There are many different technological tools for online lenders to use when determining whether to make a loan or not. Tools like Decision Logic are helping lenders of all sizes improve themselves. These tools use technology in a way that cuts down on fraud and waste while ensuring that lenders make decisions that help the customers they serve as well as their bottom line.
Online lenders can benefit from tools like Decision Logic:
Online lending is growing once again in the US. Loan originations are up while at the same time lenders are becoming more cautious. Online lending is different than traditional lending. The lending is handled without any face to face interaction so it’s difficult to size up who the customer is. When lending to a business, it’s difficult to even know if the business is genuine or actually doing any business whatsoever.
Online lending companies have been burned in the past from bad loans. They are working on bringing down default rates that had approached 9%. It’s estimated that 10% of all defaulted loans were taken out fraudulently. They are specifically looking at ways to reduce these numbers and technology is offering solutions.
Decision Logic Overview:
Decision Logic is an advanced bank verification system that is designed to provide lenders with up to the minute information about a customer’s bank account. The system provides bank account balance and bank account transactions over a 90 day period. They operate in several countries around the world including the US, Australia, New Zealand, South Africa, Canada, and the UK.
How It Works:
When a lender contracts with Decision Logic to provide information about a specific customer, the system will send an email link to the customer. Upon clicking on the link, the customer will be prompted to log into their online banking system. Decision Logic will download all transaction history and banking balance information for the past 90 days. It will log off the system and forward the information, without any bank login information, to the lender. All information is encrypted every step of the way.
Benefits of Decision Logic:
It’s easy to see how an online lender can benefit from Decision Logic. They do not have to engage in any expensive bank verification phone calls and try to get permission to find out basic information. Some online lenders have resorted to conference calls with customers and their bank, but they are unwieldy and can be uncomfortable. Other lenders will request bank statements, but they are quickly realizing that these can be faked by anyone proficient at using Google Chrome’s Inspect Element Tool.
Without an easy way to get banking information from customers, other lenders will just check credit scores and hope for the best. Unfortunately, hoping for the best has brought on high default rates and high rates of fraud that are weighing down their profitability. It’s no wonder that the online lending industry has seen a shakeup.
Decision Logic provides the missing link. Lenders can see right away what the cash flow position of the customer is. Are they having regular deposits? Does it look like there are regular transactions going out? What are the amounts of those transactions? Is the information matching what they have put on an application? Decision Logic ensures that lenders have the best information available.
Other problems like loan stacking can also be reduced. Loan stacking is where a person or company will take out several different loans from different loan companies all at the same time. The problem of loan stacking has double in the last two years. Traditional methods of detection come up short, but being to see all transaction into the bank account allows lenders to see if there are multiple loan proceeds being deposited or multiple loan payments going out of the account.
Big Data as a Solution:
While Decision Logic is a great technological tool, it’s not the only one that can help online lending companies reduce their rates of default and fraud. There are several tools all under the Big Data umbrella that are proving useful in the war against default and fraud. They can all be used in conjunction with Decision Logic to provide an armor of protection, but they aren’t as developed.
Big Data solutions are usually proprietary to different lenders, but many principles are the same. The general idea is that the more points of relevant that a lender has, the more accurate their predictions are that the person will be able to pay back the loan. The data points can be diverse, such as the time of the day when they are requesting the loan, the day of the month they are requesting the loan, where they are logging into the site from, how much they are asking, how many other loans they have applied for, and even the current weather. Computer algorithms can read this data and churn out information on whether the loan should be granted or not.
Social as a Solution:
Research has been conducted using big data and social media relationships. There is a correlation between the likelihood of an individual paying off a loan and the aggregate credit score of their friends on Facebook. It turns that people choose friends that have similar credit as themselves. Some companies have begun online lending based on these correlations.
One area where social media connections can be particularly useful is in identity verification. More than 10% of all defaulted loans are fraudulently obtained and it’s sometimes due to the lack of good identity verification. Credit reports can only go so far but verifying someone’s social media connections against credit report known relatives would reduce identity theft concerns. Tools to implement this verification are only beginning to be researched and developed.
It’s clear that online lenders can benefit from tools like Decision Logic while reducing problems like loan stacking, default, and fraud. The benefits will be huge as the industry grows and default and fraud rates continue to fall. Smart online lending companies are already implementing these tools.