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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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How to make 2018 your richest year yet

January is probably the tightest year of the month for many of us as we recover from the financial hit of the festive season.

But if you’ve overdone it on spending, there are some tricks you can use that will not only go some way to repairing the damage, but will also help to set you up for a more financially successful year ahead.

Financial experts have shared their top tips and predictions for the year ahead with Femail to ensure you use upcoming changes in legislation and interest rates to your advantage and boost your bank balance.

From investing in gold to purchasing second-hand jewellery with a renowned brand name such as Tiffany, these are the hacks that will ensure 2018 is your most abundant year yet.

‘The bank of England Base rate is likely to increase over the next couple of years to around per cent according to the Governor, Mark Carney,’ said Mark Homer, co-founder of Progressive Property.

‘As long term fixed rate mortgages are still cheap a 10 year fix may be preferable. Barclays has a 10 year fix at 2.69 per cent which just has to be a good deal.’

Some of the cheapest fixed rate deals have been removed by banks because of the interest rate rise, so if you’re looking to remortgage in 2018, you could well end up on a higher rate.

But Tashema Jackson, money expert at uSwitch.com points out that rates have only gone back to 0.5 per cent, where they sat for almost nearly nine years – so there’s no need to panic about them shooting up just yet. 

‘However, don’t be seduced into thinking that a lower interest rate is automatically cheaper,’ she said. ‘Take some time to calculate if the lower rate and higher fee is actually cheaper. It could save you a fair bit of money in the long run.’

She added that it’s crucial not to rely solely on information from your broker.

‘Many mortgage brokers will have exclusive deals from particular banks,’ she explained.

‘That’s why searching and comparing what is on offer from different providers can really help give you a better understanding about what is currently on offer from the mortgage market,’ she explained.

Don’t assume this means you know best, but being informed is always worthwhile. You may be able to give yourself a leg up before committing on a particular one.’

‘When the initial term of a mortgage ends, lenders transfer customers onto their Standard Variable Rate (SVR). This typically has a much higher rate of interest,’ said Ishaan Malhi, CEO and founder of online mortgage broker Trussle.

‘Nationwide is offering a two-year fixed rate of 1.99 per cent while their SVR sits at 3.99 per cent, for example.

Set a reminder to look into your options with a broker three months before your initial term ends to avoid paying over the odds. Just one month on your lender’s SVR can cost you hundreds of pounds in extra interest.

‘Interest rates may have crept up recently but they’re still historically low,’ Ishaan added. ‘If you’re in a position where you can afford to overpay on your mortgage, this is a good idea as it can reduce your overall debt. This will be harder to do when interest rates rise further, which they may do in the coming years.

‘Check with your lender about how much you can overpay by each month since there’s usually a limit before a penalty applies. For most fixed-rate deals this is usually up to 10 per cent of the remaining mortgage balance per year.’

Mark Homer More points out that permitted development rights for homeowners are likely to come in the New Year from the government.

This will likely allow people to extend their properties and make other alterations without the need for planning permission.

‘Rather than Moving house this could be a great option for those looking for more space who also would like to create equity in their home,’ he added.

Experts at Hitachi Personal Finance agree that you should look to improve rather than move.

‘Typical property prices jumped around £85,000 in the first half of 2017,’ they said.

‘So spending on property renovations instead – such as creating an extra room out of wasted loft space, new kitchens or bathrooms – could potentially add significantly more space, and serious value too. The average a loft conversion could add to the value of your home is 12 per cent, so it’s well worth considering all options.’

Mark Homer recommends Paragon Bank, who is offering a 120 day notice savings account at 1.45 per cent which trumps savings products offered elsewhere.

‘Should you be happy locking your money away for four months this would appear to be a good option to help reduce the effect of inflation on your capital,’ he said.

Julian Hynd, Chief Deposits Officer at Ford Money says that a number of factors could push up interest rates in the coming year.

‘The Bank of England is expected to increase the base rate further, while the Funding for Lending Scheme (FLS) to boost bank lending to households and companies comes to an end in January,’ he said.

‘Our research shows that almost three in five UK savers do not know what interest rate their account pays while nearly half only review their accounts once a year or less.

‘Finding a savings account that pays a fair and consistent rate over time could mean one less thing for savers to be worried about with any interest rate changes and ensure savers get the most out of their money.’

Jamie Smith-Thompson at pension advice specialists, Portafina, explained: ‘You don’t have to be Nostradamus to predict that Brexit will continue to create economic uncertainty in 2018. And this could leave people facing sudden changes in circumstances that put a strain on personal finances. One of the best ways to counter this uncertainty is to keep six months’ worth of outgoings as an emergency fund. It can soften the blow of any nasty surprises and give you the time and space needed to make the best decisions.’

Jamie Smith – Financial Adviser at Foster Denovo comments predicts a change to pension tax relief in the next 12 months.

This is most likely to be in the form of a reduction to the annual allowance, which is the amount that can be saved into a pension scheme and still benefit from tax relief within a given tax year,’ he said.

‘Although a reduction would not affect the vast majority of people, those who can afford to maximise pension funding should consider doing so before any new restrictions are introduced.’

Jamie warns of growing instability in the UK due to uncertainty around Brexit and recent downgrading of growth forecasts.

‘Anyone within a few years of accessing any stock-market linked savings should be reviewing their portfolios and the underlying risks,’ he said.

‘For example, if you are planning to retire over the next few years you may want to consider de-risking your pension funds and moving these into less volatile asset classes.

‘Some pension providers will do this automatically, which is known as ‘lifestyling’, but certainly many pension plans will not have this function.

‘Those who have a longer term investment horizon of at least five to ten years before they plan to access and spend their savings may not need to be as concerned but it is still a good idea to review their portfolios.’

Adrian Ash, Director of Research at BullionVault – the world’s largest online trading platform for precious metals insists gold will act as a way to protect wealth as well as to increase it in 2018. 

‘Those who forget history are doomed to repeat it, and investors seem to have forgotten both the global financial crisis and the DotCom Crash where gold investing could have helped preserve investors’ wealth,’ he said.

‘Demand for gold sank in 2017 as stock markets surged, yet gold has risen for UK investors in every year that the stock market has fallen by 10 per cent or more.’

Dr. Johnny Hon, Chairman – The Global Group says 2018 provides ‘fantastic opportunity’ for investing in media and entertainment ‘as the global middle class grows and technology develops’.

He added: ‘Virtual Reality (VR) and Augmented Reality (AR), made famous by Pokémon GO, open up new ways of watching and shopping while viewing TV and movie content. Significant returns are to be made here.

‘Property continues to be a good investment and one that again features many innovations. One that will appeal to many younger people in particular, is the new concept of co-living, which, by using shared spaces and facilities, creates a more fulfilling lifestyle, that not only offers concierge and cleaning services, but also creates a genuine sense of community through shared spaces and facilities. With building land at a premium, this has a great future.

Stuart Law, CEO and founder of Assetz Capital says that more people are turning to Peer-to-peer (P2P) as an alternative to saving.

‘P2P platforms directly match people wanting to invest money with those requiring a loan, cutting out the middle-man and giving investors a choice in where their money is lent,’ he explained.

‘The rates of return can be attractive in the current climate of low interest rates, although it’s important to be aware that – as with most investments – capital is at risk and the amount invested is not covered by the Financial Services Compensation Scheme (FSCS) as it would be if held in a bank account.

‘Most P2P lenders are now fully authorised by the Financial Conduct Authority (FCA), but anyone thinking about investing money in this way should still ensure they’re using an approved firm.’

It’s something you might ignore until you’re considering applying for a loan, but it provides a useful snapshot of all your bills from mobile phone, to gas and electricity bills, as well as credit cards, loans and mortgages, according to Tashema Jackson, money expert at uSwitch.com.

‘You’ll also be able to check that all the information it contains is correct,’ she added. If you notice any errors you can contact the relevant lender and ask for them for a correction, but bear in mind that you will be expected to provide proof that a mistake has been made.

‘Doing a bit of research will also let you know if any lenders have a particular offer on, such as cashback on mortgage payments, or preferential interest rates to existing customers.’

Source: Brinkwire

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Finance a vital resource as billing delays hit building industry

Businesses in the UK construction sector have been hit by a leap in payment delays, with invoices taking an average of 69 days to be settled.

Analysis of more than 13,000 companies by Funding Options, the online business finance supermarket, shows that delays have risen 8% in the past two years.

It warns that a single late payment can be an issue even for successful firms, which can be caught out if a major client delays a payment significantly. If that late payment coincides with a major bill coming in, such as a tax, VAT or rent payment, the consequences can be severe.

Furthermore, the construction sector has a long supply chain which includes many small and medium-sized enterprises and delayed payments could create a domino effect that impacts hundreds of small suppliers.

Slow payment of bills is a major reason why the construction sector has such a high number of insolvencies; 2,557 construction firms entered insolvency during 2016.

Conrad Ford, CEO of Funding Options, said: “What this data again underlines is that the construction sector has a persistent problem getting clients to pay early on.

“Long supply chains in industries like construction mean that the ripple effect of delays is likely to affect many other businesses further down, with SMEs hit the hardest. In an industry with high overheads in terms of materials and labour costs, this can be difficult to deal with.

“These figures show that it’s more important than ever that the construction sector fully understand the options available to them to free up the funds they require and to minimise the impact of late payment and other poor payment practices.”

Choices available to manage cash flow range from invoice finance and asset finance to crowdfunding and peer-to-peer lending.

Ford added: “Unfortunately, small businesses leaders often don’t know which sort of finance is the best fit for a particular need, or who is out there to provide it.”

Funding Options as a UK online marketplace for business finance, raising tens of millions of pounds for SME finance each year.

It works with dozens of lenders across the alternative business funding spectrum, from challenger banks to invoice finance, hire purchase, leasing, peer-to-peer lending and property funding.

Funding Options has been designated by HM Treasury and the British Business Bank for the bank referral scheme, to help UK SMEs find alternative finance when they are unsuccessful with the major banks.

Average wait in days for invoice payment in construction sector

funding options

Source: Funding Options