Income verification has always been a challenging task for lenders. The ability to gather information about a customer’s income to decipher their eligibility for a loan. The most common ways of doing this were paychecks, payslips, and tax returns. With the advent of open banking, income verification has been simplified and evolved into the foundation of something bigger. Let’s investigate.
Paychecks or payslips
This has been the traditional way banks and lending organisations have been verifying a loan applicant’s income. While that’s a perfectly reasonable way to go about it, it’s also a very challenging method due to its inefficient nature. Here are some of the reasons this is considered to be antiquated.
- No standardisation — that means there is no benchmark or verification and analysis. Each document can be unique, which makes its review both time-consuming and prone to fraud.
- Forgery — physical or digital documents are always prone to forgery in the hands of a knowledgeable fraudster.
- Payslips are static — Sure, getting access to a loan applicant’s income is helpful, but it doesn’t mean it’s enough. Finance is a dynamic process and income verification should be much more than a number. It should include transaction history, raise, breakdown of the salary and many more details that a simple doc is unable to provide.
A tax return is a document declaring a person’s liability for taxation. These return forms are provided by government agencies responsible for collecting taxes, such as the IRS in the USA or HM Revenue & Customs in the UK. These forms contain detailed information about a person’s income background and would be ideal sources for income verification. Once again, they do come with certain caveats.
Although government service digitalisation has made tax report acquisition easier, there are still several reasons why they might not be the ideal data source:
- Sourcing the form — These documents are difficult to acquire and the process requires loan applicants to familiarise themselves with complicated government services.
- Timing — Tax reporting does not happen in real-time. What tends to happen is that people submit these forms once a year, detailing their income for the past 12 months. That means there is a time lag between what’s happening and what’s been reported.
- Wrong incentives — Tax evasion is one of the most common offences worldwide. Why? Because omitting to report all of your income means you’ll pay less tax. While that is illegal, it means that tax return forms might not always be an accurate representation of a person’s income status.
Account information: going beyond income verification
What open banking proposes is a much easier, and more efficient way of gathering information. Open banking APIs mean interested parties can access information from someone’s account in real time.
Apart from the benefit of getting information at the right time, open banking opens up the umbrella of income aggregation. We live in an era where people are changing the way they work. The ‘gig economy’ is a real thing with people earning income as:
- Uber drivers
- Online investors (NFTs)
- Sneaker resellers
- Freelance artists
These are types of employment that are not reflected or encapsulated in the traditional income reporting process.
As mentioned above, income verification can be the building block of something much more helpful – a comprehensive financial profile. By accessing open banking data, interested parties can track:
- Spending habits
- Risk appetite
- Income sources
By acquiring this information, they can build predictive models, assess risk and make informed decisions regarding any user’s current and future status. Account data provide context, meaning that each figure has more depth and layers than it would in a vacuum. Open Banking is the gateway to a more straightforward income verification process and elaborate customer analysis.