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How open banking simplifies income verification

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Last editedSep 20234 min read

Anyone looking to rent a home needs to present references to prove they can pay the rent, with open banking income verification now one of the quickest and easiest ways to do it.

Using open banking for income verification involves allowing approved and secure apps or services to view certain financial information via a one-time viewing access authorisation, which ends once the relevant information has been verified. It can replace the time-consuming traditional reference check which requires bank statements, payslips, tax documents and references from an employer or previous landlord. 

The speed at which an open banking income verification can take place benefits both renters and landlords, as this kind of reference check can often be completed within a single day.

The process is secure and needs the renter’s permission, with only the relevant information pre-agreed with the bank being made available to view by the approved third party. Such information usually includes income deposits and any rent or mortgage payments made over the last twelve months. The connection is then terminated permanently once the information has been verified.

What is income verification?

Income verification has always been a vital step in a variety of processes, particularly when it comes to renting a property or securing a loan. The traditional method has involved presenting multiple documents to verify that the applicant can indeed afford to pay for the item they are applying for. These documents include

  • payslips or salary payment documents created by an employer

  • monthly bank statements

  • tax payment documents

Traditionally, these documents need to be printed out and presented in physical form, and more recently they can be presented digitally. Either way, the documents still need to be checked properly, which takes time. Even then, they do not provide a complete picture, as a bank statement only shows the applicant’s bank activity from a single month while payslips and tax returns only show taxable income.

This is why income verification needs simplifying, with secure and safe open banking being the key, as both landlords and renters can benefit from its simplified income verification process.

Income verification before open banking

Income verification, or the ability to access information about a customer’s income to judge their suitability for a loan or to rent a property, has always been a challenging task for lenders. The most common ways of doing this were pay cheques, payslips, and tax returns, but with open banking, income verification has been simplified.

Pay cheques or payslips

Traditionally, banks and other lenders typically relied on payslips for income verification, which has a number of disadvantages. 

  • No standardisation — that means there is no benchmark, verification, and analysis. Each document can be unique, which makes reviewing it both time-consuming and prone to fraud.

  • Forgery — physical or digital documents are always vulnerable to forgery in the hands of a knowledgeable fraudster. 

  • Payslips are static — getting access to a loan applicant’s income is helpful, but it doesn’t mean it’s enough. Finance is a dynamic process, and income verification should be much more than a number. It should include transaction history, raise, breakdown of the salary and many more details that a simple doc is unable to provide.

Tax returns

Tax returns contain detailed information about an individual’s income background, so they seem like ideal sources for income verification. However, although government service digitalisation has made tax report acquisition easier, there are still several reasons why they might not be the ideal data source:

  • Sourcing the form — these documents are difficult to obtain, and the process requires loan applicants to familiarise themselves with complicated government services.

  • Timing — tax reporting does not happen in real-time. What tends to happen is that people submit these forms once a year, detailing their income for the past 12 months. That means there is a time lag between what’s happening and what’s been reported. 

  • Wrong incentives — tax evasion is one of the most common offences worldwide. Failing to report all of your income is illegal, and it means that tax return forms might not always be an accurate representation of a person’s income status. 

How landlords and renters can benefit from open banking income verification

There are numerous benefits of open banking, but first and foremost among them is security. Open banking is safe, thanks to the application programme interfaces (APIs) designed and built by the banks themselves. The APIs ensure that any third party wanting to access account information is approved and authorised.

Here are some more benefits of open banking income verification:

More complete income data

Many people these days have multiple revenue streams such as short-term contracted work, online freelancing websites and even ad revenue from social media content, as well as the likes of Airbnb. This means traditional payslips and tax payment documents do not necessarily provide a complete picture of an individual’s financial situation.

Open banking income verification provides secure access to the relevant account information so the landlord or lender can get a full overview of all incoming payments to the account.

Better credit assessment

As the open banking income verification checks relevant information over a longer period of time than traditional reference checks, it is a much more reliable credit assessment.

The applicant can demonstrate that they are a reliable payer and that their income is consistent and long term.

A universal way to verify income, anywhere in the world

Open banking income verification enables landlords, lenders, and business owners to verify account information from anyone with a bank account, once they have the account holder’s permission. 

This is regardless of their country of origin, thus it opens the door for global expansion, which is especially useful for small businesses looking to grow with international transactions.

Account information: going beyond income verification

What open banking proposes is a much easier, and more efficient way of gathering information. Open banking APIs allow interested parties to access information from someone’s account in real-time. 

As well as the ability to access information at the right time, open banking opens up the world of income aggregation. We live in an era where people are changing the way they work. The ‘gig economy’ is real, and some types of employment are not reflected in the traditional income reporting process. 

As mentioned above, income verification can be the building block of something much more helpful — a comprehensive financial profile. By accessing open banking data, interested parties can track:

  • Spending habits

  • Risk appetite

  • Income sources

  • Trends

Acquiring this information implies being able to build predictive models, assess risk and make informed decisions regarding any user’s current and future status. Account data provides context, offering deeper and more relevant financial insights than was previously possible. Open banking is the gateway to a more straightforward income verification process and elaborate customer analysis. 

We Can Help

Small business owners can streamline their transactions with GoCardless, with open banking providing real-time confirmation of a payment or ownership of a bank account. You can also benefit from GoCardless Protect Plus, which is an end-to-end anti-fraud solution built specifically for bank payments.

GoCardless is a global payments' solution that helps you automate payment collection, cutting down on the amount of financial admin your team needs to deal with. Find out how GoCardless can help you with one-off or recurring payments.

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