The era of Open Banking was definitively ushered in when PSD2 came onto the scene. New financial products are emerging while processes are being integrated into the value chain by digital and third-party providers. In addition to the many new business opportunities and innovations, the level of risk is also on the rise. Banks are the main risk carriers of these new developments in Open Banking.
In order to be successful in the long run, banks must manage their risks as effectively as possible. The good news? Thanks to the data available through Open Banking, risks can be analyzed very well today. In this blog post, we show you how to use data-driven risk management to minimize the risk of fraud and make your lending process faster, easier and more secure.
A Comprehensive Financial Overview Thanks to XS2A
The future of secure banking lies in technology and data-driven Open Banking. This also includes data-driven risk management, which makes optimum use of information stored at banks in order to achieve higher quality and more reliable risk management. Open Banking provides the basis for this by enabling the necessary access to account data (XS2A).
A critical risk factor that already reaps the benefits of Open Banking is the correct assessment of the financial situation of customers and partners. For this purpose, the bank grants an Account Information Service (AIS) access to the customer account via XS2A so that it can carry out a legally compliant, digital analysis of credit-relevant transactions. The focus is on negative features such as debt collection payments or chargebacks. This information is then cleared listed in the form of a Digital Account Check (DAC) and transmitted back to the bank as real-time reporting.
Banks can now combine the results of the Digital Account Check with scoring or credit agency data and use them, for example, to carry out digital credit checks. FinTecSystems can both categorize and analyze data using machine learning within the Analytics Platform.
Open Banking Data Reduces Lending Risks
In practice, banks already use the digital account view and the digital credit check via XS2A for one of the major risks in financial business: lending. Self-disclosure is an important tool for the bank consultant to assess the risk of non-payment for a loan. In the past, consultants relied exclusively on historical data from credit agencies. However, just because a customer always pays their bills doesn’t automatically make them a reliable business partner.
Thanks to Open Banking, Account Information Services can now better serve bank consultants by extracting more relevant information from customer data across multiple sources and then contextualizing it. Account Information Services determine the current and historical credit limit using access to account (XS2A) as well as the categorization and refinement of data with risk characteristics. Based on these findings, banks can more accurately calculate the extent to which the borrower will be able to repay future loan installments.
What’s more, Account Information Services provide forecasts of future payment behavior or liquidity situations using self-learning algorithms based on artificial intelligence. This is better for the bank’s internal scoring, while the bank gains additional borrowers who were rejected because of their previous credit ratings.
Intelligent Risk Management Prevents Fraud Cases
The additional information provided by credit agencies thanks to the digital credit check not only guarantees a comprehensive financial overview for lending; it also reduces other fraud risks.
Account Information Services enable the contextualization and linking of digital data that a credit agency cannot provide. After all, instances of fraud often occur in places where work is done on paper rather than digitally:
- Fraud risk: Falsification or manipulation of salary statements
Solution: The automatic plausibility check of employer and salary using Smart Data.
- Fraud risk: Manipulation of account statements
Solution: The digital and complete categorization of payments provides evidence for the plausibility of account transactions. Manipulated transactions or simple transfers between two accounts with the same account holder are detected.
- Fraud risk: False declarations about profession and employer
Solution: Thanks to a clean listing of all transactions within the digital account view, it is easy to recognize whether the respective salary payments are actually received and whether it’s on a regular basis.
- Fraud risk: Reinterpretation of chargebacks
Solution: Thanks to a detailed categorization of the data, chargebacks are no longer accidentally interpreted as a credit entry. A cash flow analysis via XS2A can also be used to calculate the best time to collect the loan installments. Our experience has shown that this reduces the risk of chargebacks due to an account deficit by more than 95 percent.
- Fraud risk: False identity
Solution: With the help of the Digital Account Check, risk managers can check who is the holder of an account and which IBAN is being used according to the “know your customer” principle.
Win-Win for Banks and Customers: Fast, Reliable Decisions Thanks to Open Banking Data
Access to all relevant data and its subsequent categorization and contextualization enables a personalized assessment of the financial situation. This also has a positive effect on customers whose transaction history is out of the ordinary due to professional or private peculiarities, such as self-employment or their particular living situation.
With its high-quality data, Open Banking also provides new answers to old questions: Does the applicant live above or below their means? Does their savings potential point to being able to take out a higher loan?
In the end, customers and banks both reap the benefits. Having bid farewell to the usual paperwork, the customer can expect a rapid response to their enquiry and the bank advisor can make an informed, risk-aware decision.
The Advantages of Open Banking for Risk Management at a Glance:
- Well-prepared data that complements existing credit scoring processes and enables you to make an informed decision.
- A holistic financial overview of the customer or contractual partner that helps to reduce the risk of non-payment.
- A reliable, real-time credit check that is complete and simply structured.
- A comprehensive list of all relevant account activity, taking into account transactions as well as other factors.
Reduced credit default risk by categorizing all critical account activity, in particular chargebacks and debt collection payments.
“I survived because the IT systems signalled to me where the risks were lurking,” is what Hugo Bänziger, former Chief Risk Officer of Deutsche Bank, supposedly said after the financial crisis in 2007. Even then, only one thing could save a bank: the use of data and technology in risk assessment. More than ten years later, the problem is just as pertinent. Thanks to Open Banking, however, we are able to anticipate and prevent risks using the better data and innovative technologies at our disposal like never before.
FinTecSystems has already gained a lot of experience in using data to reduce risks. We ensure extremely high-quality data and excellent customer service for every step. Get in touch!