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The Role of Digital Identity Verification in Loan Approvals

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Identity verification is crucial to reduce numerous loan frauds. The possible friction it usually represents, nonetheless, it can cause applicants to efficiently relinquish such an application. Learn how to utilize it against the most generic kinds of loan fraud so as to increase real applications.

As of this high volume of fraud attempts, ensuring identity verification is a crucial part of the process of loan approval. It makes sure that lenders subject to Know-Your-Customer abbreviations as the (KYC) requirements meet their obligations while also assisting to fight fraud. However, certain identity verification methods usually work more than others for combating fraud as well as to convert prospects into applicants. YES Bank Personal Loans are easily availed at low-interest rates to help people overcome personal financial constraints. 

In such an article, it is discussed how lenders can potentially leverage identity verification to alleviate fraud—all while speeding up such an applicant experience.

How does identity verification in lending work?

In lending, the identity verification process ensures loan applicants are who they say. This can help lenders, where applicable, complete their KYC process, but it also helps lenders reduce the risk of identity theft, money laundering, and other types of fraud. 

During an identity verification process, lenders review information provided by the applicant such as name, address, date of birth, and identification numbers, and verify the information through documentary (reviewing an ID) or non-documentary (database searches) means. YES Bank Personal Loan is a low interest rate personal loan helping people overcome  financial constraints.

Digital ID verification systems can speed up this process and provide additional fraud-fighting services. These include tools like facial recognition to compare an applicant’s facial features against those of their photo ID.

Synthetic identity theft

Synthetic identity theft consists of bad actors creating false identities through the use of both real and fake information. Phishing scams, data breaches, and other leaks have led to the creation of massive databases of personally identifiable information (PII) on the dark web. Scammers can take pieces of this information—such as a social security number, address, or date of birth—and combine them with made-up data to create a fake identity. They then use this information to apply for a loan—often successfully passing the lender’s identity verification check and gaining access to funds.

It’s estimated that financial institutions lose $6-$20B per year to synthetic identity fraud. Moreover, synthetic identities resulting from application fraud are considered the number one threat by fraud executives for the near future. 

To mitigate this risk, lenders can take steps to ensure synthetic fraud is caught at the identity verification check stage. This might include implementing tools such as selfie verification and AI/ML-based behavioral analytics to better detect partially fake identities. 

Presentation attacks

Presentation attacks consist of bad actors attempting to access loans through the use of another person’s physical characteristics or biometrics. The most common methods involve printed photos and fake fingerprints, which fraudsters combine to create a ‘spoof’ during the loan application process. If a lender’s identity verification tools lack the sophistication to catch these impersonations,  fraudsters can gain access to funds. 

Lenders can protect against presentation attacks in three ways:

  • By checking identities across authoritative data sources such as bank and phone records.
  • By using a variety of government-issued identity documents for identity verification in combination with technology that can distinguish between real documents and printouts.
  • By using liveness tools such as video selfies and facial mapping technology that detects pixel changes, deep fakes, masks, and other tricks used in presentation attacks. 

Why collecting the minimum information isn’t always enough

Bad actors are able to stay on top of these requirements and develop workarounds using stolen identity information (such as the aforementioned synthetic identity fraud). 

At a minimum, lenders should verify an applicant’s name, address, ID number, and date of birth. Unfortunately, breached and hacked data containing this information is likely available for millions of people on the dark web, meaning this isn’t always enough. That’s why the additional measures examined above (such as live selfie verification) should be considered best practices for lenders looking to combat fraud in a meaningful way. 

Additionally, lenders can mitigate fraud risk by making digital asset and income verification a part of the loan application process. This not only helps qualify borrowers but also confirms the borrower’s account information matches their application and verifies their income and assets from direct source data. 

Need a better way to verify borrowers’ income and assets? Plaid’s lending APIs connect directly with borrowers’ financial accounts to enable more informed decisions, faster. 

Digital identity verification: a way for lenders to reduce drag on their business

While necessary to prevent fraud, identity verification can potentially add friction to the application process. Slow, manual ID verification processes that require human intervention to check IDs against government databases create a pause in the loan application flow. In turn, this can cause some applicants to give up or look for other options in the interim. 

Digital identity verification processes should thoroughly vet loan applicants with multiple methods, but they should do so quickly. Plaid Identity Verification, for example, lets companies confirm customer identities in 200 countries via authoritative data sources, identity documents, and selfie verification—all in seconds. This represents the lowest-friction identity verification option and can improve onboarding conversion rates by 10-20%. 

In lending, identity verification boosts the bottom line

Using a digital identity verification process provides multiple benefits to lenders. It defends against fraud, helps lenders speed up their approval times, and can even help convert more prospective borrowers into applicants. This can mean a significant increase to a lender’s bottom line—and a smart way to get ahead.

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