Let’s be honest: Payday lenders don’t have the best reputation, despite being forced to clean up their act in recent years. So you might still be alarmed if a payday lender or personal loans company asks for your internet banking logins, or asks you to authorise it to view your transaction history. So should you panic and hold down the power button on your computer/phone, or is there a legitimate reason for these request?
There are two ways lenders may want to access your transaction data:
- By requesting your internet banking logins and then “scraping” your account history.
Although not illegal, this is the less legit of the two approaches. You’ll hand over your login details so that the lender, with the help of third-party software (Yodlee is a popular company that has helped businesses do this for a number of years) can access “read-only” copies of your transactions. This is done almost instantly and more importantly, securely – using encryption. Some lenders (for example Savvy explicitly state that “No person can access your internet banking details” – so they’re more likely to be analysed by an algorithm.
- By asking you to authorise a connection to your account using “open banking”.
The newer and more legit of the two approaches takes advantage of a government-led initiative called open banking. Banks can make customer transactional data available to an FCA-regulated company, but only when the customer themselves requests this.
OK, but why does the lender need to see my online banking?
There are three main reasons why a lender might ask for visibility of your bank account:
- 1. To assess affordability.
Along with a traditional credit check, lenders can use your bank account transactions to get an idea of your income and outgoings to help them decide whether a payday/short term loan would be suitable, and what credit limit would be affordable.
- 2. To make deposits to your account when you’re at risk of going into unauthorised overdraft.
Overdrafts can be expensive – especially when they’re not authorised. If yours is more expensive than the interest on a short term loan, then you may decide to set a balance limit at which a payday lender should automatically issue credit to your account. Lenders should never initiate a loan without you asking them to do so first.
- 3. To collect repayments when there are sufficient funds in your account.
Some lenders can use visibility of your online banking to automatically take a repayment if they see money come into your account.
I don’t want to share my login details… do I have an alternative?
Absolutely, although it may rule out some potential lenders.
You’re right to hesitate: after all, your bank almost certainly wouldn’t approve of your internet banking login details being shared with a third party, and could even hold you liable if there are any unauthorised transactions, or fraud, as a result of you giving out your banking details.
The good news is that most of the lenders that previously used services like Yodlee to effectively login to your internet banking and scrape data, including SafetyNet Credit and Tappily, are now switching to the more legitimate approach of requesting you to authorise a secure connection through open banking.
With open banking, your bank can legitimately share transactional data with third parties, if you give it permission to do so. In this situation you won’t need to hand over your internet banking login details, but you will be prompted to give your bank permission to share transactional information with the lender. If you decide to do this, your bank will verify that the lender is authorised, before securely sharing your data via an API (application programming interface). You can then revoke your permission at any time (although if you’re still using a lender, be aware that this may invalidate the terms of your agreement).
Unfortunately it’s not likely to be a case of simply saying to a prospective lender “Can we do this via open banking instead?” – if it doesn’t suggest this method itself, it’s almost certainly not geared up for it yet.
Most payday/short term lenders still don’t use either of these approaches, so if you don’t need the automated deposits/collections, there are plenty of lenders who aren’t going to ask for your online banking information. These lenders may still request to be emailed copies of your bank statements, however.
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You can compare how much the loan that you have in mind would cost from a range of lenders by using the table below.
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