Anyone who has ever applied for a loan or sought to rent property has probably dealt with the process of providing proof of their income in some form or another.
For lenders, understanding client income amount and stability is crucial — these factors help them assess creditor ability to afford financial products or services that require regular payments.
Income verification is typically provided in the forms of paychecks (paystubs), tax returns or account data (either acquired through Open Banking APIs or bank statements).
In this article, we review the most popular types of income verification and outline why account data is ultimately the best data source for income verification.
These are either physical documents issued by an employer to remunerate an employee for their services (a paycheck) or a digital document detailing the payment amount calculation (a payslip). Although these types of income verification methods are commonly used in several countries, they come with a set of drawbacks:
There are no standardised forms for such type of documents;
Due to lack of standardisation, paychecks are time-consuming to process and automation of analysis is difficult to achieve;
Paychecks often are paper documents or PDF files, which have a higher fraud risk as they are easy to forge;
Performing paycheck analysis can in some cases involve the loan applicant’s employer, which can raise privacy concerns;
A tax return is a document declaring liability for taxation. These return forms are provided by government agencies responsible for the collection of taxes, such as IRS in the USA or HM Revenue & Customs in the UK. Although government service digitalisation has made tax report acquisition easier, there are still several reasons why they might not be the ideal data source:
These documents are difficult to acquire and the process requires loan applicants to familiarise themselves with complicated government services;
These documents often have a time lag depending on when taxes are reported;
These documents present a negative bias towards individuals who are not required to report particular income sources or don’t do it properly.
A typical form of account data is a bank statement — the summary of financial transactions which have occurred over a given period on a bank account. Using bank statements for income verification used to be a slow process — from acquiring them from the client’s bank, to actually processing them. The rise of various account aggregation services and Open Banking APIs, however, has made account data more easily accessible.
This type of income verification provides the most thorough view of a client’s income:
All taxed income (available via tax returns) and all payments provided by the employer (available via payslips) are available in bank statements;
Bank account contains information on additional revenue sources like income from rent, the ‘gig economy’ (e.g. UBER drivers), income from investments, etc.
Bank statements facilitate financial inclusion whereby income of freelancers or people who have recently moved to a new country can also be properly assessed.
In addition to having the most complete overview on the person's income, account data is already generally accepted for income verification in many countries. This makes it the perfect income verification solution for working with customers from multiple geographies.
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