Digital lending technologies and trends that are shaping the industry
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Digital lending technologies and trends that are shaping the industry

January 18, 2023

The pandemic changed how US consumers approached financial services, with an increased usage of digital banking tools that has continued until now. Today, almost two-thirds of the US population relies on digital banking, and nearly one-third uses an online-only bank.

Lending is also undergoing a digital transformation. Solutions such as Buy Now, Pay Later (BNPL) allow consumers to get credit at point-of-sale, while digital lending platforms allow consumers to apply for a loan without ever stepping foot into a bank branch. 

Digital lending technologies have also enabled fintech players to enter the lending space and reach more consumers with unique credit products, such as loans for people without a credit score. 

Thanks to technologies that support digital lending, fintechs and traditional financial institutions can save time on loan origination, create friction-free customer journeys, and continue to deliver innovative credit services even in a tumultuous financial market.

1. Alternative credit data for managing default and credit portfolio risk

Alternative credit data, such as real-time income insights, gives lenders the opportunity to respond proactively to any changes to a borrower’s salary or employment. These insights are critical now that financial uncertainty and the possibility of a recession threaten to destabilize employment and increase default risk.

Lenders can leverage the same alternative data for credit portfolio risk management. According to consulting firm PwC, it’s critical for lenders to “acknowledge that credit risk assessment based only on traditional measures isn’t enough” in times of crisis.

Robert Reynolds, Head of Product at Pinwheel, explains,

“When analyzing a loan portfolio, traditional measures entail relying only on credit scores to assess risk in a loan book. The obvious downside to this is that credit reports typically only update once a month and lack real-time insights that are critical for weathering financial storms.   The earlier institutions are able to head off potential deterioration in their loan book the better the outcome they will achieve.”

Instead, lenders should incorporate a “more flexible framework that includes expanded internal and external data,” says PwC. They can achieve this by using real-time consumer-permissioned data from sources such as payroll platforms and bank accounts.

Alternative credit data also helps provide a granular insight into an applicant’s financial health. With additional customer data, lenders can safely extend credit to applicants who they would normally have to reject due to an insufficiently high credit score. 

A low credit score is the top reason why lenders turn down applicants, although nearly half of US workers agree that the current credit scoring system is missing information that shows they are financially responsible. More data fills this information gap, which allows lenders to better determine an applicant’s default risk. 

2. Real-time income data for automatic credit line management

Income and credit score are typically the deciding factors when lenders assign a credit card limit. But once a customer is assigned a credit line, access to real-time income data enables lenders to proactively manage their credit limit.

For example, card issuers can automatically increase a cardholder’s credit line if they get a raise, which will have a positive impact on customer engagement and grow card spend. Access to real-time earnings data also helps credit risk managers determine which customers are at a higher risk of delinquency and proactively lower the risk of loss.

Consumer interest in this offering is high, with around six in 10 US workers saying they are interested in automatic credit line increases based on increases in income. Lenders can easily offer automatic credit line management to cardholders using solutions such as Pinwheel Earnings Stream, which provide consumer-permissioned access to real-time income insights.

3. Automated identity and income verification

Compared to pre-pandemic numbers, the cost of fraud has grown between 6.7% and 9.9%. For every $1 lost to fraud, financial service providers now spend an additional $4. (In 2019, it was $3.25 per $1 lost.) Banks and mortgage lenders have also seen an increase in fraud via the mobile channel alongside an increase in malicious bot transactions for all financial service providers.

To improve fraud detection, lenders are relying on automated identity and income verification solutions. For example, an API for payroll connectivity can validate a borrower’s identity and income using verified data from their payroll platform. The data spans their full name, date of birth, Social Security number, current and historical income details, and employment details. With this information, lenders improve their KYC processes and also protect themselves from fraudsters who would otherwise misrepresent their income or employment.

Before lenders use this information for credit decisioning, however, they should make sure to only partner with a data provider that is a credit reporting agency (CRA). This helps lenders comply with the Fair Credit Reporting Act (FCRA) and protects consumers from bad data.

Providing automated identity and income verification is also a vast improvement in customer experience compared to a manual process. Instead of requiring applicants to download PDF copies of their paystub and then upload them as part of their application, they can simply log into their payroll platform via the API, and the rest of the verification process is handled automatically. According to Pinwheel research, nearly 6 in 10 US workers are likely to use such a platform for identity verification, demonstrating that consumers are ready to move past manual verification processes. 

Support your digital lending strategy with an API for payroll connectivity

Facing turbulent market conditions, a better understanding of consumers’ financial health is essential for digital lending solutions. 

As payroll platforms sit at the top of the financial data stack, gaining access to the information inside these platforms provides lenders with invaluable insights into how their customers are doing financially.

Pinwheel’s income data solutions are powered by a payroll connectivity API with the highest coverage in the industry, spanning more than 1,600 payroll platforms and the top 40 time & attendance platforms. Verify is our solution that supports automated identity, income, and employment verification for more than 80% of US workers. Thanks to our CRA status, data retrieved with Verify can be safely used for FCRA-permissible purposes such as credit decisioning. 

Earnings Stream is our solution that delivers real-time income data insights across an individual’s historical cash flows, accrued earnings in the current pay period, and projections of future earnings and pay dates. Financial service providers can leverage these insights to enable cash flow underwriting, earned wage access, financial management tools, and other services.

Pinwheel also supports ongoing access to consumer-permissioned data, allowing lenders to get notified when a borrower’s salary or employment changes. Unlike a credit score, which is a snapshot of a person’s financial standing, our recurring access feature allows real-time updates to facilitate a proactive relationship between lenders and borrowers.

Contact us to learn more about how Pinwheel can support your lending operations.

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