Open banking is set to dramatically improve the referencing and payment processes for letting agents by removing the traditional barriers to accessing financial data. Under the Second Payment Services Directive (PSD2), banks are required to make their payments infrastructure and customer data open to third party providers, which will give referencing providers near-instant access to more detailed information on tenants’ financial position than ever before and make paying by bank transfer as easy as paying by credit card.
Let’s start with referencing. This is a typically difficult process that requires applicants to supply significant amounts of information in order to prove their income, including several months’ worth of bank statements and letters from their employers confirming their salary. It’s not always a foolproof process - it’s possible (although rare) for applicants to fake bank statements or get “referees” to provide false information on their behalf. Credit checks can help to build a better profile of an applicant’s financial position, but they do not include whether or not someone reliably pays their rent on time, so letting agents are losing out on access to valuable data for decision making.
Open banking can help referencing providers build a more accurate profile of an applicant’s financial position through access a wider set of data. Applicants can share more detailed information about their finances with a referencing provider by simply logging into their online banking. This includes the amount of money that’s actually coming into an applicant’s account each month, which means referencing providers 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. I don’t think open banking is the silver bullet that will make traditional referencing companies redundant overnight. I do, however, think it will provide them with additional data that, if correctly layered onto existing datasets, could be the first step towards an instant, comprehensive reference.
Payments are then next part of the rental experience that could be transformed by open banking. Letting agents currently collect money through cash, credit card or bank transfer. Cash - well, it harks back to the dark ages and quite frankly I think it will be obsolete in 5-10 years. Credit cards, meanwhile, are expensive - you’re unable to find rates much lower than 0.5%, 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, but 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 or giving your iPhone a little smile. In time, I can see this becoming the preferred method of payment for letting agents, abolishing variable fees and chargeback risk while not sacrificing efficiency, experience or conversion.