By Philipp Pointner on Monday 15 August 2016
Philipp Pointner, VP Products with Jumio explains why, as alternative finance is embedded in the mainstream and in the face of the growing threat of fraud, it must continue to embrace digital ID verification.
It will come as absolutely no surprise to anyone working in alternative finance that the market is booming. The debate about whether alternative finance will move into the mainstream is over. The only question left is how much business will be taken from legacy lenders as individuals and businesses look to alternative finance as a safe and cost-effective way to raise funds and capital.
There are a number of reasons for this trend, among which is, the fact that in the face of seemingly endless banking scandals, alternative finance has remained healthy and secure.
Part of this might be down to the organic and collaborative nature of alternative finance. As in the wider sharing economy, it is populated by like-minded souls who share the ideals and philosophy behind this movement.
Yet, as this type of financing becomes more embedded within the mainstream, and more and more people embrace it, the question is how will alternative finance providers maintain security and remain compliant with anti-money laundering (AML) and know-your-customer (KYC) regulations.
It’s only right to start with the good news; a 2015 FCA review of AML and KYC protocols within crowd funding companies was positive about how companies were implementing these regulations.
However, as the industry continues its rapid growth, can these companies maintain the rigorous standards they have in place?
The first problem alternative finance providers face is, unlike traditional banks, most alternative finance providers do not have a bricks and mortar presence.
In traditional lending, no matter how much has been done online, at some point the individual or business needs to make face-to-face contact with the bank in question. There will be forms to be signed and documentation such as proof of income and, critically, proof of identity to be shown.
This proof of identity is a legal requirement for lenders. AML and KYC legislation has to be complied with and, in order to do so, they need to know that the person they are dealing with is who they say they are.
In the world of traditional finance, this necessary inconvenience slows the process down. Our own research at Jumio has shown that this process causes significant levels of abandonment when customers start bank application processes online but then have to physically present documents at a bank branch to complete the process.
The study also found that banks have been slow to adopt new technology to make the process fully digital, reducing the friction and dissatisfaction among customers.
One of the promises of digital commerce is that gratification is instant. Want a movie? Download it. Want a song? Download it. Want to play a game? Download it. Want to open a bank account? Spend 20 minutes filling out forms online only to discover that you have to go down to your nearest branch with your passport and proof of address -- not the same experience.
For alternative finance providers who don’t have the bricks and mortar presence of banks, this is even more of a challenge.
A critical part of the appeal of these providers is that they do things differently from traditional banks. This isn’t merely in the risks they are willing to take or the way they finance loans in a sustainable way. It is also in the entire experience they present to clients.
This is an area that alternative finance providers are getting right, though. As an example, we work with Landbay, a leading provider of buy-to-let mortgages through P2P networks. We allow them to validate new customers by scanning their passports and other IDs on mobile devices for quick verification which complies with AML and KYC regulations.
Landbay is not unique in leveraging such technologies to on-board clients quickly and seamlessly. It illustrates how companies in the alternative finance industry are showing traditional finance the way forward.
However, as alternative finance becomes part of the mainstream, what now? How can that all important trust which has been a foundation of the industry be maintained?
The simple answer is that the industry must continue to take the lead. Fraudsters are clever and the exponential rise in data breaches means that there is more personal information available on the dark web which can be used to make, among other things, false financial applications.
Where there is opportunity for honest customers, there is opportunity for criminals and alternative finance providers must be on their guard to protect themselves and clients against fraud.
Equally, though, this must not impact on the all-important client experience.
Ultimately, then, alternative finance providers need to be trailblazers in digital authentication. By looking at the mistakes of traditional lenders and continuing to promote best practice through cutting edge technology, the industry can provide an excellent user experience and sustained growth.
In recent years, alternative finance has led the way. Now, more than ever, it is critical that this path continues.