What open banking can mean for the lettings industry
Open banking has already worked to dramatically improve the referencing and payment processes for letting agents, by removing the traditional barriers to accessing financial data.
What is open banking?
Open banking gives third-party service providers open access to a consumer’s banking, transactional, and other financial data, allowing it to be shared between banks and other non-banking institutions, in a safe and secure way.
This gives referencing providers near-instant access to more detailed information on tenants’ financial positions than ever before. It has the future capacity to make paying by bank transfer as easy as paying by credit card.
What are the pitfalls of the current tenant referencing process?
Referencing is a typically long process that requires applicants to supply significant amounts of information to prove their income. This includes several months’ worth of bank statements and letters from their employers confirming their salary.
It’s also possible – although rare – for applicants to fake bank statements or get “referees” to provide false information on their behalf.
Credit checks are another step in the process which could be improved. They can help to build a better profile of an applicant’s financial position, but they do not include whether someone reliably pays their rent on time, so letting agents are losing out on access to valuable data for decision-making.
That’s where open banking comes in.
How does open banking help the tenant referencing process?
Open banking in the RentTech space can help referencing providers build a more accurate profile of an applicant’s financial position through access to a wider set of data.
Applicants can share more detailed information about their finances with a referencing provider, such as Vouch, by simply logging into their online banking.
This includes the amount of money that comes into an applicant’s account each month. Referencing providers therefore don’t need to rely on just a letter from an employer or three months’ worth of bank statements.
Plus, they’ll be able to see whether or not an applicant has historically paid their rent on time.
At the same time, the amount of information applicants are required to submit manually is significantly reduced, speeding up the entire process.
What’s next for open banking in the lettings process?
Payments are then the next part of the rental experience that could be transformed by open banking. Letting agents currently tend to collect money through cash, credit card, or bank transfer.
Cash – now fairly obsolete in the lettings process, is inconvenient to handle and adds a level of risk in terms of handling and customer due diligence.
Credit cards, meanwhile, are expensive. You’re unable to find merchant rates much lower than 1.5%, which is a huge amount if you’re collecting money on someone’s behalf.
You’re also exposed to chargeback risk. If someone is paying 12 months’ rent upfront, that could leave a big hole in an agent’s pocket.
Currently, bank transfers are the safest method for both letting agents and tenants when making and receiving large payments, such as a deposit on a rental property.
However, unlike credit card payments, they aren’t an integrated part of the application process and often the wrong amounts or references are entered.
Open banking, however, means paying via bank transfer could be as simple as paying by credit card.
This could wipe out renting-related card transactions. Imagine being able to authorise an accurate bank transfer by scanning your fingerprint.
In time, this could become the preferred method of payment for letting agents, abolishing variable fees and chargeback risk while not sacrificing efficiency, experience, or conversion.