Open Banking and use in tenant referencing

Open banking along with a credit report has been utilised by several tenant referencing companies as the way to provide a quick reference. However, if Open Banking is used as the sole method of payment/income verification, this has serious downsides and is a flawed method of validation.

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 helps to provide a faster 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 so as to establish the risk regarding the application; if Open Banking and a credit search is used as the validation methods in tenant referencing for payments/income, this is inadequate and in effect, represents the equivalent of a credit check and obtaining copy bank statements.

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

Re: 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.

Re: 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.

Income confirmation

As bank transactions identify incoming payments, this should not be treated as being validation of a person’s income position and 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 and in-depth referencing is a requirement in this area to help guard against the bad tenant experience.

Key areas of concern

Open Banking cannot confirm the following:

• The type of income stream - employed, fixed term contractor/temp worker or self employed

• 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?

• The profit or loss figure for the self employed applicant

• Open Banking cannot confirm a future work position

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.