William Wagner, CMO/Vice President of Marketing, Cloud Lending Solutions
Online lenders have been disrupting the lending ecosystem by combining innovation with advanced financial technology to improve borrower experience, address underserved markets, and reduce operating costs.
In 2014, the US marketplace lending origination volume was around $5.5 billion. Accounting firm PwC expects marketplace lending loan volume to grow to $150 billion by 2025. According to another study by Juniper titled Fintech Futures: Market Disruption, Leading Innovators & Emerging Opportunities 2016-2021, fintech platform revenues for lending and financing will exceed $10 billion globally by 2020, doubling the $5.2 billion expected in 2016.
This growth is driven by a combination of factors; acceleration in peer-to-peer (P2P) lending; crowdfunding becoming a viable alternative to traditional lending mechanisms; and the deployment of next-generation analytics platforms.
But, the growing phenomenon of online lending also introduces the issue of online lending fraud. The new trend called ‘loan stacking’ is a major concern in the online lending ecosystem.
Loan stacking, or taking out multiple loans from different lenders, has doubled between 2013 and 2015, according to research from credit-reporting firm TransUnion.
Loan stacking is not necessarily done with an intention of fraud. A company might receive part of the loan’s original amount approved by one online lender, and therefore seek to procure the remainder of the requested amount from other online lenders. This does seem like a lucrative option for the borrower, but is detrimental to the borrower in long term as the creditworthiness has been exceeded and the borrower can end up paying a higher interest amount.
For consumers, new research shows that on an average day about 4.5% of people who take an unsecured personal loan go back for seconds at other lenders later that day. Many lenders discourage loan-stacking because it increases the probability that a borrower will default.
In an article in the WSJ, it was stated that borrowers who apply for a second loan within 15 days of the first loan are four times more likely to later be identified as fraudsters with no intent to repay – a third loan application in the period makes borrowers ten times more likely to be fraudulent.
Another form of fraud prevalent in the online lending industry is synthetic fraud (the use of a fictitious identity). A fraudster may raise loans from a cloud-based lending platform based on stolen identities and documentation, or hacked borrower profiles.
While speed is the key advantage offered by online lending, it also makes it more susceptible to fraud, since the fraudster can access a substantial volume of funds before reservations are raised.
The probability of loan stacking and synthetic fraud is high in online lending due to general nature of online loans: Algorithmic underwriting, soft credit checks with insufficient background and ID verifications, loan approvals in less than 24 hours and irregular reporting of the resulting loans to credit bureaus.
But there is no reason to fret. Fraud and risks specific to the rapidly growing online lending P2P industry can be contained by taking necessary preventive and precautionary steps. These include:
1. Contribute to and consolidate borrowers’ credit data with credit reporting agencies to ensure a more informed decision. Make the process for the lenders during loan approval and credit scoring holistic.
2. When using an algorithm for underwriting, strike a balance between technology and lending experts for the final decision. This ensures a higher accuracy rate than algorithms alone. The loan management software should not rely solely on technology for underwriting.
3. Understand and map the drivers and indicators of ‘loan-stacking’ by implementing a proactive data-driven anti-stacking strategy in the online loan management software. This will greatly reduce your risk of loan stacking by predicting bad loan behaviors and technical patterns.
4. As online lending platforms are cloud-based, data security and data breaches need to be controlled and monitored. A strong risk and compliance structure paired with an IT framework for security checks and alerts within the loan management software helps combat malwares and fraudulent activities. A robust and proactive IT strategy can also aid in monitoring in-session behavior, authenticating IP address, location, device and, information related to the borrowers.
A platform that offers cloud-based, flexible and secure solutions and integrates relevant Know Your Customer (KYC) and Anti-Money Laundering (AML) checks can assist in avoiding and combating the risk of fraud in online lending. Cloud Lending Solutions end-to-end lending platform, built on Salesforce, is uniquely designed and tested to deliver innovation for the global lending community. Companies can grow their business with our full lending platform through digitization, resulting in rapid product delivery, increased operational efficiencies and reduced compliance risks.