Open banking is a new way to connect lenders and borrowers. It’s time to start thinking about how it might impact your real estate business in terms of innovation.
The term “open banking” refers to the idea that banks should provide customers with access to information about their financial accounts, regardless of whether they use those services. This means that consumers will be able to see all of their account balances, transaction history, and other important details online.
You can read more about open banking technology in general in our previous article on the topic. This article will focus on how open banking is relevant for the proptech industry.
There were three major waves of real estate digitalization and property technology development identified since 2000:
- V1.0: Moving the industry online in general. This involved introducing digitalization and digitization for basic processes like online booking, etc.
- V2.0: Real estate startups appeared, offering innovating products that involved integrations with other services and marketplaces.
- V3.0: PropTech as we know it at the current moment, where there is more experimentation with emerging technologies like virtual reality, blockchain, open banking, and others.
Open Banking Benefits for Real Estate Industry
There are numerous benefits and advantages of open banking for businesses and people in general. However, when you deal with real estate, where the sums of money and transactions are usually quite high and the risks are, accordingly, also quite high, you need more than just bank statements.
The bureaucratic procedures for acquiring or renting or lending properties are cumbersome. All sides are trying to ensure that their rights are observed and that the possible risks are assessed and minimized.
How can open banking help with that?
Minimized paperwork. One of the benefits is a reduced amount of paperwork to print out and exchange. When you have everything digitalized, it increases the efficiency of both sides. You can find necessary information much faster, not to mention that digital signatures from banking institutions are more secure than just a printout that could’ve been edited to match the requirements.
Personalized offers. Open banking allows lenders to share data with third parties, such as real estate agents. Of course, there is no sensitive data that is shared, but the general audience information is helpful to create more personalized offers to attract both sellers and buyers.
Improved customer experience and service. Open banking streamlines and automates many of the mundane and boring aspects of the paperwork, which, in turn, helps to communicate about more important subjects and just be humans without being buried under the papers. Also, open banking is a trend on a rise right now, so by offering this feature to your customers, you open more doors for them to enter because your option seems more attractive than the one where they have to do all the work.
Increased security and data protection. At first, it might seem that sharing your banking information with third parties is risky and scary. But in fact, open banking increases the security of your financial data because it is only accessible with specific credentials and only in a very specific way. For example, if you need to provide a financial statement from your bank, the company will get only that, nothing additional that might provoke problems.
With open banking, all the actors of the real estate property processes are benefiting: renters, landlords, and property owners. In today’s world of image editing tools, it’s simple to forge bank statements. However, with open banking’s data directly from the bank, it’s impossible.
Simplified communication. Along with the customer experience and service, you get simplified communication because it’s focused on the properties and not so much on the paperwork itself. For people, it’s important to feel that they are treated as people and not just as bringers of the papers, and more time can be spent on discussing the pros and cons of specific properties with the goal to find the best fitting option.
Faster approval rates. This is one of the most important features and advantages of open banking for everyone involved. With traditional banking systems, all the paperwork has to be prepared and analyzed manually. Did the renter pay the rent on time before? Are there any issues the landlord should know about in terms of financial information? These and many other questions have to be answered beforehand in order to approve the person’s ability to rent or purchase a place. With PropTech and open banking, this becomes faster and easier because it is easier for computers to detect anomalies and analyze a large number of data and figures to see whether everything is good. Additionally, this verification can be done at the onboarding stage with minimal effort required.
Examples of Open Banking for Real Estate Businesses
Open banking connects technical providers, banks, and third partners together to allow data exchange in a secure and simplified manner.
Here is a general overview of how the traditional process of renting a real estate property works as opposed to the process empowered by open banking technology.
The steps to rent a place in the traditional process (and this is a quick overview):
- You look for a property on a real estate aggregator and find ones that you like.
- You apply for that property and, if/when approved, you submit the necessary documents.
- Once approved, you get a call or an email with a notification about it.
- You negotiate and sign the contract.
- You pay your rental bond as well as the monthly rental fee.
- Enjoy your life in the new place.
- Once the period ends and you need to look for another rental, you terminate the contract and repeat the previous steps for the next property.
Does open banking change that? Oh yes.
- You look for a place you like and find it.
- You connect your bank account and this step:
- Verifies your identity
- Confirms your income
- Checks the affordability of the chosen property
- Provides necessary information to the real estate agency
- Authorizes the future payments for the rent (with your conscious consent)
- Sign the contract
- Terminate the contract when complete
Due to the COVID-19 pandemic, the adoption of financial technologies in general and especially in real estate was accelerated throughout the world. With fewer opportunities to meet in person, technologies came to the rescue to streamline the processes that didn’t require too much human interaction, leaving the times to meet face-to-face for more critical ones. This results in:
- Greater speed
- Less bureaucracy
- Friendlier apps
Let’s see what were the business cases for the combination of FinTech and PropTech: namely open banking for the real estate industry.
Credit & Transaction History
Does the person have good financial management skills? Does he have any outstanding debts that might become obstacles to paying rent? Did the person pay the previous credits on time?
All this information can be presented in a simple report from the bank. The old way was to check all the data manually to see whether there were any anomalies. However, with the open banking technology, real estate agents can easily get the analysis of the credit history right away and have access only to the information necessary for their purposes.
Also, credit bureaus sometimes don’t have the entire data on tenants’ financial stability and income levels – something where open banking technology can be a handy assistant.
Did the person rent a place before? Were there any problems with previous landlords in terms of paying the rent?
Rental history, together with credit history, can be checked using open banking technology with the help of, for example, Rent Passports. While credit history checks the financial practices and discipline in general, rental history checks the payments connected with the invoices for the rent.
When a person had a good rental history, this increases the probability of being approved for the new place faster. Tenants can also automatically verify their past rental payments and share this information with landlords.
Besides less bureaucracy, it also helps renters get references for their next move. For example, in the United Kingdom alone there are over 15 million renters, who move every 12-18 months, and every time they move, they need a new reference. With open banking, this process becomes a lot less stressful for everyone involved. One of the providers that offer data-based referencing to real estate businesses is called Canopy.
Open banking APIs are also incredibly helpful in reducing fraud for document verification. It’s one thing to bring copies of documents and another to have them directly from the banking institution.
Banks usually require identity and address proofs as well as other additional documents when they open accounts for persons or for companies, therefore they do most of the verification themselves. As a result, there is no need to go through the same process again – that very information can be shared in a secure way.
Reduced back-office costs for screening tenants
Back-office and administrative tasks take a lot of time and resources. You need to hire people whose main job would be to screen tenants and, let’s admit, that’s a rather boring mundane task that mainly revolves around papers, papers, and some more papers.
With artificial intelligence for the identity verification process, you, as a business owner, may pay a bit more at the beginning to introduce this technology and integrate it into your processes, but in the long run, you’ll reduce the administrative and HR costs dramatically. At the same time, the quality of checks would not suffer and may actually improve.
Automating payments is also a very convenient thing because it takes care of the “Oh, it’s that time of the month already to pay the rent!”
Besides the basic automated payments, which are available in numerous financial services, there is an added feature that’s convenient for landlords and real estate managers – disbursement of the payments.
For example, the tenant pays $1,000 for rent. The landlord gets those funds and has the additional expenses involved like paying the real estate agent’s fee or other recurring payments. With open banking technologies and set up automatic payments, the amount that the tenant pays is automatically distributed to the required accounts.
Crowdfunding / Crowdlending
Open banking, due to its security and anti-fraud precautions allows providing secure crowdfunding or crowdlending service.
Crowdfunding in the case of real estate is a collective property investment while crowdlending is an alternative to bank mortgage loans. Buying a home usually requires a hefty down payment that many cannot afford (even if they can easily manage the monthly payments.) As a result, a large portion of upper-middle-class people would like to purchase a home, but can’t overcome the obstacle of the initial payment.
Open Banking and Real Estate: In Conclusion
Much more can be said about the real estate market and how it’s powered up by open banking and other software technologies. We’ll stop here for now, but we believe that we are just beginning to see the potential.
With a growing world population and further urbanization, we need convenient ways to manage our lives and everything that is connected to our living areas. These tools are needed by tenants, landlords, mortgage brokers, real estate agencies, and many others involved in the industry.
Who benefits from it?
Everyone who’s involved.
Millennials and Gen Z especially are ready to take on the challenge of owning real estate and finding a place to live and take care of their families and with open banking, they have a chance to get a decent mortgage without a credit score even. All that is necessary is risk assessment and that can be done with the help of software and data.
How open banking can transform your business? Contact us to learn more.
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