Open banking for tenant referencing and why it’s important

Of all the tasks affiliated with being a landlord, the admin and paperwork involved with tenant referencing has got to be up there with some of the most mundane and tedious tasks. From emailed PDFs of bank statements, payslips that may or may not be genuine and credit checks that only tell part of the story, it’s a slow and manual process. 

Not only this, but payslip fraud is on the rise, making up over half of all tenancy fraud. With fraudsters getting better at faking documents, a safer and quicker way to verify tenants’ income is needed.

Enter: open banking for tenant referencing. Open banking presents an opportunity to not only streamline this process and ditch the piles of documents but also to securely share tenants’ financial data directly through their bank. In this article, we explore what open banking is, how it fits into modern tenant referencing and how you can start using it to reduce arrears and voids whilst opening your doors to more of the right tenants.

What is open banking?

Open banking is a government-backed scheme that provides a secure way for you to electronically share financial records from your online bank account with third parties. It uses the same technology your bank uses to allow you to view your accounts with other providers from within the app and to apply for loans and mortgages, for instance.

In basic terms, it’s secure, read-only access to a tenant’s bank data with their consent. No passwords shared, FCA-regulated providers only, and data is limited in scope and timeframe.

Open banking and tenant referencing

Let’s put this into the context of tenant referencing. Traditional methods of tenant referencing included exchanging PDFs and payslips and making phone calls to employers. With open banking, the process looks like this:

• Tenant receives a link from your letting agent or referencing provider asking them to share their bank data using open banking
• They click the link, choose their bank and are briefly redirected to their normal online banking or banking app to log in
• They confirm that they are happy to share a read-only view of their recent transactions
• The referencing company securely pulls in a snapshot of their income, regular bills and rent payments and turns that into an affordability report.

It’s not hard to see why open banking is changing the tenant referencing game. Whilst it’s not necessarily a replacement for all checks, when it comes to tenant referencing, it’s significantly faster and more secure than providing a traditional bank statement. Often, tenants can pass referencing in a single day.

Check out our guide on the tenant referencing process.

Key benefits of open banking for tenant referencing

So, we’ve covered the efficiency and safety benefits of open banking for tenant referencing. But what else makes it something that landlords looking to simplify the process should consider?

See real income patterns

Traditionally, a landlord would request payslips and bank statements, but open banking provides real income patterns, rather than just a salary on paper. It gives the potential to spot existing debts and any regular financial commitments.

Essentially, this helps a landlord differentiate between tenants who look good on paper but can’t actually afford the rent and tenants who genuinely could be a great fit for your tenancy.

Reduce the risk of fraud

Whilst PDF statements can be edited and tampered with, fake payslips have become a real issue; direct bank data makes this virtually impossible. Open banking reduces the risk of fraud, which, in turn, reduces the risk of you taking on tenants that may be susceptible to falling into rent arrears and ultimately costing you in legal costs.

Instant data access

Arguably, the biggest benefit of open banking for tenant referencing is that it simply speeds up the process. Handling the process manually can result in days spent chasing documents. But compare this to instant access to the data, and you can make faster decisions and get your properties occupied sooner.

Fairer decisions

A common concern and problem amongst young people looking to rent, or those new to the UK or self-employed tenants, is not having the evidence behind them in terms of payslips and credit scores to help them pass the tenant referencing stage.

Open banking allows landlords to see real payment behaviour, rather than relying on these traditional methods. This leads to fairer decisions and confident agreements for tenants who may otherwise be unfairly declined.

Concerns around open banking for tenant referencing

Of course, with anything, it’s not all benefits and advantages. It is important to consider some common concerns around open banking if you’re considering implementing it into your processes.

Not all tenants are comfortable with it

It could be that you are met with resistance from some tenants when it comes to open banking. Some people prefer the traditional methods over a more digital approach and don’t like the idea of ‘sharing their bank data’. They may feel that a landlord would see too much of what they deem to be private information, for example, where they shop or what they spend money on.

Landlords can reassure tenants that this data is read-only and regulated but may have to accept that sometimes open banking could potentially put off good tenants who don’t fully understand or embrace it.

Not all tenants have online banking

Whilst they may be few and far between these days, open banking assumes that the tenant has online banking, a smartphone and is confident using them. This may not always be the case. Older tenants, for instance, or lower-income tenants or those with limited digital skills may struggle. In these cases, it’s important to have the traditional process to fall back on to accommodate these tenants.

Technical issues

Being too reliant on technology can mean that, should there be any technical issue, such as connection failures, it can slow things down rather than speed them up. Again, it’s wise to have a traditional process to fall back on if open banking is not possible for whatever reason.

Possible bias

Relying on a referencing system can result in you missing the bigger picture. If you’re using a referencing system alongside open banking, it might automatically flag things like overdraft usage or variable income as a concern. It might be, however, that this tenant has always paid their rent. Landlords must understand how reports are scored and not just accept a pass/fail at face value.

How to get started

If open banking for tenant referencing is something that you’re interested in implementing, you might be wondering how exactly you get started. Here’s a simple step-by-step guide:

• Decide on your referencing policy – are you going to use a letting agent, a referencing company or manage it yourself? Additionally, decide whether you will require all tenants to use open banking, or perhaps only use it in higher-risk cases.
• Choose a referencing provider or speak to your agent – find out if they are using open banking already, which provider and what exactly the report will show.
• Communicate the process clearly with tenants – explain why you use open banking, what’s shared and what isn’t and the benefits it presents to the tenant.

Open banking for tenant referencing is about one thing: protecting your time and your investment. The more you can front-load your checks, the less likely you are to be dealing with arrears, disputes or the cost and stress of finding a new tenant sooner than planned. Good data helps you make better decisions, but it doesn’t remove every risk that comes with owning and letting property.

That’s why, alongside strong referencing, it’s vital to make sure you’ve got comprehensive landlord cover in place. Insurance can step in when even the best systems and judgment can’t prevent the unexpected.

If you want to protect both your time and the long-term value of your portfolio, it makes sense to review your cover regularly and check its fit for purpose. To find out what’s available and get a quote tailored to your properties, contact CIA Landlord Insurance and speak to the team about comprehensive landlord insurance.