A Challenging Summer for Open Banking Powered Lenders

In the realm of financial innovation, where traditional models are swiftly reshaped, the summer of 2023 has proven tough for UK-based fintech players, Koyo and Fronted. These companies, which harnessed the power of open banking and alternative data to cater to the underbanked population, have recently ceased operations, according to Meaghan Johnson, Forbes. This development sheds light on the trials faced by lenders relying on novel methods of credit assessment, ultimately impacting the economically vulnerable in the UK. The backdrop of rising interest rates and a burgeoning cost of living crisis further complicates this situation.

Koyo, established in 2020, specialized in providing personal loans to individuals who struggled to access credit through traditional means. Leveraging open banking and AI, Koyo offered a comprehensive view of a user’s creditworthiness. By linking their bank accounts via open banking, users could receive credit decisions within minutes, transcending conventional credit scoring. Notably, applying for a Koyo loan didn’t impact the user’s credit score. Unfortunately, the fintech’s inability to secure fresh capital led to its downfall, despite a 2022 Series A Extension that infused GBP 100 million in debt and GBP 5 million in equity.

Fronted addressed a unique market niche, catering particularly to renters in need of short-term loans for rental deposits. Similar to Koyo, Fronted utilized alternative data to evaluate creditworthiness, ensuring no impact on credit scores. Interestingly, Fronted sought to alleviate a significant pain point in the rental market by devising a deposit scheme that adapted to customers’ needs.

Alternative data, particularly through Open Banking, carries the potential to reduce credit decision costs significantly. A 2021 report from Credit Kudos highlighted that 47% of lenders believed Open Banking could slash credit decision expenses. Furthermore, 43% of lenders acknowledged its potential to enhance decision accuracy. These advantages directly benefit those most in need of credit, offering them higher chances of securing crucial financial resources and ensuring affordable credit options.

The current wave of fintech closures might be seen as a «last-in-first-out» scenario, with companies founded between 2019 and 2021 facing heightened operational challenges. Several factors have converged to create a perfect storm for early-stage UK fintechs:

• Scarcity of New Capital: Recent data from Innovate Finance revealed a 37% drop in funds raised by the UK fintech sector in the first half of 2023 compared to the latter half of 2022.
• Rising Cost of Capital: The Bank of England’s interest rate hike to 5.25% on August 3, 2023, has added to the increased cost of capital.
• User Constraints: Changing market dynamics have made it difficult for users to afford services. Fronted’s CEO noted the shift that impacted their pricing strategy.
• Intense Competition: The UK’s saturated fintech landscape utilizing open banking technologies contributes to a highly competitive environment.

The closure of Koyo and Fronted has significant implications for the underbanked. Research indicates that open banking could substantially reduce fees for financially marginalized individuals, contributing to better financial inclusion. As the fintech landscape evolves, these closures underline the challenges of serving underserved segments during economic uncertainty and fierce competition. While setbacks hinder open banking’s potential to empower the financially vulnerable, they also underscore the imperative for ongoing innovation and support to ensure comprehensive financial inclusion for all.