You are your transactional data: Open Banking in tenant referencing
Dr Alexandra Ciocănel and Dr Alison Wallace, School for Business and Society, University of York
Tags: Proptech, private rental sector, tenant referencing, open banking
Output type: Research briefing
Target stakeholders: Proptech entrepreneurs, letting agencies, landlords, tenant groups, government
"Data privacy" by http://www.thoughtcatalog.com/ is licensed under Attribution 2.0 Generic (CC BY 2.0)
Although developed mainly for financial management services and payment tools, Open Banking has increasingly become a dominant tool of the trade in the tenant referencing industry in the last three years. The technological capacity to retrieve and share one's transactional data with third parties is now used to assess who is likelier to be a good tenant, reflecting a happy marriage between prop-tech and fin-tech. Open Banking undoubtedly brings increased time and cost efficiencies in tenant referencing and allows access to new volumes and types of data. But given that most of the ethos around Open Banking has been developed around consumer empowerment through better data control, it is essential to examine if how data is handled and used in the context of tenant referencing still holds to this ideal.
In this blog post, we draw on our findings from the project Code encounters: algorithmic risk profiling in housing, undertaken at the University of York and the University of Bristol and funded by the Nuffield Foundation. The project examines the societal impact of algorithmic risk-profiling tools lenders and landlords or letting agents use. During our research on tenant referencing in the private rental sector, Open Banking has been presented as the most important technological change in the industry. Still, opinions were split around its utility, relevance, and privacy. Professionals and tenants alike might find it a very time-efficient way of assessing affordability based on past data, but at the same time, concerns around the invasion of privacy and proper categorisation have been raised. In the following, we broach three important questions unfolding from our research.
1. Is consent really informed and really consented?
As tenant referencing firms currently provide it, Open Banking has an opt-in form of consent through which an individual can choose it as an option among others, in contrast with an opt-out form of consent specific to a default setting of a service. An Open Banking user journey in tenant referencing starts with applicants agreeing to go through it, but our research shows that applicants do not always understand that they have other options. For example, the section introducing Open Banking as an option in the portal of one of the most popular tenant referencing companies is titled 'Completing your reference quickly and securely'. Its content presents the benefits of using Open Banking and explains how salary and rent payments will be identified and how to log in. At the end of it, applicants have clearly marked the option to click 'Yes, I am happy to confirm my income and rent using Open Banking checks' while the fact that this can be skipped is less visible. A few of our research participants told us that they did not realise that during the application, they have the option not to go through Open Banking. Such applicants felt forced to do something that they found highly invasive as they did not see any point in sharing their bank account data for the purpose of application. But as many declared, tenants do not feel empowered regarding their data use during an application since they would consent to anything to get a tenancy in current market conditions.
At the same time, under the UK Open Banking regime, individuals have to give double consent to a financial institution to share their data and to a third party to collect it. Third parties in Open Banking can only be FCA-approved entities such as Account Information Service Providers. None of the tenant referencing companies currently on the market have this status, working in practice with various companies to access data. Still, only a few tenant referencing companies publicly disclose this, applicants being usually unaware that another party has access to their data. These two issues raise important questions about informed consent, aggravating what is already a false agreement given that the content of the documentation that should inform consent is usually unreadable due to its legalistic jargon and length.
2. What counts as affordability?
Open Banking is usually promoted as the most efficient tool to calculate affordability, automating a process that involves sending all sorts of documents, such as pay slips and bank statements, by identifying incomes and payments from one's bank account. Usually, an affordability assessment involves the categorisation of income, and questions might be asked about the amounts involved and their source and receiver. Still, there is no common standard in the industry for calculating affordability. Given the richness of data available, different companies might take different approaches, including more categories of expenses. Some tenant referencing companies offer the option to ‘personalise’ the calculation of affordability based on criteria that a client might find important such as utility bills, groceries, or gambling. Although many would consider affordability a legitimate goal of tenant referencing, it is essential to be more transparent about its calculation and clarify when it is actually an assessment of a lifestyle. Given that housing costs are usually one of the main priorities of tenants, inferring future rental payment behaviour out of present spending habits might be a misleading route. Moreover, not informing applicants about what exactly will be assessed, even though this is based on having shared access to their data, represents a betrayal of the values of Open Banking.
3. What type of innovation does Open Banking bring to tenant referencing?
Time and cost efficiencies and increased security are undoubtedly the main benefits of Open Banking in tenant referencing, a technology that can allow for speedy results. However, our research participants were rather unconvinced about its 'revolutionary' impact, given that it has not transformed the main pillars of tenant referencing. At the same time, it is rather a very past-focused snapshot of an applicant, while algorithmic categorisation raises a few technical difficulties. In our research, landlords and letting agents spoke about tenant selection as a complex process that involves a formal tenant referencing assessment but also a more qualitative judgement in which information is gleaned from various sources while interacting with applicants. As such, tenant referencing and Open Banking were usually seen as a 'tool' among others, and what counted as determinative for a decision was instead decided on a case-by-case assessment. Hence, depending on how scrutinous a letting agent/landlord is, the time efficiencies brought by Open Banking might be actually diluted in practice, especially if the selection process tries to go beyond the financial assessment of an applicant.
Open Banking might be used as an alternative to check information about incomes that might be hard to prove only based on documentation, as for example, in the case of a self-employed person without an accountant and with various clients. However, writing an algorithm that can easily do this is complex. Some of our professional research participants expressed concerns that either what could be valid incomes are not properly taken into account or that once people know how this works, it might generate various ways of gaming the application. More generally, in tenant applications, there is a tendency to favour applicants that can show a future stream of regular incomes sufficient to assure the payment of rent. In contrast, those with insufficient or less well-regarded incomes but with substantial savings have lower chances of being accepted. Among our research participants, those who were receiving state pensions declared that they had a hard time finding something to rent given their low pension, despite having some important savings. As with other technology adoption, Open Banking will need continuous work of tinkering in order to make sure that its application does not exclude worthy applicants and that it really brings an improvement in the market.
The ethos of Open Banking celebrates individuals' ownership of their financial data, promoting this service as a solution that can drive competition and innovation and stop the monopolisation of digital data by big tech companies. However, its usage in tenant referencing shows that ownership of data does not equate with consumers' empowerment in using it, as consumers enter asymmetrical relationships in which they are rather forced to share their data which might be used in ways that they did not consider. Given that research has shown that consumers prefer more control of their data, businesses using Open Banking in the private rental market should ensure that they comply with its values by:
4.1 Making clear that there is an opt-out of data gathering
Enabling the ability to opt out reveals to consumers that a commercial organisation has implemented good data management. Given that current checks of incomes, previous rental payments, and assessments of affordability during tenant referencing can be easily made through other means, Open Banking should be presented as an option that applicants can freely choose. They should not feel pressured to do it given time constraints, and the interface of a tenant referencing process should clearly state the options available. This is extremely important since even landlords and letting agents agree that Open Banking is just a tool among many. Although tenant selection is increasingly focused on the financial characteristics of an applicant, landlords and letting agents alike seem to agree that the 'fiscal view is not necessarily the right answer' as this does not always guarantee a proper assessment of a 'good tenant'.
4.2 Being more transparent on how data is read from a bank account and used in risk profiling applicants
Given that consumers share important data about themselves through Open Banking, what is considered for calculating affordability and creating a risk profile should be clearly stated even before the start of the application. Among our research participants, there was a consensus that having access to a vast amount of transactional data goes beyond the purposes of tenant referencing being in this way important to make clearer how and what data circulates among the different actors involved and how assessments are being made. Especially since third parties such as Account Information Service Providers are involved in the process, applicants should be made better aware of how they extract the data and what is sent to referencing companies.
4.3 Being inclusive through properly recognising a variety of financial circumstances
The technological affordances of Open Banking should be used for the good, and tenant referencing companies need to make sure that they include all sorts of incomes, not only the most privileged ones. Affordability assessments should be more nuanced, and the granularity of Open Banking data could enable this in a more transparent way that really empowers consumers.