Disrupting the traditional process

Income verification is a crucial step in the mortgage, rental services, car financing, and consumer lending processes. Successfully verifying the borrower’s income reduces information asymmetry between the lender which drastically reduces the risk for lenders or landlords. This process protects consumers too, as it prevents them from borrowing beyond their means and adversely affecting their credit score in the future.

The traditional method of income verification through manual document uploads or paper submissions was riddled with loopholes and inefficiencies; fraud was a prevalent issue across all income verification processes, data that were obtained are often unstandardised, and manual processes meant that countless hours were wasted on document quality checks and manual uploads. The digitisation of this process through Open Banking or Open Payroll can drastically reduce the time taken to verify a customer’s income. Especially in an increasingly digital landscape, a manual step in the process can significantly affect lead generation and conversion. The time for a fully-digital income verification process is now.

Open Banking’s attempt at Income Verification

Open Banking has been revolutionary for the financial services industry, Fintechs and consumers globally. Many Open Banking players saw the opportunity within income verification and sought to provide a creative solution using the bank’s financial data. The income verification is done through the monitoring of inflows and outflows of money into the end-users’ bank account and looking for regular, large inflows which are believed to be the end-users’ income.

However, Open Banking remains an imperfect solution for income verification. Whilst the speed of income verification has improved, verification of the data remains an issue. Inflows can be easily constructed to look like regular payslips, and the lack of granularity in the data does not give lenders or landlords the confidence on whether the end-user’s income is sustainable throughout the term of the contract. This is the reason why Open Banking companies have developed proprietary algorithms to patch up the flaws of Open Banking-based income verification. The underlying solution does not perfectly match the use case!

The Mistho Solution: Open Payroll

Open Payroll is the right tool for the job. By leveraging access to the end-user’s payroll account directly, Mistho acts as the trusted data-messenger for end-users and counterparties: lenders, brokers and landlords. We securely and swiftly deliver payslip data in a standardised format with higher granularity. Since the data is retrieved directly from the payroll portal, the end-user’s payroll information is guaranteed, without the need for algorithms and assumptions!

To dive deeper into the comparisons of income assessment methods, we take a look at what we believe are 6 key areas that we can compare income verification solutions across in this section. Namely, these are 1. Is the payroll data up-to-date? 2. Is the data tamper-proof? 3. Has the data been verified? 4. Do we have granularity in the income components? 5. Does the solution enable a seamless end-user experience? 6. Privacy and Nature of Access.

1. Is the payroll data up-to-date?

The traditional sources of payroll data were obtained either directly from the end-user or from credit reporting agencies. As the data provided by the latter were usually old and dated data, a combination of recent payslips from the end-user is necessary. The former could not be used in isolation despite up-to-date data to obtain a comprehensive and credible assessment of the end-user’s income (see later). Technology-enabled solutions such as Open Payroll and Open Banking provide counterparties with up-to-date information, allowing for better credit decisioning.

2. Is the data tamper-proof?

The aforementioned combination of first-person data from the end-user and credit reporting agencies was needed due to the possibility of fraud on the up-to-date data that the end-user provides. By cross-referencing the two data sources, counterparties were able to observe if changes in income were legitimate. This is because information on the paper/electronically uploaded documents could be tampered with or edited. With Open Banking, although the data is streamed directly from the end-user’s bank account, tampering of data can still occur through regular, large-ticket transfers to the bank account or short-term inflated income. On the other hand, Open Payroll ensures that the data counterparties receive is exactly what is on the end-user’s payslip, leaving no opportunity for tampering.

3. Has the data been verified?

In this case, we define “verified” loosely as a check on data by legitimate providers such as credit reporting agencies, open banking and open payroll providers. By this definition, credit reporting agencies, open banking and open payroll providers are all able to verify the data through different means.

4. Do we have granularity in the income components?

The breakdown of the end-user’s income into its components is crucial as it allows counterparties to know the proportion of income that has low-risk of change (i.e. base salary) and which are more variable (i.e. one-off bonuses). This allows counterparties to better quantify their risk and qualify end-users that are eligible. Traditional methods of paper documentation and electronic upload of documents, as well as credit reporting agencies, centered their checks around payslips and thus provided counterparties with this granularity into income components. On the other hand, as Open Banking’s income verification is mainly centered around banking flows data, the solution is only able to provide total income received from the end-user, but not the income components. Open Payroll fixes this flaw — it enables counterparties to receive the granularity of data that was traditionally available while providing the benefits of a digital process.

5. Does the solution enable a seamless end-user experience?

With the advent of digitisation, customers are seeking out seamless applications with counterparties and a fully-digital process has proven to capture large market shares in other industries. Similarly, the traditional process where the UX is interrupted by a need to manually scan and upload documents, or obtain external reports from credit reporting agencies is unsustainable. Both Open Banking and Open Payroll have unleashed the potential for counterparties to digitally transform their processes and deliver a seamless UX for their customers.

6. Privacy and Nature of Access

We understand that many end-users are not comfortable with permitting open and continuous access to their financial information. They only wish to share that data for purposes of the application. This has been the key reason for the slow uptake of Open Banking in the UK. For example, in the case of loans (e.g. Mortgages), we believe that such a lending decision should be based solely on the end-user’s income and not other factors such as spending habits or bank transfers. Imagine two workers with the same salary; should the worker who makes monthly transfers to his/her parents be penalised in the loan decision? We think not. Unlike Open Banking which continuously streams data live for an average of 3 months, Mistho’s Open Payroll solution does not store any credentials. Access is given once by the end-user and all necessary information is extracted from the end-user’s payslips. Once.

Benefits of Open Banking

Although Open Banking is not the perfect solution to income verification broadly, it still serves a fraction of the market that Open Payroll cannot yet serve. That is: 1. Gig Workers, 2. Employees without an electronic payroll system. As gig income is delivered without a centralised system, gig workers’ incomes can only be verified after annual tax filings under “self-employment”. As such, Open Banking provides access to up-to-date periodic income that is available in the user’s bank account. Similarly, for employees working in companies without an electronic payroll system, Open Payroll is unable to obtain a digital payslip from the end-user; Open Banking thus serves to fill these gaps in Open Payroll coverage.

What’s Next?

The switch between manual and physical process is inevitable. Counterparties will seek to smoothen user experience and reduce costs associated with cross-referencing and checking for document fraud. This would mean switching to digital income verification solutions such as Open Payroll and Open Banking. We imagine a future where income verification utilises multiple data sources through Open Payroll and Open Banking, where real-time information symmetry powers accurate decisioning — fostering an environment for financial inclusion.

Who are we?

Mistho is developing the first-of-its-kind Open Payroll API for Europe and the UK, enabling consumers to share payroll data directly to their counterparties through a consent-based system. The payroll data is retrieved directly from their payroll accounts and Mistho ensures seamless, secure and untampered delivery of this data.