Income verification is amongst the most important procedures that a bank or lender conducts before approving a loan. The process is equally important for large retail banks and small online lenders alike — the aim is to use income information for calculating whether the customer can afford new liabilities (i.e. do “affordability” checks) and whether the customer fits the risk profile of the lender (ie. do “credit risk” calculations).
While income verification has always been a crucial part of the lending business, the process itself is far from simple. Depending on the geography, a loan applicant would be asked to submit any of the following documents to verify their income:
1. payslips or salary payment documents created by the employer (in physical form, scanned or digital);
2. bank statements (in physical form, scanned or digital);
3. tax payment documents acquired from the tax registry.
Open Banking grants any lender immediate and secure access to customer account information — as long as they have the customer’s consent. This new process has several benefits:
More complete income data.
Payslips and tax payment documents are often useless in cases where a customer is a freelancer, works abroad or makes additional income from the “gig economy” (e.g. Airbnb, Uber, Fiverr, etc.). Access to account information gives the lender a full overview of all the incoming cash flows to make a more realistic assessment of the loan applicant’s financial health.
Better customer conversion rates.
Customers value simplicity; attaching payslips or bank statements to loan applications is the direct opposite. Automated access to account information means less trouble for the customer providing the data required for credit assessment.
A universal way to verify income, anywhere in the world.
Once a lender uses the account information to verify income, they can then perform income verification of anyone with a bank account, regardless of their country of origin. While this might sound like science fiction, it is already happening as more people relocate or work abroad.
With Open Banking slowly becoming a reality, most innovative financial institutions are already preparing for a new era of access to account information. Here are a few things any financial institution can do to prepare:
Make a critical assessment of the existing income verification process.
How are you currently verifying income and what are the results? What percentage of applications are rejected due to insufficient income data? If the answer is “too many”, you’re ready for a change.
If you're not already using an account aggregator, consider trying one. Or several.
Before Open Banking comes into full force, it’s possible to use third-party account aggregation solutions that grant you access to customer account data in an automated way. Here's a list of some aggregators that provide the service.
If you’re already using an account aggregator, consider using a good transaction categorisation engine on top.
An account aggregator alone is often insufficient for verifying income with high accuracy. Income verification is only as good as the transaction categorisation algorithm behind it. There are a few companies on the market that specialise in accurate income verification algorithms, Nordigen is one of them.
Here’s what we've been up to recently.
In recent years, tech giants like Apple, Google and Amazon have started planting flags in the financial sector, intruding on traditional financial institutions. Facebook is finally joining the race with Libra, its digital currency described as a “simple global currency and infrastructure that empower billions of people.”
As a society, we are gradually moving away from paper cash, increasingly gravitating towards alternative digital payment methods - contactless-cards, cryptocurrency, mobile and wearable technology. Regulatory driven initiatives like EU's PSD2 and UK's Open Banking are propelling financial innovation and enabling the emergence of new products and services.