Verifying income is a key step in the rental application process. It's also a key point of friction that can cause applicants to tap out and increase the risk of fraud.
Consumers have shown that friction in the onboarding process can cause them to give up. According to Plaid’s Fintech Effect consumer survey, 73% of Americans say easy sign-up impacts whether or not they use an app. In addition, 58% say they’ve given up on signing up for an app when the process was too complicated.
The same sentiment applies during income verification, but the process doesn't have to be a headache. It has come a long way from fax machines and hand-delivered W-2s. This article provides insight into modern income verification, the different ways to verify income, and how both landlords and property management software platforms can reduce friction and fight fraud.
What is income verification?
Income verification is the process of verifying that an applicant's income matches the requirements for a rental or loan. It is a key factor in determining rental application risk.
In recent years, digital income verification has streamlined this process, making it far easier for both tenants and property managers and owners. Instead of manually requesting income documents from applicants and waiting hours or days, rental agencies and landlords can use income verification APIs (application program interfaces) to verify income in seconds—directly during the application process.
Plaid Income makes it simple to add an income verification connection at any point during the new user onboarding process. Using their existing login credentials, applicants can connect their bank account or payroll providers (e.g., Workday, ADP) in seconds to pull the information needed to verify income.
With traditional methods, this process requires the borrower to find all of these documents themselves, which can include printing and scanning or contacting employers for missing documents. These manual verification methods cause friction in the loan application process, and can even cause borrowers to abandon their application when they have difficulty finding the documents they need.
Benefits of modern income verification processes
Digital income verification creates several benefits for both applicants and landlords, all of which positively impact the bottom line while helping them better serve their customers.
Benefits for landlords include:
Increased cost-effectiveness: Digital processes enable lenders to scale the amount of applications they process without additional labor or time, while also being less expensive than traditional credit bureau options like The Work Number.
Faster application process: Digitally verifying income through APIs moves applicants through the tenant screening process more quickly. In a matter of seconds, applicants can show proof of income directly from the source. This also builds efficiencies in management companies' fraud processes because they no longer need to manually review documents for alterations.
Reduced risk of fraud: When property managers or owners get complete income information faster, they can quickly approve or deny rental applications, which reduces administration time and vacancy periods.
Applicants also enjoy benefits from digital income verification. These include:
Easier time getting approved: Renters who can quickly provide a more complete picture of their income have an easier time getting approved. This is especially true for gig economy workers and people with multiple sources of income. The co-living marketplace company, Padsplit, went from manually verifying income to using Plaid’s digital solution. By doing so, they went from varying dozens of incomes per month to over two thousand.
Simple application processes: A one-step payroll or bank account connection is much faster and easier, allowing renters to complete the process quickly.
Easier to verify gig economy income: Because borrowers can directly prove income from multiple sources with just their bank account login during the application process, these workers are more easily able to access rentals. With 36% of American workers participating in the gig economy, it’s important to ensure that people working in non-traditional employment have access to rentals.
Typical income verification documents
Common documents used in income verification include W2s, 1099s, paycheck stubs, and bank statements. These documents prove the renter earns the income they claim and is able to afford the property they are applying for.
The higher the friction, the higher the drop-off. The fast connection with Plaid keeps more people in our application flow and allows some borrowers to receive funds within minutes of verifying their income.
How to verify income: 3 methods
Income verification used to be a manual process requiring hours to gather, sort, deliver, and verify income documents. In addition to being time-consuming, the process was easier to manipulate. For example, an applicant might doctor their pay stubs to make it look like they earn more.
Today, however, the process is almost always done digitally — which is both faster and more secure. There are three methods for digital income verification, each with pros and cons.
1. Link bank accounts
In this process, the applicant links their bank account via an API, which extracts data to summarize income streams. This low-friction process makes it easier for applicants to prove income from gig jobs and other sources. Since most people know their banking credentials, this process is generally smooth.
However, accuracy depends on the quality of machine learning models used to categorize income streams. In some rare cases, income may be misclassified or missed.
2. Document upload
Document upload is the most similar to the old manual income verification process. Rather than sending in physical documents, applicants can scan or take a picture of their documents and submit them digitally.
While this process might seem to invite fraud, it can actually be quite secure. After uploading documents, Plaid reviews the documents for dozens of signals of fraud. However, the document upload process can become complex if applicants have multiple bank accounts or income streams, and there is a slight increase in fraud risk.
3. Partner with payroll platforms
This is the most accurate income verification process, as the information is pulled directly from payroll platforms like Workday or ADP. Users enter their payroll credentials into Plaid, which then pulls payroll information directly from the source. Using this method, Plaid is able to verify income for around 85% of the US workforce in seconds.
Although this process is highly accurate and secure, not all applicants know what payroll provider their company uses. Additionally, some companies may use unsupported payroll platforms.
Plaid Income allows property managers and owners to offer all three verification processes in one API. By allowing applicants to choose the process that best fits their needs, you can streamline the process, reduce fraud, and verify income faster.
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Fraud signals in income verification and how to prevent them
Fraud is always a risk in income verification. For example, applicants might alter documents to increase their income or manufacture fake documents that show additional income streams.
Preventing fraud starts with prioritizing the income verification process. Using bank or payroll income data should be a first choice, as these processes are more secure. Document upload should only be offered as a backup, as most fraud is associated with manual document uploads. With bank and payroll verification, the data comes directly from an account, which can’t be falsified.
Fraud signals Plaid detects in document upload
Despite the slightly higher risk of fraud in the document upload process, it's not the Wild West. Plaid has dozens of fraud checks to detect fraud, including looking for inconsistencies in font, edited text, and inconsistent formatting.
Other common alterations Plaid checks for include:
Content masking: Some data within the document is being hidden by overlaid new data.
Edited text: Text within the document has been edited after the initial document creation.
Metadata changes: The creation date and modification date do not match in the document's metadata.
Rejected user: The user with the document has been previously marked as “Rejected” within our systems.
Copycat documents or images: Documents look similar or the same as other documents submitted by different users.
Software Blacklist: Software tools were used to create or modify the document, and they match a maintained blacklist of suspicious tools.
The future of income verification is faster and more secure
As mentioned above, 76% of Americans say they’re more likely to use an app when they can sign up and access it instantly. Rental applications are no different. Creating friction with manual income verification—especially in an age where streamlined solutions are the standard—gives applicants more than enough reason to give up on the process.
While customer experience matters, so does fraud risk. As fraudsters get bolder and more tech-savvy, property owners and managers must rely on tools that help spot fraud signals.
Interested in streamlining your income verification process with Plaid? Fill out the form below to speak with us.
Digital ID verification and income verification work hand-in-hand
Along with income verification, identity verification is another part of the loan application process that can be a point of friction. To prove their identity, applicants must provide a host of documents and information, not all of which are readily available.
Using both manual identity and income verification methods together can be a major source of friction and drop-off in the application process. However, digital ID verification can be used with digital income verification to create the ideal in-app loan process.
Plaid’s Identity Verification product provides a solution for personal lenders that need to meet KYC requirements, reduce fraud, and give their customers a smooth onboarding experience. Providing a seamless ID verification experience can improve onboarding conversion rates by 10-20%. It also uses cutting-edge technology to verify IDs against authoritative sources, ensure selfie photos match ID photos, and find signals for potential fraud.
Using digital identity verification and digital income verification together is a surefire way for lenders to increase loan acceptance rates, reduce drop-off, and provide a customer experience that borrowers love.
→ Need to fight loan fraud while handling KYC? Plaid Identity Verification meets KYC requirements, reduces fraud, and is the lowest friction ID verification experience available.
The future of lending is better customer experience
As mentioned above, 76% of Americans say they’re more likely to use an app when they can sign up and access it instantly. Personal loans are no different. Causing friction with manual income verification—especially in an age where streamlined solutions are the standard—gives many consumers more than enough reason to give up on the process.
In a competitive personal lending market, customer experience makes a difference. When consumers know another loan is readily available and that it’s likely to be an easier application to get through, they won’t hesitate to switch. For lenders looking to compete on good customer experience, digital income verification is an easy choice.