Banking Without Banks: Importance of ID Verification in P2P Lending
The estimated $11 trillion consumer lending market is a banking phenomenon. Peer-to-peer lending (also known as P2P lending) is experiencing a surge in popularity with $2.4 billion in loans being made in 2013 by the two leading P2P lending platforms, Lending Club and Prosper, and that number is expected to more than double this year.
While credit card lending is in a slow 2 percent per quarter decline, P2P lending has increased an average of 84 percent per quarter since 2007, according to an emerging lending industry report released by the Cleveland Federal Reserve. All of this stems from the fact that peer-to-peer lending has some attractive qualities. First, people with short credit histories can get credit more easily through this channel. Additionally, consolidating credit and lowering interest rates can also be easier through P2P than traditional finance with interest rates lower on P2P loans than credit card loans since 2010.
Although P2P lending is less formal than a bank, these are legally binding contracts with many of the same consequences as traditional loans. Like traditional finance loans, P2P require identity verification; a process to ensure that the borrower is a real person and their contact information is valid. Identity verification is crucial in P2P lending because it enables the lending company to have solid knowledge of the borrower and their repayment behavior. To verify ID, borrowers may be asked to provide a driver’s license, passport, bank statement, or utility bill. While the borrower’s identity is verified, anonymity is also protected through the use of screen names or member numbers by the borrower and lender. The process for each site varies, which means borrowers and lenders can expect to prove their identity as a first step to engaging with this emerging loan industry. Peer-to-peer lending companies vet borrowers with ID verification solutions like Trulioo’s Global Gateway, to help mitigate risks by detecting fraud, while complying with regional Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations.
Naysayers of P2P lending cite concerns that loans will default based on non-credit worthiness of the borrower; that if a person can’t get a loan through traditional banks, then perhaps it is because they are a higher credit risk. However, as noted in the Cleveland Federal Reserve report backed with data support from Equifax (one of the three largest US credit bureaus), 39.8 percent of people with short credit histories have credit scores higher than the subprime threshold. In other words, they are not bad credit risks. This is important, as ensuring that loans are paid is critical since keeping investors satisfied is the financial engine of the P2P industry.
Each P2P platform has a credit-worthiness assessment strategy, some of which are very sophisticated. The Lending Club, a consumer-direct marketplace striving to transform banking through bypassing traditional financial institutions, and allowing clients to realize savings though this new model, note that 83.3 percent of P2P loads are personal, one-time loans used to consolidate high-interest-rate credit card debt.
Peerform boasts a Peerform Loan Analyzer, which was developed in conjunction with leading economists, that represents a differentiated way to determine the creditworthiness of borrowers, enabling individuals with credit scores as low as 600 to secure funds. Zopa offers complete transparency in their default and arrears loan performance and multiple levels of lender protection such as a collections team to “chase (missed payments) on your behalf” and a Safeguard fund in case of borrower default.
This market is taking off. Not only is the sheer increase in loans skyrocketing, but also are the number and types of businesses competing in the space. The industry is also diversifying, not only focusing on individual consumer P2P, but also P2B like the instance of Funding Circle, a British P2B funding platform.
Currently, online P2P lending is mostly popular in the US, UK and China. However, due to local lending laws and lack of awareness, growth is being stifled in other countries across the world. With global identity service providers like Global Gateway – P2P lending doesn’t have to stop at the border. Cross-border lending may offer the best solution for global expansion.