It’s a common experience for many, especially millennials and Generation Z: The first of the month is coming up, but your paycheck has yet to come through — and you owe your share of the rent. Paying the rent will result in you dipping into your overdraft by maybe £20, resulting in fees that could be avoided if you just had a few extra quid to carry you over for a day or two.
This sort of scenario was precisely what Paul Pester, the chairman of online-only bank Tandem, had in mind when he founded Loop, a money-sharing app that enables users to share small amounts between family and friends to optimise the finances within groups.
“What Loop is meant to stop is a case in which one member of the group — let’s say my niece, my nephew, my son, my daughter — is running out of cash and having to pay a bank a lot of money for an overdraft when I may have £10 or £20 or £50 sitting in my account doing nothing,” says Pester. “It nets off and moves the money to their account and then moves it back again. It’s a layer that sits between customers and banks and gives customers with more limited means the sort of service that a very wealthy individual would have from a private banker.”
But the upside of this kind of fintech service isn’t just avoiding fees. Establishing a history of paying back microloans like the ones enabled by Loop can potentially contribute to an individual’s credit profile. It can provide an opportunity for younger users without access to traditional credit to show they’re responsible with their finances.
The key, says Pester, is open banking, which enables fintech users to build credit by securely sharing their financial data with third-party providers, allowing for more comprehensive credit assessments beyond traditional metrics.
Pester: ‘Start Laying the Credit Trail Early’
Building a credit history early in one’s life is vital for qualifying for financial products that are all but essential in today’s economy, including loans, mortgages, and credit cards, often with more favourable terms and interest rates. A robust credit history can also impact nonfinancial aspects of life, including the ability to rent housing and obtain mobile phone contracts. For better or worse, credit scores are used as a measure of trustworthiness, and starting to build this trust early can significantly ease present and future financial stress.
Notes Paul Pester: “Building a credit footprint is surprisingly important. It’s important to start laying the credit trail early.”
However, millennials and Gen Z face unique challenges in establishing credit. Traditional scoring systems rely heavily on credit histories, which younger people, especially those with limited savings or income, may not have had the opportunity to develop. With no savings to act as a cushion and an often uncertain global economic environment, this younger generation may also be more reluctant to take on debt, further limiting their engagement with traditional credit-building products.
That may in fact be a prudent decision, but it hampers access to better credit opportunities at later stages of life when an individual may be more financially secure and could take advantage of debt-based financial instruments like mortgages.
Paul Pester thinks open banking and fintechs like Loop can offer a beneficial middle ground: Users can work to establish a credit history earlier in life without taking on the risk of massive debt.
“Why did Loop become so popular?” Pester muses. “Because as you were making microloans with your friends lending £10 here, £10 there and repaying it, Loop kept track of all of those microtransactions and helped you build a credit file — which we call your Trust Badge — that you can then export to a bank.
“You can say, ‘OK, I’ve never borrowed from a bank before, but I may have two, three, four, five years’ worth of evidence here that I’ve borrowed from friends or family a hundred times, and 98% of the time I’ve always repaid it on time,’” he continues. “That’s exactly the data that banks need to help make informed decisions. And it’s really valuable data because it’s very hard for a bank or an organisation to get those insights into Gen Zs and millennials.”
Open Banking and Transparent Finance
The genesis of open banking in the U.K. can be traced back to the findings of the Competition and Markets Authority’s report in 2016, which highlighted the lack of competition in the banking sector. To address this, the CMA mandated that the nine largest U.K. banks — often referred to as the CMA9 — allow licenced startups and other fintech companies access to their data, given customer consent. This initiative was part of a broader set of reforms aimed at stimulating competition and innovation in the financial services industry.
Customer consent is paramount in open banking. Banks and fintechs must obtain explicit permission before accessing or using their financial data. This consent can be withdrawn at any time, providing customers with control over their financial information. Ultimately, the goal is to increase transparency in the service of the consumer, enabling them to access and utilise their finances more effectively.
“Open banking means that as a consumer, I can request that my financial services provider shares my data with whoever I want them to share it with, so I suddenly get access to my data,” says Pester. “It’s historically been very hard for customers to know more than their bank about their financial services, or to know what they’re paying for.
“The internet gave us price discovery and changed the way many of the banks functioned. I think we’re about to see another revolution in enabling consumers to know more about themselves and their own data and get a better deal.”
