While fast and broad access to credit can be seen by many as a way to keep clients happy with the speed they can access finance, it can also allow bad actors to take advantage of relaxed background checks.
Online credit lenders, therefore, need to ensure they’re able to spot these bad actors through their KYC and AML checks.
However, in a world where speed and convenience are valued, online lenders need to ensure they make the right lending decisions. This means decisions need to be made quickly, sometimes based on limited information.
Three Ways Online Lending Carries Higher Risk
Bad actors know that the speed of loan access can create vulnerabilities in the system that can be exploited. The three most common ways include:
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Synthetic identities - removing the human factor means you can’t verify a real person is applying for the loan. Bad actors are now able to combine a mixture of fake and real personal data to create a new person that looks legitimate on the surface. Once this new “person” has successfully applied for the loan, they promptly disappear with no way to trace them.
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Account takeovers - when you can’t see the person that’s in front of you, how do you know that they are who they say they are? Fraudsters can now carry out account takeovers, gaining access to an existing account and changing crucial details, such as the bank account where the loan is paid into, before withdrawing the money and disappearing.
When it comes time to repay the loan, the original account owner has no idea the loan exists and may dispute the charges when chased.
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Money laundering - money launderers may take out a loan with the sole purpose of repaying it with illegally-derived funds. This allows the money gained from the loan to appear in banks as a legitimate source of funds while it’s being repaid with illegitimate funds.
How can you identify high-risk customers?
High-risk applications often look legitimate on the surface, so you have to ensure your procedures are robust enough to catch them.
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Applications from high-risk jurisdictions - the paperwork may look legitimate and have been filed correctly, but you need to ensure the applicant is from the country they claim to be.
You can check this by cross-checking the IP address against the country of origin. However, this can be bypassed with the use of a VPN, so you should also cross-check employment history and phone numbers.
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Document evidence is too perfect - have you ever looked at a deal and thought, “what’s the catch?” this can happen during document gathering as well.
For example, you could receive evidence of an ID card, like a driving licence, that appears to have been scanned but has had the colour corrected and looks airbrushed. In other words, it’s too perfect and doesn’t look real. If you think someone has supplied a document that looks too perfect, try to dig deeper into them as a person.
Most individuals these days have some form of social media, whether that’s Facebook or LinkedIn. If their details here don’t match what you’re expecting, or they’re sparse, it could be a red flag that you need to look deeper into them.
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Loan stacking - this isn’t always obvious, and you might not be able to check for it unless you have access to credit bureaus or fraud intelligence.
Loan stacking involves applying for as many loans as possible, and cashing out and disappearing before needing to repay any of them. This is typically seen across lenders and can either happen in the short term or as a longer strategy.
In isolation, you might not spot the loan stacking; however, if you have access to shared systems, it can become apparent.
Procedures that spot high-risk clients
While it can be tricky to spot bad actors, there are procedures you can implement to help.
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Electronic ID checks check several different sources, including credit reference agencies, which can help verify whether the individual has applied for any other form of finance or whether they have a credit history.
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Enhanced document verification can verify whether the appearance of a legal identification has been altered.
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Screening against watchlists allows you to check whether the individual concerned needs to undergo any enhanced verification.
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Checking for anything out of the ordinary can give you an indication of whether the client is displaying any unusual behaviour. This could be as simple as paying off any loans faster than expected, given their income.