The risk landscape for unsecured lending has radically changed within the last year. As lenders seek solutions to help identify well-qualified borrowers, consumers are demanding technology-driven capabilities and convenience. Fortunately, lenders have access to various tools to gauge an applicant’s ability to repay loans and to protect their business. For example, some business lenders are leveraging digital income and employment verifications.
Income and Employment Data Can Facilitate a Better Experience For All Parties Involved
Few parts of the account origination process are as timely or as notoriously clunky as income validation. Traditionally, lenders have verified income through the applicant’s employer or by asking the applicant to provide pay stubs or banking credentials. Both of these avenues create friction for both the borrower and the lender. Friction is bad, especially in today’s digital age of instant gratification. Customers simply don’t have the patience for it and will often abandon the process if delayed. Lenders can cut through these complexities with the right third-party verification partner.
What Should Lenders Do Next?
Lenders must first focus on the business problems they are trying to solve. A lender can then identify the data sources that best align with their business needs and customer segments. Here are three things to consider when using income data to grow business:
1. Credit Scores May Not Tell The Whole Story
Many lenders still rely on traditional credit scores and applicant-reported details to determine creditworthiness or to predict the stability of loans. However, relying solely on credit scores may not give a comprehensive view of credit risk. Not all consumers behave as their credit scores might indicate, especially when economic conditions may cause setbacks that impair credit.
Equifax research revealed that a significant segment of the population has average to damaged credit (i.e., near-prime or subprime) combined with positive financial capacity measures, such as low debt to income ratios. This combination attests to their potential ability to afford additional financial obligations — despite a low credit score. Income and employment data provided directly from employers can deliver a far more holistic and comprehensive view of a consumer’s financial picture. Further, millions of U.S. consumers just entering the workforce either have no credit file, or have insufficient information in their file to generate a traditional credit score.
2. Not All Data is Created Equal
With an increase in fraud, having quality data from the start of the application process is critical in adequately evaluating consumer risk when underwriting loans. Up-to-date data direct from employers and payroll providers, delivered from a secure database is ideal for verification. Fake pay stub creation tools and applicants who overstate and understate their income, further point to the importance of verifying information.
3. Digital Income Data Verification Can Reduce Friction
Digital verifications can help improve the speed and efficiency of the lending process. By using employment and income data sources direct from the employer, lenders can bypass manual paper-based processes where possible — without increasing risk — and potentially shave days off the process. Paperless documentation that flows directly into automated underwriting and benefits decisioning platforms can help ease customer and administrative burdens.
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Lenders should rely on tools built for today’s dynamic lending environment. They must focus on ways to mitigate risk and verify income data, both quickly and securely. Choosing a verification partner that offers a variety to products and services that meet your unique needs is key. Further, choosing technology with system integration capabilities can help alleviate administrative burdens. Learn more about the Work Number® from Equifax.