility of changing certain things in the loan. The API can answer those questions in a pretty seamless way while they are on Vroom’s site.

“It is very sophisticated to give consumers the answers they need, but as a consumer, it is very simple.”

APIs are also being used by finance providers in other ways to help improve the customer experience.

Black Horse Finance is in the middle of a phased rollout of open APIs.

The first one, which is already in use, allows the customer to get a settlement figure.

Jim McCaffrey, director of customer propositions and business enablement at Black Horse Finance, said: “Getting a settlement figure is a high-volume request that is relatively straightforward to fulfil. It’s acted as a proof of concept but now the plan is to extend the range of services and partners so things like quotes, credit decisions, figures for future value as well as aftersales service will all be available.”

Whatever the platform, the success of the open banking system in delivering a better customer experience in auto and equipment finance will be reliant on the customer being willing to share their data in the first place.

Research from Accenture in October 2017 said that two-thirds of consumers in the UK would not share their financial data with third-party providers such as online retailers, tech firms and social media companies.

More than half (53%) said they will never change their existing banking habits and adopt open banking.

It is likely that patience will be required to give consumers time to assess the idea of data sharing in return for better service.

Taplin said: “Of course there is concern, but customers have already given their data to the asset finance provider in order to transact with them – there need to be clear rules that are understood and here standardisation does come into play.”

Haslingden added: “If consent is given then providers can build that data into their lending processes and make operational gains and provide a better customer experience. But they will need to position the advantages of data sharing to customers very well in the first place.”

Source: Asset Finance International

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Lender clears £13.2bn of government loan repayments

The company behind Bradford and Bingley and Northern Rock Asset Management has paid back £13.2bn in government loan repayments.

In its six-month results up to 30 September, Bingley-based UK Asset Resolution said that of the £13.2bn repayments, £11bn was from its Financial Services Compensation Scheme debt. The company said that 76% of its government loans have now been repaid.

As part of the plan to repay the FSCS loan, UK Assest Resolution completed the sale of two separate B&B asset portfolios to Prudential and funds managed by Blackstone and launched a further asset sales process that, subject to market conditions and value for money, is expected to repay the loan in full.

Underlying pre- tax profit reduced by 41% to £238m. Mortgage accounts three or more months in arrears, including possessions, reduced by 9% since March 2017 bringing the total reduction to 89% since formation.

Ian Hares, chief executive, said: “In the first half we finalised a major sale of assets and, subsequently, we have launched the next stage of the asset sales programme designed to repay the remaining FSCS debt. These are major steps towards realising our objective of reducing the Balance Sheet while continuing to maximise value for the taxpayer. It is pleasing that we continue to see high levels of service delivered for our customers.”

It was in April that £11bn of the FSCS loan was repaid using the proceeds received from the sale of two separate B&B asset portfolios to Prudential and funds managed by Blackstone. In October, a further asset sales process was launched will enable the repayment of the remaining £4.7bn of the FSCS loan. The transaction is expected to complete during the first half of the 2018/19 financial year.

Since formation in October 2010, the UKAR Balance Sheet has reduced by £94.7bn, including £40.9bn of customer loan repayments and £27.2bn of asset sales, which have facilitated the repayment of £57.5bn of wholesale funding and £36.8bn of government funding.

As at 30 September, lending balances stood at £18.2bn (FY 2016/17: £19.5bn).

Statutory profit reduced to £216.8m from £480.4m reflecting the declining mortgage book, £43.5m additional provisions for PPI claims and the prior year benefiting from a £51.0m profit on sale of loans and an insurance recovery of £50.0m in relation to remediation losses incurred by NRAM in 2012.

The number of mortgage accounts three or more months in arrears, including those in possession, reduced by 9% from 4,617 at March 2017 to 4,196 at 30 September 2017. The total value of arrears owed by customers has fallen by £2.5m from March 2017 to £35.2m, a reduction of 6.6%. This reduction is a direct consequence of proactive arrears management coupled with the continued low interest rate environment.

In total, UKAR has 139,000 customers (FY 2016/17: 148,000), with 149,000 mortgage accounts (FY 2016/17: 158,000) and 32,000 unsecured personal loan accounts (FY 2016/17: 35,000).

The company said that the majority of these loans continued to perform well with more than 93% of mortgage customers up to date with their monthly payments. In addition, UKAR continues to provide oversight of the 98,000 accounts (56,000 customers) sold to Prudential and Blackstone as part of an interim servicing arrangement.

Source: The Business Desk

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Distiller secures finance to acquire historic Rosebank site

IAN MACLEOD Distillers has secured a funding deal worth £80 million, revealing that the finance will be used to underpin its recently-announced acquisition of Falkirk’s historic Rosebank Distillery.

The Broxburn-based distiller, which owns the Glengoyne and Tamdhu single malts, said it will also use the loan package to drive its organic growth ambitions.

The asset finance facility, which has been jointly provided by Bank of Scotland and PNC Business Credit, is secured against the distiller’s whisky stocks. Its most recent accounts show that the value of stock held by the firm stood at £76.5m at September 30, up 14 per cent on the year prior.

As part of its new funding deal Bank of Scotland will provide Ian Macleod, which acquired Edinburgh Gin last year, with day to day banking services, including a £250,000 overdraft facility.

It comes shortly after the distiller announced that it is set to restore production at Rosebank Distillery, which has been silent since 1993.

Ian Macleod has agreed a deal to acquire the stock and trademark from Diageo, while securing a separate agreement to purchase the site from Scottish Canals, subject to planning consent. Rosebank Distillery sits on the banks of the Forth & Clyde Canal.

Mike Younger, finance director at Ian Macleod Distillers, said: “Bringing the iconic Rosebank distillery back to life is a big project, and one that we’re incredibly excited about.

“We are very pleased that we now have a funding package which allows us to both rebuild Rosebank and fund the general expansion of the business.

“Asset based lending is ideal for us, as it provides highly flexible funds secured against our appreciating maturing whisky stocks.”

Source: Herald Scotland