November 7, 2016

FinTech and fraud: the case for humans first, algorithms second

PropTech and FinTech companies alike, especially in the lending sector, need to be careful they don’t subscribe to the idea of tech for tech’s sake. And this argument is, perhaps, at its strongest in the context of a world where fraud is on the rise.

During the first six months of 2016 a financial scam was committed, on average, every 15 seconds, according to recent figures from Financial Fraud Action UK. That represents a 53% rise year-on-year, with these scams coming in all shapes and sizes. Furthermore, a staggering 56% of UK organisations have been affected by fraud in some way, and it is one of the biggest risk concerns facing board members.

The mortgage market is no stranger to financial frauds. Recent years have seen fraudsters raise their game in identifying weak spots within the transaction chain, so lenders are duty bound to do more in order to keep them at bay.

Meeting the needs of borrowers: customer experience and anti-fraud measures

Lenders face a tricky balancing act between implementing effective anti-fraud measures, which address concerns about the risk of identity theft and online fraud, while still offering a frictionless customer experience.

How can lenders reduce the fraud risks that face us?

Awareness, data and having the right systems in place is a crucial tool in the fight against financial services fraud. At LendInvest we are members of CIFAS, which is the UK’s leading fraud prevention system. It gives firms access to the fraud data collected by government agencies, the police and other industry firms. That membership is a supplement to our existing use of SIRA (Synetics) and other data providers which give us enhanced insight to ID verification, including Sanctions, PEP (Politically Exposed Persons) and Adverse Media. Furthermore we provide quality training to our underwriters on the risks faced by fraud.

These data feeds, along with Equifax Insight credit data, are a very powerful resource, supplying us with a range of data on mortgage applicants and how accurate the information they have supplied truly is. It’s crucial that lenders engage with these data feeds, and add in their own information in a structured way. The richer those structured data feeds become, the more they benefit everyone across the industry.

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Humans first, algorithms second

However, the data can only do so much. There is no single algorithm that can look over that data and then decide if the application is credible and transparent. It’s also vital therefore to employ quality and experienced underwriters who know how to cast a truly critical eye over all application data.

While LendInvest is a lender that sees the potential improvements technology can bring to the mortgage market, we have always been clear that technology must be there to support manual decision-making, rather than replace it. Technology for technology’s sake must be avoided. Instead a risk-based approach should be adopted.

Zero tolerance

In the short-term finance world, some of the attempted fraud focuses around buying the property under value for reasons which aren’t transparent. There can be good reasons for securing a property for less than it is worth of course, but there are also cases where borrowers attempt to keep lenders in the dark about the true nature of the transaction. LendInvest’s core principles focus on transparency and disclosure; we perceive any form of non-disclosure as a form of fraud and do not tolerate it.

Future Technologies: Blockchain

Looking to the future, the development of blockchain where fraud management is concerned can be exciting as a solution to minimise cyber crime and fraud.

There have been some wide scale attempted frauds in the banking system over the last decade whereby a universal distributed ledger in which individual transactions are securely recorded and encrypted could have been a more technological advanced way to disrupt fraud. The future of FinTech is heavily focusing on developing blockchain solutions to create more secure ways of banking and disrupting fraud, with a number of regulators supporting companies in developing the technological advances.

In a world of advancing technologies to minimise financial crime, there is no escaping that firms have to have the appropriate systems and controls in place. It is without a shadow of a doubt that human diligence still plays a fundamental role in protecting people against fraud and will do for some time to come.

For now, it comes down to each individual lender, and the checks they carry out. If you want to build a sustainable and scalable business, then you need to demonstrate in word and deed that you are lending responsibly.

This article was co-authored by Willem Wellinghoff, LendInvest’s VP of Compliance and Roy Armitage, LendInvest’s Head of Credit