How digital income verification improves personal lending

Asking borrowers to show proof of income can slow down the loan application process and even cause borrowers to give up. Digital income verification can change that.

January 12, 2023

Tom Sullivan Pic
Tom Sullivan

Tom is a fintech industry writer who creates whitepapers and articles for Plaid. His work has been featured in publications like Forbes, Fortune, and Inc. He's passionate about the freedom that the union between financial services and technology can create.

The borrower or loan application is a key part of the lending process, if not the most important part. For lenders, they must ensure their application is easy to use and intuitive in order to convert borrowers. There are several difficult points in the process that can cause borrowers to give up or look elsewhere. The harder this process is, the less likely a borrower is to complete it.

Consumers have shown that friction in the onboarding process can cause them to give up on a product, whether that be a fintech app or a loan. 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.

In the lending space, the income verification process during the application is a key point of friction that can cause borrowers to tap out. 

This article provides insight into what income verification is and how it works, the differences between manual and digital income verification, and how businesses can streamline income verification to reduce loan application drop-off.

What is income verification?

Income verification is a key factor in determining that potential borrowers can repay their loans. Historically, it involved borrowers sharing documents from several sources, such as W2 forms, pay stubs, or bank statements. Lenders manually review these documents and verify that a borrower has a sufficient and steady income before making a loan approval decision.

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. 

How digital income verification works

Instead of manually requesting income documents from loan applicants and waiting for hours or days, lenders can use income verification APIs (application program interfaces) that allow applicants to verify income in seconds—directly during the application process. 

Plaid’s Income product, for example, enables lenders to add an income verification connection at any point during the new user onboarding process. Using their existing login credentials, applicants can connect with payroll providers (eg. Workday, ADP) or their bank account to pull the required information needed for income verification in seconds. 

If an applicant’s employer uses Paychex, for example, they can simply type in their Paychex username and password and retrieve their W2s and pay stubs in seconds, rather than looking for those files on their own. Plus, they can do so directly from the lender's website or mobile app during the application process. 

→ Want to verify borrowers’ income and employment faster? Plaid’s Income APIs provide robust data pulls for employment and income verification in seconds.

How digital income verification streamlines personal loan applications

When a lender requests that a loan applicant manually retrieve documents to prove their identity, bank account, or income information, the applicant often has to exit the application and search for these documents.

These redirects and experiences outside the lending platform add a high amount of friction to the loan application process. That friction can lead to drop-off as some applicants won’t be able to get these documents easily or may not find their way back to the application. 

Digitally verifying income through APIs keeps borrowers from having to leave the application or screenshot documents by moving to a more efficient, in-app process. In a matter of seconds, borrowers can show proof of income directly from the data source. This also builds efficiencies in lenders’ fraud processes because they no longer need to manually review documents for alterations. 

Purpose Financial, a personalized financial services provider that’s issued over 134 million loans, experienced this for themselves. When they switched to Plaid, they enabled their applicants to verify income in as little as 11 seconds—as opposed to up to 24 hours with manual methods. They also saw a reduced drop-off. 99.8% of applicants who used instant income verification were approved, as opposed to just 78% for those using manual verification. 

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.
Nathan Wiggins, Director of Technology and Innovation at Purpose Financial

Benefits of digital income verification for lenders

Digital income verification creates several benefits for lenders, all of which positively impact the bottom line while helping them better serve their customers. 

Benefits for lenders include:

  • Increased loan closing rate: Less friction in the income verification process leads to more loans closing and getting funded. 

  • Increased cost-effectiveness: Manual income verification uses significant labor and costs to process applications. Digital processes enable lenders to scale the amount of applications they process without additional labor or time. 

  • Faster and easier onboarding process: When loan applicants can link to their existing payroll provider and bank accounts within a lending app, they’ll get through the process faster.

  • Better and faster loan decisioning process: When lenders get complete income information faster, they are better informed and more able to act quickly when deciding whether or not to provide loans.

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Benefits of digital income verification for borrowers

Borrowers also enjoy benefits from digital income verification over manual verification. These include:

  • Better chance of getting approved: When borrowers can instantly provide proof of income, they’re more likely to get approved for their loan. This is especially true for gig economy workers and people with multiple sources of income. The stats from Purpose Financial (linked above) show the impact: 99.8% of applicants who used digital income verification are approved while only 78% of those using manual verification are approved. 

  • Simple application processes: Manual income verification forces borrowers to dig around for old and sometimes missing documents or email their former employers for a pay stub or W2. Replacing that with a one-step payroll or bank account connection is much faster and easier. 

  • Access to loan funds faster: With personal loans, borrowers often need quick access to their funds, especially when it comes to covering costs for things like medical expenses or car repairs. By reducing income verification time from up to 24 hours down to seconds, lenders are able to provide funds faster to borrowers in need.

Digital income verification is an evolved solution for the gig economy

In the modern economy, it’s increasingly common for people to have multiple sources of income. Some may make their living in the gig economy, others as freelancers and independent contractors, and some may have side gigs on top of their full-time job. In fact, 36% of American workers participate in the gig economy. 

Due to the evolving workplace landscape, lenders need better tools to assess and understand their applicant’s income. At the same time, borrowers need an easier way to show proof of income when they have multiple income sources. 

Digital income verification provides the solution that gig economy workers and the lenders they’re borrowing from need. 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 the same types of personal loans that full-time workers can. 

With today’s diverse workforce, it’s important to ensure that people working in non-traditional employment have the same level of financial access as those with traditional jobs.

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.

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