Why some payday and short term lenders ask to access your internet banking

Let’s be honest, payday lenders don’t have the greatest reputation, despite recent regulations forcing them to clean up their act. So, you might still be alarmed if a payday lender or personal loans company asks for your internet banking logins, or requests 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 requests?

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How do lenders access my transaction data?

There are two ways lenders may want to access your transaction data:

1. By requesting your internet banking logins and then “scraping” your account history.
   Although not illegal, this is the less legit way to access your data. The lender will use a third-party software (Yodlee is a popular company that has helped businesses do this for a number of years) to access a “read-only” copy of your transaction history. Important to note: for this approach, you’ll have to hand over your login details, which may feel unnerving to say the least.
2. By asking you to authorise a connection to your account using “open banking”
   The newer and more secure 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.

What is open-banking?

The good news is that lenders are using the more secured approach to viewing your transactions, open-banking.

With open banking, your bank can securely share transactional data with third parties, if you give it permission to do so. You won’t need to hand over your internet banking login details in this situation. 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). More importantly, at any time you can revoke permission and your bank woon’t be able to share your data, 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, then the lender probably doesn’t have the right resources to conduct open-banking.

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 use your bank account transactions to get an idea of your incomings and outgoings. This helps them decide whether a payday/short term loan would be suitable, and what credit limit would be most affordable for you.
• 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 your overdraft 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 will 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. This way you won’t collect debt or pay interest on a loan you’re able to pay back.

I don’t want to share my login details… do I have an alternative?

Absolutely, although it may rule out some potential lenders.

It’s completely understandable if you don’t want to hand over your login details. Especially since your bank probably wouldn’t approve of your details being shared with a third party, as there’s a great risk of fraud being committed. Moreover, since you shared your details, you could be held liable.

Most payday/short term lenders 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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