Consumer lending in the on-demand economy has created new opportunities for individuals and businesses with limited credit histories or financial data, commonly known as “thin files.” The rise of alternative credit scoring models, driven by technological advancements and changing consumer preferences, has allowed these individuals to participate in the economy based on their performance and reputation rather than solely relying on traditional credit scores. However, the use of thin files also presents challenges, particularly in terms of security and fraud prevention.
In a recent podcast, Sunil Madhu, Founder and CEO of Instnt, and John Buzzard, Lead Analyst in Fraud and Security at Javelin Strategy & Research, explored the opportunities and pitfalls in consumer lending within the on-demand economy and discussed the importance of balancing customer experience with fraud prevention measures. This article will provide the highlights. It will also discuss how businesses can streamline identity verification processes and reduce friction by adopting emerging standards like verifiable credentials.
The On-Demand Economy Is Built on Thin Files
Individuals or businesses that have limited or insufficient credit histories or financial data are said to have “thin files.” Traditionally, this lack of information made it difficult for them to access loans, credit, or other financial services. However, the rise of the on-demand economy has introduced new opportunities for thin-file individuals and businesses.
For example, the on-demand economy has seen the emergence of alternative credit scoring models, which rely on non-traditional data points to assess creditworthiness. Platforms like Uber and Airbnb consider user ratings and reviews, transaction history, and other data to evaluate participants. This approach allows thin-file individuals to participate in the economy based on their performance and reputation rather than solely relying on traditional credit scores.
Making use of thin-file consumers has 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 common, they become increasingly sophisticated at mining customer behavior for insights, making credit reports unnecessary in certain cases. Thus, thin files have become normal files and businesses have become more sophisticated at using them.
As technology continues to evolve, the challenge lies in ensuring the security and protection of consumers as they engage in digital transactions and build relationships with businesses. Using thin files can lead to increased fraud, which companies need to take into account.
Fraud: The Eternal Challenge
Different types of fraud have a significant impact on the cost of doing business today. For example, a portion of consumer loan receivables is lost due to credit defaults caused by fraud.
“Identity fraud and synthetic ID fraud, where fake identities are created, are growing problems that lead to billions of dollars in losses,” Madhu said. “Fraud affects a large portion of the global economy, around 74% of the global GDP.”
In the financial industry, even existing customers can fall victim to fraud within the institutions they do business with. However, balancing the client experience with fraud prevention can be challenging.
“We want the payments process to be smooth,” Buzzard said. “But at the same time through all this convenience, sometimes we really forget just how mission-critical it is to build the security infrastructure in there.”
As a result, customers can face significant friction when they sign up for various on-demand products, which can be an inconvenience.
“They often have to go through multiple identity verification and credit checks for different products, even within the same institution,” Madhu said. “This is due to fragmented infrastructure and independent business units operating separately, which leads to inconsistent treatment and loss of business, particularly with younger, impatient customers.”
Portable Digital Identities
According to Madhu, the ideal situation for consumers would be to have easy access to any product or service from any brand with just a click. But consumers also want control over their own identity and data, being able to share it as needed.
“We’re moving towards a future where governments may mandate businesses to separate ownership of customer data, allowing individuals to import their data where they choose,” Madhu said. “Privacy regulations are also coming into play, with stricter rules on how consumer identity can be used, as seen in California and other places.”
This is likely to lead to a decentralized model where individuals have ownership and control over their data, allowing them to access a wide range of services across different sectors, including digital identities issued by governments for things like passports and driver’s licenses.
“The goal is to have universal digital identities that can be used across different states or countries,” Buzzard said. “Currently, the United States is experimenting with state-specific digital identities, but it’s still in the early stages. There have been some challenges, like an account takeover resulting in the misuse of a digital driver’s license. However, these issues can be addressed with better requirements for device monitoring and other security measures.”
One promising development toward digital identities is the emergence of verifiable credentials, a secure document that includes validated identity and data information. Verifiable credentials are cryptographically protected and cannot be tampered with—and they include information about how the data was validated, ensuring its authenticity.
“By adopting standards like verifiable credentials and exploring levels of assurance for different risks, we can reduce friction and make interactions with businesses smoother using digital identities,” Madhu said.
The Future of Identity Governance
According to Madhu, identity solutions will go beyond just big tech companies like Apple and Google.
“Identity solutions will be standardized and interoperable, allowing our consumer identity to be easily accepted by any merchant without revealing more information than necessary,” Madhu said.
This will make it easier not just to accept customers but also to onboard employees, making HR functions way more efficient. It will also be easier for businesses with comparable risk to pool information, making ID recertification unnecessary.
“For example, if you have been accepted by one business at a certain level of risk, another business subscribing to the same level of risk should be able to accept you instantly without additional checks,” Madhu said.
Artificial intelligence and blockchain-powered technology will play a significant role in the movement toward improved identity solutions, according to Madhu.
“We recognize the importance of providing bridging technology that allows businesses to gradually transition from the current centralized infrastructure to a decentralized one,” Madhu said. “By offering this migration capability, businesses can onboard customers using familiar centralized methods and later switch to decentralized identity management.”
As the on-demand economy grows and evolves, consumer lending opportunities for thin-file individuals are expanding. The future of consumer lending lies in the development of portable digital identities, where individuals have control over their data and can access a wide range of services across sectors.
