Marketplace lending is becoming more prevalent as larger institutions are introducing their own automated loan platforms, like Goldman Sachs’ introduction of Marcus, which made it the first major bank to launch its own marketplace lending platform.
This alternative form of lending relies heavily on new data technologies and automation, since the transactions are completed online using algorithms. But how do these automated processes affect important security and compliance measures?
How does marketplace lending work?
Marketplace lending is how individual investors loan money directly to borrowers. Sometimes referred to as “peer-to-peer” lending since the focus is on the individual level, it is becoming a popular alternative lending option for consumers and small businesses. The transactions take place on an online platform, without a bank stepping in as an intermediary in the traditional manner.
The transactions take place on an online platform, without a bank stepping in as an intermediary in the traditional manner.
Once a borrower fills out the basic digital application, a credit report is run. If the prospective borrower is approved, online investors can choose whether or not to invest in the loan. Once the entire amount has been agreed to by investors, the borrower gets the funds through a digital transaction, and makes monthly payments back to investors through the platform.
How does automation factor in?
New platforms like LendingRobot use advanced machine learning algorithms to diversify investments automatically, among other complex actions. This type of tool claims that with advanced systems, it is able to create the best investment strategies with the highest returns, with minimal effort on the part of the investor.
However, with any new technology, especially one that is automated, a closer look is needed into how security measures are or should be handled.
Fraud prevention and regulatory compliance
Because running an automatic credit report only predicts whether or not a person is credit-worthy, it doesn’t predict or detect fraudulent behavior. Before taking part in marketplace lending, it’s important to understand that, while automated diversity will most likely benefit you, there are still risks involved. As an investor, there is always the chance that a borrower will default and you will lose money.
Anti-terrorism and anti-money laundering tactics are compliance practices under the Bank Secrecy Act, which marketplace lenders still need to follow through with online. These regulations indicate that the online platforms should have compliance programs in place that will monitor suspicious activity by analyzing the borrower’s information closely, including the reasons they need funds and their identification information.
The Marketplace Lending Association lists industry best practices, including assigning compliance regulation to a chief compliance officer, following a rigorous AML compliance program and monitoring watch lists to better detect terrorism financing and fraud.These practices should also apply to new investors.
Making sure all risk protections are in place can be difficult and time-consuming. GDS Link can assist lending institutions in implementing modern systems for increased automation and comprehensive data analysis. Get in touch with our specialists today to learn more about the risks of marketplace lending and how to remain compliant.