Open Banking: An introductory guide for credit unions

Open Banking has been hailed as a revolution in financial services. But what does it mean for organisations, like credit unions, who are at the forefront of supporting people to manage their finances and access fair services?

In a new guide, written by our Head of Programmes, Marloes Nicholls, and published by the Centre for Community Finance Europe, we demonstrate the importance of this question, and the need for wider debate and action across the credit union movement – and beyond.

What is Open Banking?

In 2018, Open Banking was introduced in the UK to challenge the market dominance of the biggest banks and building societies, as well as to catalyse innovation and competition in payments.

Open Banking: requires the nine biggest banks and building societies to make it possible for customers to share their current account data with third parties, using a new set of standards designed to make the transfer of data consistent and secure.

By enabling people and small businesses to share information about their finances with new players in a standard and secure way, it is hoped that it will create space for an array of new businesses and services offering better products, more choice and lower prices.

Today, the Open Banking ecosystem is still early in its development, but awareness and adoption is starting to pick up. There are now hundreds of regulated providers, with the majority offering people either new tools to help track spending and manage budgets (e.g. Moneyhub and Yolt), or new ways to borrow money (e.g. Creditspring and Updraft). While many still won’t have heard of Open Banking, the number of customers that have consented to share their transaction data (associated with online payment accounts) reached one million at the beginning of 2020 – and is set to double every six months.

Open Banking and credit unions

Open Banking has reached the credit union sector too. We have uncovered that at least 10% of credit unions have formed partnerships with fintechs to use Open Banking. For example, Central Liverpool Credit Union (which is working with Lab Fellows NestEgg.ai) is using its members’ data to improve the accuracy of credit risk assessments and the efficiency of their loan application process. This has meant they can now offer loans to people who were previously declined on the basis of traditional, out-dated, credit data alone. As a result,  in the run up to Christmas 2019 they lent £700k more than in the same period 2018 and saw their fastest ever winter membership growth rate.

Central Liverpool Credit Union’s online loan application process is also fast – capable of competing with the instant decision-making and user experience offered by many high-cost, short-term lenders, and potentially freeing up staff time for other work that is better suited to in-person meetings with members. As a part of Nesta’s Affordable Credit Challenge, they are now developing an app for members which will use Open Banking data to help them better understand their own financial situations and the action they can take to improve their financial health and creditworthiness.

Our analysis suggests that, combined with appropriate IT, oversight and governance, Open Banking has the potential to radically improve credit union operations, responsible lending decisions, and member engagement and support. However, we also uncovered and anticipate serious risks and challenges. These include using and misinterpreting Open Banking data in ways that lead to less responsible lending decisions, ballooning exposure to the risks of sharing members’ data with third parties, and – most importantly – heightened financial exclusion and reduced support for the people who need it most. If Open Banking is to contribute to shaping a future financial system that delivers better outcomes for local communities, and is not to undermine a sector that is already trying to fix the problems of our broken financial system, then it is vitally important these risks and challenges are understood.

For credit unions to harness the opportunity Open Banking presents, and ensure that it is used in a safe, impactful, cost-effective and sustainable way, will require movement-wide collaboration. We look forward to continuing to work with credit unions, including with the Centre for Community Finance Europe, and policymakers, including the Treasury financial services team who we presented our early findings of this research to. We will also be speaking on Open Banking and credit unions at the ACE Credit Union Services conference in Bristol in May.

Open Banking matters

Whether a credit union decides to use it or not, Open Banking matters. It is set to be a major feature of our increasingly data-driven financial system – and our lives. Already, the Open Banking agenda has expanded to ‘Open Finance’, whereby people could share a wider set of their financial data (such as pension, mortgage and insurance data) with third parties. To ensure that this major development evolves with the interests of people and planet at its heart, we’ll be calling for organisations like credit unions and responsible finance providers, along with debt advice agencies and other charities, to be meaningfully involved from the outset. Look out for our response to the FCA’s Open Finance Call for Input soon.

You can read the short guide to Open Banking for credit unions here.

You can also read coverage about the report’s development in Coop News here, and listen to a short interview about our research on the Talking Credit Unions podcast here.


If you’d like to find out more, and explore ways to build on this work in collaboration with the Lab, contact marloes@financeinnovationlab.org.