Open banking and payday loans

Open banking is changing how we manage money – and how lenders decide whether to approve short-term borrowing. If you’ve ever applied for a payday loan or considered one, you may have noticed lenders now asking if they can access your bank account data directly. That’s open banking in action.

This guide explains how open banking is used in payday and short-term lending, what it means for you, and how to stay safe and in control of your data. We’ll also explore the benefits, risks, and where to get free financial advice if you’re worried about debt.

In this guide:

• What is open banking?
• How payday loan lenders use open banking
• Benefits of open banking for borrowers
• Open banking risks and things to watch out for
• Alternatives to payday loans
• Where to get free help with debt
• Open banking and payday loans: Key takeaways

What is open banking?

Open banking is a secure way for you to share your financial data with regulated companies – like lenders, budgeting apps, or banks – through encrypted connections.

Instead of sending payslips, bank statements, or piles of paperwork, you can give a lender permission to see your account history directly. They’ll only see the data relevant to your application, such as:

• Regular income (wages and/or benefits)
• Outgoings (rent, bills, food, debt repayments)
• Spending patterns (including discretionary or impulse spending)

In the UK, open banking has been regulated by the Financial Conduct Authority (FCA) since 2018. You remain completely in control, able to grant or withdraw consent at any time.

If you’d like a primer on how open banking works more generally, check out our complete open banking guide.

How payday loan lenders use open banking

When you apply for a payday loan with open banking, the lender needs to decide quickly whether you can afford to borrow. Instead of relying on credit scores alone, they use open banking to get a more detailed, real-time picture of your finances.

Here’s what usually happens:

1. Consent request: The lender asks if you agree to share your account data via a regulated open banking provider.
2. Secure connection: You log into your online banking and authorise the data share.
3. Assessment: The lender reviews your income, outgoings, and spending behaviour.
4. Decision: If your finances look stable enough, the loan may be approved.

This process is fast, digital, and transparent. Instead of waiting days, many lenders can reach a decision within minutes.

Benefits of open banking for borrowers

Open banking has replaced many of the older affordability checks that relied on things like self-reported income, credit reports, or paper bank statements. Those methods could be slow and sometimes didn’t reflect someone’s real financial situation. Open banking offers a more reliable, real-time view of your financial health.

And while it might feel intrusive, using open banking has  some real advantages:

• Faster applications: No need to scan, print or send bank statements.
• Fairer assessments: Your actual income and outgoings are considered, not just a credit score.
• Improved transparency: You can see exactly what data you’re sharing.
• Lower risk of over-borrowing: Lenders can safeguard borrowers and reject applications that they believe are unaffordable.
• Access for non-traditional earners: If you’re self-employed, on benefits ,or have irregular income, open banking can help lenders understand your financial situation more accurately.

For many, loans with open banking feel quicker and fairer than previous eligibility checks. The FCA has also been very clear that loan lenders must prioritise affordability checks – and open banking helps them do exactly that.

Open banking risks and things to watch out for

That said, borrowers should also be aware of some potential risks:

• Data sharing: Although regulated, you’re still handing sensitive information to a third party. Always check that the provider is FCA-authorised by checking the Financial Services Register.
• Over-reliance on instant decisions: The speed of approval may encourage impulse borrowing. Take time to consider whether you really need the loan.
• Digital challenges: If you’re not confident with online banking, you may find the process complicated, but you can always reach out to the lender directly for support.

Remember: just because a lender offers you a payday loan doesn’t mean it’s always the right choice. It’s important to assess your affordability and consider any possible alternatives before committing.

Alternatives to payday loans

If you’re struggling to cover costs, payday loans aren’t your only option. Other alternatives may include:

• Short-term loans from regulated lenders: Short-term loans like ours can help offer flexible repayments over two to six months.
• Credit unions: Local organisations that offer affordable credit.
• Budgeting tools: Open banking-powered apps can help track spending and avoid shortfalls.
• Debt support: If you’re borrowing to cover essentials, it may be time to seek help.

If you’re considering a loan, make sure you’re aware of the risks, such as what happens when you fall behind on loan payments. Missed payments can negatively impact your credit report for up to six years.

Where to get free help with debt

If you’re feeling overwhelmed or stuck in a cycle of borrowing, you don’t have to face it alone. Free, confidential help is available from various independent resources, including:

• StepChange: Debt advice and solutions
• Citizens Advice: Practical support and advocacy
• MoneyHelper: Government-backed guidance
• National Debtline: Helpline and online tools

You’ll also find other useful resources on our Moneyboat support organisation page, helping you find impartial guidance for money worries and mental health support.

Open banking and payday loans: Key takeaways

• Open banking for payday loans uses secure data sharing to check your affordability quickly and fairly.
• Thanks to open banking, payday loan lenders offer faster approvals and better transparency, especially for people with non-traditional incomes.
• Potential risks include data privacy concerns and the temptation to borrow too quickly.
• Always weigh up alternatives and seek free independent advice if you’re struggling with debt.

Looking for more helpful financial insights? Our Moneyboat blog can help you learn more about budgeting and financial safety, including guides on how to prevent financial cybercrime and how to save money each month.