Open Finance's potential and the digitisation of tax records
Between coronavirus pushing the economy to the limit and a group of Redditors challenging the financial market hegemony, people are questioning the role of established institutions. If finance doesn’t work to benefit the economy, businesses, or individuals, then who is it for?
Yet, just as traditional banking models have been upended by technology, so too could finance.
Through Open Banking, challenger banks can connect services digitally, cutting inefficiencies and costs while speeding up transactions. Open Finance can build on this model to connect financial services via technology, upending the existing financial model.
So how could Open Finance benefit society?
Using tax Information
Every working adult pays income tax, creating a centralised repository of financial information for every UK worker. Unfortunately, HMRC is currently a black hole of information.
However, by Making Tax Digital (MTD), HMRC is effectively allowing individuals to keep tax records on their chosen software, providing assurance for any financial institutions using that information.
Individuals could then share some of this information via Open Finance to help with things like loan applications or managing credit scores.
Faster loan applications
With access to complete and validated financial information, lenders would be able to more quickly and accurately assess an individual’s risk.
Mortgage applications, for example, can take months to approve and, since property sales usually occur in a chain, these inefficiencies slow the process down for everyone and can have major impacts.
If, however, mortgage applicants could simply share validated financial/tax records, mortgage providers could use that information to make quick decisions with reduced risk.
This process could be applied to any kind of loan application, whether for a business venture or property purchase, for example, making finance a more productive driver of growth in the real economy.
Building accurate risk profiles
Currently, credit reference agencies use crude and easily gamed measures to assess risk.
Someone who has always been careful with their money and never taken out a loan or credit card, for example, will have a far worse credit rating than someone who regularly uses debt to finance their lifestyle.
With Open Finance, people would be able to quickly prove their earnings, spending, and savings, decreasing their risk profile in line with reality. This both transfers more power to individuals and contributes to faster economic growth while reducing overall risk.
Empowering PAYE taxpayers
Currently, PAYE taxpayers have little, if any, control over their tax contributions and can’t claim many of the same expenses as self-assessed taxpayers. Instead, PAYE taxpayers must use their already-taxed income for many expenses, especially homeworkers.
This imbalance could be rectified with MTD for PAYE taxpayers, allowing them to access their digital tax records using their preferred software, claim for reasonable allowances and benefit from Open Finance.
Ultimately, Open Finance has the potential to help people access finance quicker in order to grow their business and personal finances while reducing risk, inefficiencies, and costs. Not only would this lead to growth and recovery, but it would also reduce risk, helping make finance more sustainable.
This article was contributed by Sudesh Sud, Founder and CEO of APARI.
Sud started in the accounting profession with KPMG, where he worked with some high-profile global clients, including Credit Suisse and JP Morgan. He started APARI in 2018.