Trust in the Digital Age: Use IRS Data to Instantly Determine Business Stability and Financial Relationships Published January 29, 2019

In the old days, you could walk right into a bank, and they’d know you, your friends, where you lived, and where you worked. There are still some places in America where everyone knows everyone’s name, but for most of us, this concept is incompatible with modern times.

In the 1940’s classic movie, “It’s a Wonderful Life,” George Bailey, a bank owner, knew everyone in his town of Bedford Falls, NY. Throughout his life, he aspired to leave Bedford to see the world but never did. However, in the end, these trusting, lifelong connections are what ended up protecting his livelihood.

Suffice to say, lifelong relationships don’t require verifying identities or relationships. In the modern digital world, lenders can’t possibly know everyone and have limited visibility into who is truly behind the computer. This ambiguity can lead to fraud, sloppy payers, and ultimately, credit losses.

So how can lenders ensure they’re efficiently lending to the right borrowers and screening out the appropriate high-risk applicants?

Three Trust Establishing Questions

Trusting a borrower from a digital application is challenging. Commercial lenders should be able to answer these three questions before proceeding in the application process:

1. Is the applicant representing a real and non-fraudulent business?
2. Is the application information indicative of a stable business?
3. Are there other connected businesses or financial relationships that might impact the repayment of the loan?

These questions are simple in concept and when answered definitively, will set the stage for a successful lending relationship. Trying to answer these questions with the current solutions in the market inevitably falls short because they aren’t able to verify the applicant-provided data with certainty.  

Marketplace Solutions are Incomplete

I sat down with Tax Guard’s Chief Data Scientist, Steven Thompson, to understand how the existing solutions provide a false sense of security for commercial lenders. His experience working across the worlds of a credit bureau, credit risk modeling for lenders, and tax data positions him as a unique expert in answering these three questions:

1. Is the applicant representing a real and non-fraudulent business?

“Maybe.

Synthetic fraud is growing, is difficult to catch with public data and credit bureau solutions, and costs commercial lenders billions of dollars in credit losses every year. Current solutions rely upon lender or applicant-provided data within credit bureaus or data vendors. Once a synthetic identity exists within these data sources it’s nearly impossible to remove.

Therefore, lenders shouldn’t trust the verification of a business’s identity by using the potentially fraudulent data in public records.”

Read more about combatting synthetic fraud in our previous blog: “How to Fight Synthetic Identity Fraud with IRS Data”

2. Is the application information indicative of a stable business?

“Maybe.

Public records capture changes only after they are made public, not on every application variation a business submits to a lender. At best, a business with variations across applications indicates sloppiness (which may mean sloppy payment) or at worst, intent to hide something from the lender.”

3. Are there other connected businesses or financial relationships that might impact the repayment of the loan?

“Maybe.

The reporting on financial relationships between businesses and guarantors is often lagged and not reliable. This data is typically based on public information (e.g. – Google, LinkedIn, Yelp, D&B, etc.) or lender-reported applicant information.

As a result, public records and credit bureaus are not providing information based on verified and real-time data. Therefore, it’s hard for commercial lenders to understand which businesses they’re truly funding. Credit risk increases when there is less visibility into the applicant’s related businesses and financial connections – which may be under financial distress.”

With all of these “maybes,” how do we get back to that “Wonderful Life” level of trust in modern digital lending?

The answer lies in leveraging trusted and verifiable data.

IRS Data is the Most Trusted Source

Tax Guard offers a unique and verifiable data source that provides a more complete result than public record and credit bureau data solutions. The solutions are built upon IRS data to help answer the three questions you need to establish trust in the borrower.

1. Lenders can verify a business is real and not fraudulent by using Tax Guard’s IDCheck.

No other data source can identify synthetic fraud by using IRS data to verify business identities. Remember, synthetic identities don’t file taxes.

2. With Tax Guard’s unique database of over 70 million records, lenders can investigate the stability of the applicant with Tax Guard’s BizConnect.

In the evaluations of lender application data, we found that businesses with inconsistent application data are nearly 3x more likely to default.

3. Lenders can identify relationships amongst businesses and guarantors with BizConnect, enabling them to conduct fuller due diligence and build models to assess the risk of non-payment.

Using Tax Guard’s set of 1,500 unique attributes, we found that businesses with 3+ connections to other businesses are 2x more likely to default.

In a digital lending world, it’s not likely that we’ll go back to the days of “It’s a Wonderful Life,” but that doesn’t mean lenders can’t evolve and adopt the right tools to build profitable, trusting relationships with their borrowers.

To build a more complete applicant screening process with IRS data, contact us today.