How APIs Boost The Integrity Of SMB Financing Data

Know Your Customer (KYC) regulatory requirements are frequently cited as a top — if not the top — challenge for banks. However, for non-bank lenders, those compliance burdens can be just as high, and many players lack the back-office technologies necessary to manage the deluge of data and paperwork linked to due diligence processes.

Financial institutions (FIs) are spending tens or even hundreds of millions of dollars a year on KYC compliance, Thomson Reuters analysis found, connected to the process of aggregating and cross-checking data about loan applicants. In the asset-based lending and merchant cash-advance market, the burden of aggregating data (connected to KYC compliance and beyond) is not one easily addressed.

This point of friction is why inFactor — which provides non-bank lending liquidity solutions — introduced its platform for the asset-based lending and merchant cash-advance market last year. The company announced last week that its Secure Funding Ecosystem platform, which enables originators of small business (SMB) loans and merchant cash advances to streamline processes and promote automation, will now be available to other underwriters.

A key component of the solution is its third-party validation feature, tackling an issue that inFactor Chief Technology Officer Eric Wright said is one of the largest in this market: data integrity.

“One of the biggest pain points [the platform] addresses is the lack of validation in the third-party lending space,” he told PYMNTS in a recent interview. “The fact that people are able to originate bad loans without validating data behind it, that’s what our platform addresses.”

The inability to validate data exposes loan originators to a range of risks, not least of all the risk of non-compliance. KYC is a particularly troublesome spot in this space, Wright said, adding that the industry continues to struggle with its reliance on spreadsheets to handle small business information — a fact he described as “mind-blowing.” Non-bank financiers may have a piece of technology that automates a small portion of the loan origination process, but rarely is a company able to streamline the entire process from origination through the life cycle of the loan.

That can spell trouble in a number of ways, especially when it comes to matters of compliance with KYC and anti-money laundering (AML). LexisNexis Risk Solutions‘ “2018 True Cost of AML Compliance” report revealed that U.S. financial services players are spending $25.3 billion a year on compliance costs, with SMBs often hit hardest by that financial burden related to AML program implementation. Reporting, risk profiling and sanction screening are the biggest challenges for financial players, researchers found, all of which come attached to major data aggregation requirements.

While interbank databases can be a valuable service to traditional FIs, many non-bank lenders and financiers lack such resources.

“We have to know we’re not going to be funding some malicious people,” Wright explained, adding that having visibility and data insight is vital to mitigating fraud in the small business finance market. “The ability to say you are who you say you are is extremely important.”

While data collection and the verification of that information is a major pain point, so is the ability to aggregate that information into a single portal. Platforms like the one just launched by inFactor are only able to achieve that simplified view as a result of a range of application program interface (API) integrations and partnerships.

For example, the company announced on Monday (May 6) a partnership with Ocrolus, a data verification and cash-flow analytics company that deploys artificial intelligence and crowdsourced data to validate data. The collaboration sees the Ocrolus bank statement analysis integrated into inFactor’s loan origination platform, and reflects the importance of collaboration in the underwriting process.

The platform is also integrated with identity verification solutions provider BlockScore, as well as Plaid, a company that enables apps to connect to bank accounts.

Working with other service providers to integrate data and verify information is an essential part of cutting down friction. According to Wright, more data integrations with platforms like Salesforce are on the horizon for the solution.

As the non-bank small business finance market continues to grow, these players cannot rely on offering a better customer experience than a traditional lender to win over the competition. Compliance, security and efficiency must be part of the equation, too. Just as big banks are beginning to integrate FinTech solutions, and embrace an open data ecosystem, so, too, can the non-bank lending and finance industry.

Data integrations not only promote security and compliance for the originator, underwriter and financier, but support a secure experience for the end borrower as well.

“When you have transparency, it opens doors to a lot of different folks: merchants and originators,” said Wright, pointing to the strong growth of the industry. “Once you have visibility, and have validated data, you can make a lot of decisions — and we’re seeing that people in the market are getting excited about that.”