Open Banking and use in tenant referencing
Open banking along with a credit report has been utilised by several tenant referencing companies as the method of providing a full reference report. However, if Open Banking is used as the process for payment/income verification, this has serious downsides and should not be relied upon when seeking validation as to an applicant's suitablility.
What is Open Banking?
Open Banking is a change to the UK banking industry and has been designed to give access by an applicant to share their financial information electronically. For some industries such as money lenders where full referencing is not undertaken, Open Banking provides an automated decision regarding an individual from the previous method of a credit check and a scan of bank statements. However, property rentals are not white goods or monetary sums and full referencing should always be undertaken to identify the risk regarding the application; if Open Banking and a credit search is used as the process for tenancy suitability, this is a flawed high-risk method as has been highlighted below:
Income confirmation
As bank transactions identify incoming payments, this should not be treated as being validation of a person’s post-tax income position and the suitability for tenancy. Complete verification of an applicant’s current and future income situation is the most important aspect regarding an application, as this identifies how the rent is to be paid with in-depth referencing being a necessity in this area to help guard against the bad tenant experience.
Key areas of concern
Open Banking cannot confirm or distnguish in the following areas:-
• the type of income stream - employed, fixed term contractor/temp worker or self employed
• If the applicant is self employed, Open Banking uses the TURNOVER figure and does not identify the profit.
• Open Banking Includes additional elements as "income" such as refunds and related party transactions.
• if the income is the basic salary or includes non-guaranteed bonuses etc.
• the applicant’s job title
• the stability of the application – when did the applicant start?
• is the work position set to change or end?
• is the applicant still at the workplace?
• has the applicant resigned?
• Open Banking cannot confirm a future work position
Landlord/letting agent reference where the applicant is a tenant.
We have seen examples of landlord/letting agent references not being undertaken, with Open Banking used as the sole source of information to confirm a tenant’s performance as a tenant.
Key areas of concern
• Tenancy breaches
• Tenancy commitment and payment validation
Tenancy breaches
Clearly, bank transactions alone cannot identify if there have been tenancy breaches or problems such as damage, anti-social behaviour, unauthorised occupants, use of the property as AirBNB accommodation, consistent shortfall rental payments etc. However, some referencing companies state there have been no tenancy breaches, having identified this point as a report presentation area of concern.
Tenancy commitment and payment validation
Once again, Open Banking alone cannot validate if there is a tenancy commitment at the current rental address. In addition, Open Banking cannot confirm if the payment transactions are for the rental property in question and if the payments have been made to the actual landlord.
Copy references for the landlord
On occasion, landlords request the copy references that have been obtained regarding applicants once the referencing has been completed. With Open Banking, references are not available.
Conclusion
There really is no shortcut to in-depth full referencing in assessing the suitability of prospective tenants and in minimising the bad tenant experience; the use of Open Banking does not provide the required referencing assurances sought by letting agents and landlords.
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