Sunil Madhu, Founder and CEO of Instnt, speaks to FFNews to discuss how we're aiming to ease the burden of fraud loss whilst helping financial institutions onboard more customers
"A bank account, credit card or loan should be accessible to everyone, but getting one isn’t always straightforward. When a bank’s onboarding process shuts the door, it’s often those who are just beginning their financial journey who lose out. Imagine you’re a young person getting their first credit card, hoping to boost their credit rating and get on the property ladder. Or what about the millions of people in the wake of misfortune who just need a bank account to begin their road to recovery?
These are the people affected by know-your-customer (KYC) solutions that don’t know their customer very well at all. For the banks, though, there’s a very good reason this problem exists. Getting it wrong is just too costly.
According to Javelin Strategy and Research, US identity fraud losses alone totaled $43billion in 2022. Even though this was a reduction from the previous year, it is still an astronomical figure that affected 40 million adults in the US. In the UK, new analysis from Experian reveals identity fraud there rose by 22 per cent in 2023, compared to the year before. Data also suggests that the types of fraud occurring have shifted. ‘First party fraud’, where consumers use their own identity but with inaccurate information or open an account with the intent to defraud the lender, now represents 31 per cent of all fraud, up 10 per cent from the previous year.
It’s an area that entrepreneur Sunil Madhu knows all about. He’s the founder of Instnt, a US-based KYC platform that launched in 2019 with a mission to streamline the onboarding process without increasing financial businesses‘ risk exposure or excluding innocent customers.
REJECTION AND LOSS
With analysts estimating that somewhere between 10 and 25 per cent of every dollar of consumer loan receivables is written off to first-party fraud, trillions of dollars are lost annually across industries. So, the fight against fraud is justified but due to siloed KYC processes, there is a danger it can be inefficient. A study from software company Fenergo showed that 48 per cent of banks globally have lost customers due to a slow onboarding process – and that loss is further compounded when you factor in the sheer cost of KYC compliance.
One of Instnt’s own case studies said a client’s ‘anticipated growth of more than 100,000 monthly sign-ups had been cut short, thanks to a legacy risk and compliance management toolbox that disproportionately rejected more than 60 per cent of customers.
Unsurprisingly, and sadly, ‘90 per cent of the users rejected were those with credit-thin files, including Millennials, Gen Z and Immigrants’, the company said. This may seem an egregious figure but it is prevalent in the US, where compliance legislation is not as progressive as in Europe and smaller community banks rely on legacy infrastructure.
So how do they solve fraud effectively?
Madhu explains that one approach is taking ‘past negative behaviours that suggest someone may be a first-party fraud risk, such as whether they have defaulted on a loan, or missed payments, and share that in a common database which businesses can subscribe to’. Of course, consumers do have the right to assess and challenge this data, but that’s assuming you have a credit history.
“This is a very naïve way of looking at fraud,” says Madhu, “because a lot of young people coming into the market don’t have that spread of information. In an on-demand economy, they are going to end up getting penalised, causing financial exclusion for the future of the market.”
Even if these people were to be accepted, there’s a very real danger they could get unfairly marked as fraudulent if the first payment is missed. Madhu says that’s often all fraud detection is based on.
It can be a pretty good indication that the user is fraudulent, but it could equally be because of an individual’s economic circumstances. A black mark next to their name could be the beginning of a painful process.Madhu believes ‘it’s prudent to look at the problem differently’. In fact, he views it as a loss optimisation issue and, therefore, concluded that insurance could play a pivotal role because there’s a dual problem here: a costly KYC process to solve for the very real and costly threat of fraud, but which has the unfortunate side effect of losing potential business. Instnt has a compelling solution to prevent those losses compounding, he says.A
UNIVERSAL SOLUTION
Instnt’s core product, Instnt Accept, fights the problem on both fronts by providing the technology needed to onboard efficiently whilst also insuring against losses caused by true KYC fraud.
“We’re providing a capability that has not existed before,” says Madhu. “We’re saying ‘you don’t have to worry about classifying people as fraudsters’. If you end up incurring a loss, by allowing a particular person in who has been approved by Instnt, Instnt is going to take that loss off their balance sheet.“We’re the first vendor in the market that will price and underwrite the fraud loss risk that a business holds.
“Traditionally, because everybody has had to build their own risk management and compliance infrastructure, they have held on to their losses. They’ve had no option of insuring away those losses because no insurance company had developed the capabilities to do this.
“We’re the first vendor in the market that will price and underwrite the fraud loss risk that a business holds”
“We’ve solved this problem by creating the underwriting, as well as the technology piece. That allows us to own and manage the overall fraud loss.”
Insnt has partnered with A+ rated insurance companies to provide this service and Madhu points out that it’s only able to do that because it can pool the fraud loss risk across its client base. In theory, this should allow businesses to say yes to more customers, especially those with a thin credit file.
“The beauty of this consortium approach is that, because the business no longer has to worry about fraud loss management, it can focus on growth, and that perspective also allows it to optimise the customer onboarding process and eliminate a lot of friction and drop-off,” argues Madhu.
It’s a bold strategy and one that is made even more appealing by the addition of Insnt’s latest product, Multipass, launched in October 2023. This has the potential to reduce the ongoing costs of onboarding the same person multiple times for separate products. After all, the fraud issue is not closed with the initial onboarding process, as shown by the growth rates of FPF.
“We provide capabilities for that entire lifecycle, beyond account opening, ensuring it is the same person doing the transaction, and the account has not been taken over because that’s also a significant problem in the industry,” says Madhu.
It’s been estimated that, by 2023, 22 per cent of adults in the US had been victims of account takeover. In the UK, incidences of account takeover fraud rose by 79 per cent between 2022 and 2023, according to industry body UK Finance.
Multipass adheres to, and is made possible by, open and interoperable standards. It’s something that the US-based company recognises has more in common with the regulatory landscape of the UK and EU, but Madhu believes greater focus in the US on ‘privacy regulation and compliance will drive the adoption of technologies like Multipass’.
To explain the product, he uses the example of being onboarded at a bank for a standard chequing account and returning some time later to face the same labour-intensive process again for another product from the same institution.
“This happens because of the silo-based approach that’s been taken towards customer onboarding. Instead, we can bring the customer to the product or service within one click. In terms of friction avoidance, that’s the closest you can get them,” says Madhu.
Through this product, which Instnt is calling a ‘portable KYC solution that lets a business’s good customers access any product or service with a single click,’ it generates a reusable, verifiable credential or identity for that customer.
“This digital pass is securely and quickly sent from our platform to the mobile application of that business, inside which we provide an embedded identity wallet,” says Madhu.There are similar products on the market but it’s the encryption and storage of that pass on a decentralised blockchain that makes it stand out.
“In the traditional model, that identity would have been stored in a database that could be hacked, exposing the business to reputational harm, and other types of loss such as cyber liability exposure,” says Madhu. “In this new model, we eliminate that.”"
Original Source - FFNews