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In the digital age, efficiency and convenience are everything. This is particularly true for loan approvals. Traditional loan processes sometimes take too long and are slowed down by extensive paperwork, lengthy verifications, and outdated systems. A delay of one to two days might not seem like a long time, but it could be detrimental for borrowers in a tight spot.
Fortunately, open banking solutions address this issue. Understanding how to speed up loan approvals with open banking will help lenders reduce errors, streamline approvals, and produce faster payouts.
Challenges in Traditional Loan Approval
Imagine a customer looking to secure a loan, whether to finance their dream home or to use as capital for their business. There are two ways to do this: visit a bank or file a loan application online. In both scenarios, they spend a significant amount of time filling out forms and submitting several documents. After going through all that hassle, the customer is left wondering if they will even get approved and receive the funds they need.
Customers aren’t the only ones left frustrated by traditional loan processes. Manual checks create bottlenecks and increase operational costs for lenders.
Let’s explore these inefficiencies in depth:
1. Extensive Documentation Requirements
Borrowers are typically required to provide a wide range of financial documents, such as bank statements, pay slips, and tax records. Gathering and submitting these documents can take days or even weeks, delaying the loan application.
2. Manual Verification
Each document submitted must be reviewed manually by loan officers. These employees usually rely on checklists and certain criteria to approve the loan. After a loan is approved, the loan officer transfers the funds from the lender’s bank account to the borrower’s—with each transfer needing to be signed off and matched with a corresponding bank account for the transfer to push through. This approach is not only time-consuming but also prone to human error, increasing the likelihood of mistakes or overlooked details.
3. Inaccurate Data
By the time financial documents are processed, they may already be outdated, leading to less accurate assessments of a borrower’s current financial position. This delay can result in decisions based on incomplete or irrelevant information.
How Open Banking Speeds Up the Loan Application Process
Open banking falls under the wider umbrella of open finance. It’s important to distinguish between open banking vs. open finance to better understand loan approvals in the fintech ecosystem.
Open banking allows third-party financial service providers to access consumer data to expedite banking transactions. Application programming interfaces (APIs) are used to facilitate the safe and quick transfer of banking data. On the other hand, open finance encompasses open banking and provides a broader scope of consumer services and financial products. Customers benefit from open finance by having more control over their financial information.
So, how does open banking affect the lending process?
1. Real-Time Data
Traditionally, customers had to submit or upload documents such as bank statements, pay slips, and tax documents. This could take days to process and further slow down applications. Open banking allows lenders to retrieve financial data from a borrower’s bank account in real time. By leveraging open banking solutions, lenders get a comprehensive view of an applicant’s financial standing instantly.
2. Automated Credit Assessment
The foundation of any loan application is a credit check—an assessment of an applicant’s financial health and credit history. Open banking gives a clear picture of an applicant’s creditworthiness and how likely and diligently they will repay the loan. If a lender decides not to approve an application or offer a loan at higher interest rates, they’re required to inform the applicant why. Lenders can present the applicant’s credit history and credit score as a basis for their decisions.
3. Faster Identity Verification
Fraud prevention is a top priority in lending, and verifying borrower identities can be a bottleneck in the approval process. Using secure banking authentication vs authorization methods, open banking allows lenders to authenticate users instantly, ensuring that only legitimate applicants proceed. Multi-factor authentication (MFA), biometric verification, and API-based identity checks replace cumbersome document verification processes.
4. Enhanced Accuracy
Manual processes are susceptible to errors, which can delay approvals and lead to inaccuracies in risk assessments. Lenders with access to detailed, accurate, and updated information can make better decisions and provide loan terms suited to the customer’s financial standing and goals.
5. Improved Customer Experience
One of the most important benefits of open banking in loan approval is payment initiation, which allows a licensed third-party provider to carry out a payment order on behalf of the lender. Lenders can push a payment directly from their account via payment disbursement solutions without doing the work themselves. Meanwhile, borrowers get a more seamless application experience, faster approvals, and greater transparency.
6. Lender Confidence
When lenders have a 360-degree view of a borrower’s financial situation, they’re more likely to offer favorable terms quickly. Accurate financial data helps build trust between the lender and the borrower and prevents any discrepancies in the information.
Essentially, open banking is about data sharing. It removes dependency on outdated processes like manual bank statements and credit score checks. This is how lenders can speed up loan approvals with open banking: instead of manually sifting through piles of paperwork and spending grueling hours verifying information, lenders can now automate these tasks.
Key Considerations for Lenders Leveraging Open Banking
Because of the nature of open banking when it comes to handling customer information, there are key factors lenders should consider when leveraging it:
Regulatory Compliance
First, regulatory compliance is non-negotiable. Open banking involves handling sensitive financial data, so lenders must adhere to data privacy laws like GDPR, PSD2, or local regulations. To protect customer data, lenders must implement strong security measures such as encryption, multi-factor authentication, and consent management.
Tech Integration
Next, technology integration is key to seamless implementation. Choosing the right API provider and open finance platform ensures smooth connectivity with banks and financial institutions. Lenders should look for an all-in-one API suite that offers scalability and security, as well as features that enhance data-driven decision-making and fraud detection.
Customer Awareness
Finally, lenders must communicate the benefits of data sharing with their customers despite fears and hesitation due to privacy breaches. Open banking facilitates faster loan approvals, more accurate assessments, and financial equity. Transparency about data use and protection will help customers understand the bigger picture and encourage adoption.
Open Banking: The Key to Faster Financing
Open banking eliminates the bottlenecks associated with traditional loan approvals. However, speeding up loan approvals with open banking is not just about efficiency. It’s also about smarter and mutually beneficial lending for both lenders and borrowers. Lenders can speed up their loan approvals by leveraging real-time financial data and secure API integration while staying compliant with industry regulations.
If you’re ready to streamline your loan processing, Brankas’ open finance suite offers the tools you need. With seamless API solutions for financial data access, identity verification, and secure transactions, Brankas empowers lenders to approve loans faster and with greater confidence.
Unlock the full potential of open banking with Brankas. Request a free demo or contact us today.