Growing P2P Marketplace Through Evolved Fraud Management

by Kevin King

Kevin King

When most organizations think about deploying origination fraud strategies, the focus is often on reducing losses and trimming operational expenses. The marketplace or peer-to-peer lending industry is not like most industries. The pain this industry feels by each successful fraud attempt is extreme and most prevention strategies involve friction-heavy methods, but if they create a more efficient and effective fraud strategy it can have a real, meaningful impact to the growth of the business.

Consider the challenges faced by today’s marketplace lenders. Each fraudulent loan can produce losses into the tens of thousands of dollars, and perhaps more importantly damage their reputation as a safe-and-secure lending environment. For most players in the space, the combination of extreme financial losses and damage to their brand results in mandates to keep fraud rates in the low single basis points. Reaching this goal is even a challenge most traditional financial services companies couldn’t dream of meeting.

To achieve this goal, most risk managers at marketplace lenders have responded by creating strict fraud prevention strategies, which usually place applicants through a high-friction process by relying heavily on manual review of applications. These strategies can work, but they have two clear drawbacks, the high-friction reduces conversion and the manual process creates a barrier to growth.

The concept of high-friction processes hurting online conversions is likely a familiar one for marketplace lenders. The idea of manual screenings as a barrier to growth may seem foreign to marketplace lenders because the vast majority of players in this space are start-ups. When you receive 100-500 loan applications a day, it might seem like a feasible and sensible process to have a trained employee lay eyes on nearly every application which comes through the door. Yet as business grows many marketplaces are realizing that such an intensive manual review process won’t allow them to scale.

Now this is where the evolving fraud strategies come into play. The objectives are typically quite clear; improve automation and accuracy so fewer applications are routed through the friction-heavy manual process, without increasing risk exposure. It won’t surprise anyone to learn that the companies ID Analytics has worked with have turned to predictive fraud scores to achieve these goals. They have utilized an automated assessment to identify a small portion of high-risk applicants to investigate and these organizations have boosted conversion while trampling down operational barriers to transformative growth. What is your institution doing to grow your marketplace business without increasing fraud risk?

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Kevin King is Senior Consultant, Professional Services for ID Analytics.