December 6, 2023

Consumer lending in the on-demand economy creates new opportunities for individuals and businesses with limited credit histories or financial data (often referred to as “thin files”). Driven by technological advances and changing consumer preferences, the rise of alternative credit scoring models allows these individuals to participate in the economy based on their performance and reputation, rather than relying solely on traditional credit scores. However, the use of thin files also poses challenges, especially in terms of security and fraud prevention.

In a recent podcast, Sunil Madhufounder and CEO of Instnt, and John BuzzardJavelin Strategy & Research Principal Fraud & Security Analyst explores the opportunities and pitfalls of consumer lending in the on-demand economy and discusses the importance of balancing customer experience with fraud prevention measures. This article will provide the highlights. It will also discuss how enterprises can simplify the authentication process and reduce friction by adopting emerging standards such as verifiable credentials.

payment journal

Verified digital identities will revolutionize consumer lending

payment journal Verified digital identities will revolutionize consumer lending

The on-demand economy is built on thin files

Individuals or businesses with limited or insufficient credit history or financial data are known as “thin files.” Traditionally, a lack of information has made it difficult for them to obtain loans, credit or other financial services. However, the rise of the on-demand economy has brought new opportunities for thin-file individuals and businesses.

For example, the on-demand economy has emerged with alternative credit scoring models that rely on non-traditional data points to assess creditworthiness. Platforms such as Uber and Airbnb consider user ratings and reviews, transaction history and other data to evaluate participants. This approach allows vulnerable individuals to participate in the economy based on their performance and reputation, rather than relying solely on traditional credit scores.

Consumers have played a role in shaping the on-demand economy, but it is also the result of technological advancements and changing consumer preferences. As on-demand apps become more ubiquitous, they become more sophisticated at mining customer behavior for insights, in some cases making credit reports unnecessary. As a result, thin files have become normal files, and businesses have become more sophisticated in using them.

As technology continues to evolve, the challenge is to keep consumers safe and protected as they engage in digital transactions and build relationships with businesses. The use of thin files can lead to increased fraud and companies need to take this into account.

Fraud: A Perpetual Challenge

Different types of fraud have a significant impact on the cost of doing business today. For example, some consumer loan receivables were lost due to fraud-induced credit defaults.

“Identity fraud and synthetic identity fraud (the act of creating a false identity) are growing problems, resulting in billions of dollars in losses,” Madhu said. “Fraud affects a large portion of the global economy, accounting for approximately 74 percent of global GDP.”

In the financial industry, even existing customers can become victims of fraud within the institution with which they do business. However, balancing customer experience with fraud prevention can be challenging.

“We want the payment process to go smoothly,” Buzzard said. “But at the same time, despite all these conveniences, sometimes we really forget how mission-critical it is to build a security infrastructure out there.”

As a result, customers may experience significant friction in signing up for various on-demand products, which may cause inconvenience.

“Even within the same institution, they often have to go through multiple authentication and credit checks for different products,” Madhu said. “This is due to a fragmented infrastructure and business units operating independently, which has resulted in inconsistent treatment and loss of business, especially with younger, impatient customers.”

Portable Digital Identity

According to Madhu, the ideal situation for consumers is to easily obtain any product or service from any brand with just one click. But consumers also want to control their identities and data, and be able to share them as needed.

“We are moving toward a future where governments may require companies to separate ownership of customer data, allowing individuals to import data where they choose,” Madhu said. “Privacy regulations are also coming into play, with stricter rules on how consumer identities are used, as seen in California and elsewhere.”

This could lead to a decentralized model where individuals have ownership and control over their data, giving them access to a wide range of services across different sectors, including government-issued digital identities for things like passports and driving licenses.

“Our goal is to have a common digital identity that can be used across different states or countries,” Buzzard said. “Currently, the U.S. is experimenting with state-specific digital identities, but it’s still early days. There are challenges, such as account takeover leading to abuse of digital driver’s licenses. However, these issues can be addressed with better requirements for device monitoring and other security measures.”

A promising development in digital identity is the emergence of verifiable credentials, which are secure documents containing verified identity and data information. Verifiable credentials are cryptographically protected from tampering, and they contain information on how to verify data to ensure its authenticity.

“By adopting standards such as verifiable credentials and exploring assurance levels for different risks, we can reduce friction and use digital identities to smooth interactions with businesses,” Madhu said.

The Future of Identity Governance

Madhu said that identity solutions will not be limited to big tech companies like Apple and Google.

“Identity solutions will be standardized and interoperable, allowing our consumer identities to be easily accepted by any merchant without revealing further necessary information,” Madhu said.

Not only does this make it easier to onboard customers, it also makes it easier to onboard employees, making the HR function more efficient. It will also be easier for businesses with similar risks to share information, eliminating the need for re-authentication.

“For example, if you have been accepted by a business with a certain risk level, another business with the same risk level should be able to accept you immediately without additional checks,” Madhu said.

According to Madhu, artificial intelligence and blockchain technology will play an important role in improving identity solutions.

“We recognize the importance of providing bridging technology that enables enterprises to gradually transition from their current centralized infrastructure to a decentralized infrastructure,” Madhu said. “By providing this migration capability, businesses can use a familiar, centralized approach to attract customers before moving to decentralized identity management.”

As the on-demand economy grows and evolves, consumer lending opportunities with thin profiles are expanding. The future of consumer lending lies in the development of portable digital identities, where individuals control their own data and have access to a wide range of services across industries.