As I’ve iterated more times than I can remember over the last two years, the implementation of Open Banking has changed the face of finance for ever.
To my eye, most financial institutions have now reached ‘base camp’ with Open Banking, that is to say, the development of account aggregation within mobile apps. This is nice, and I’m sure consumers are enjoying having access to all their accounts in one place.
The next step is for banks and financial institutions to begin deriving value from their use of bank data. We are now beginning to see new services being launched by banks and FinTech’s that will allow financial institutions as well as consumers to reap the rewards bank data can provide.
To that end, we here at DirectID have been working with banks and lenders to bring a new proposition to market.
Income Verification from DirectID, gives a visual and accurate depiction of an applicant's income, relayed to you in seconds.
In this article, I want to outline why the product was developed. In essence, from talking to our partners and customers, we have established that income plays an central part in the lending decision - and not being able to accurately and quickly input an applicant's income is a major challenge.
It is also critical for income to be established prior to the awarding of credit in order to ensure they are lending responsibly and offsetting any future risk of bad debt.
We work with numerous banks and lenders. On top of that we’ve spoken to many more over the course of the last year, both in the UK and Europe, and across the globe.
As such, I have a good idea of some of the challenges that are witnessed in the banking sector.
One of the biggest that we’ve witnessed is the need to stay competitive.
The finance sector is far more crowded than it was just 10 years ago, with the Challenger banks now boasting healthy customer acquisition, impressive UX across their apps and web interface, as well as innovative new services. By way of example, just look at Revolut, who have become the UK's most valuable FinTech, valued at over £4 billion.
Reduce Operational Costs
Having an applicant’s income calculated within seconds of them making an application for a loan or credit totally negates the need for paper-based bank statements. The savings in time and resource here are enormous. It could take a few weeks for an applicant to submit their bank statements. And in that time, there’s plenty of opportunity for them to decide not to proceed, or to find an alternative lender.
We're sympathetic to the hurdles that banks need to jump through in order to grant a loan. As well as AML and KYC checks, there are new rules on affordability to consider. For these reasons and more, it is vital that a sound lending decision is made, that can be justified and validated.
Income verification allows you to do just that. With a solution such as DirectID's, banks and lenders can know an applicant’s income exactly and can then calculate their monthly disposable income accordingly.
Thin Credit Files
Many of us will have friends and colleagues who are not British by birth. It feels a long time since I made the long journey from Canada to Scotland, but it is one that I remember well.
With individuals moving homes and countries with such frequency why is it that when beginning life in a new country, you also start with a blank credit file? An income verification solution means that those with thin credit files can illustrate exactly what their income is.
Understanding credit risk is a difficult challenge because most people aren’t paid monthly, or consistently. When we consider those working in the gig economy, students, retired, and others; those that get paid monthly are actually in the minority. To make a decision around credit risk, Underwriters or others need some context on which to base a lending decision. We need to understand what kind of income an applicant has – frequency, recency and more are all critical factors.
This works both ways. While those with thin credit files can demonstrate why they might be right for a loan, it also gives the creditor more protection as they can protect themselves from applicants unable to practically make repayments or those that pose a risk.
When we were conducting research into loan applications and how Open Banking could support banks and lenders, I was struck by the volume of fraudulent activity that financial institutions need to filter out in order to service genuine applications. Open Banking removes any opportunity for fraud as through APIs, direct access is made with an applicant’s bank account - there is no scope to alter paper-based statements. Our Income Verification solution then looks back over many months to calculate income, not just the last one or two.
Income verification is one of the first services that will allow banks and lenders to derive value from Open Banking. The savings in time, cost and resource through its use are enormous and as its such reception from those who have trialled it use has been universally positive.
Reducing fraud, servicing customers with a thin credit file, widening prospect pools of potential customers, and illustrating good governance are all vitally important to lenders in 2019. We think that the introduction of our Income Verification solution will give financial institutions the answers to these questions.
Ready to learn more? Speak to one of our bank data specialists today to organise a free demo!
This article was originally published in April 2019 and has been updated to reflect context.