A Beginner’s Guide to EmFi: Part 3 How to Leverage credolab’s Solutions

Over the years, technology has come to save the day, providing benefits to both businesses and customers. Due to customers’ increasing dependence on technology, industries must continuously adapt to offer useful and cost-effective products and services.

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As we saw in the previous guide, A Beginner's Guide to EmFi: Part 2 Navigating the Challenges, embedded finance (EmFi) has become an integrated part of the financial market where, depending on the industry, it may offer banking, payments, insurance and lending services. While EmFi certainly has some challenges, the benefits far outweigh these hurdles.

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Fintech businesses such as credolab are helping to overcome these challenges, offering risk control, fraud and marketing solutions all in a single API. Through embedded scoring, credolab offers its clients an integrated solution to financial services, enabling a quick and accurate review of credit and loan applications that help simplify and speed up operations. With financial technology evolving, lenders and similar financial institutions must upgrade their processes and technology, and embedded scoring can help.

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How embedded scoring helps financial institutions

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In the world of lending, identifying reliable versus careless borrowers is essential for the effectiveness and longevity of any business. It is no surprise that lenders are interested in incorporating stricter and more rigorous processes to review credit and loan applications since fraud leads to defaults, and defaults lead to write-offs and losses. The lender’s ultimate goal is to maintain a healthy and profitable balance between customer experience at onboarding, approval accuracy and fraud and risk verifications while helping deserving borrowers attain the credit they need.

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Embedded scoring integrates credit scoring technology into financial services. This allows lenders to incorporate more stringent and thorough procedures for evaluating credit and loan requests.Through digitalisation, businesses can apply Artificial Intelligence (AI) technology to understand a borrower’s credit profile better and perform a more solid credit risk assessment. The wide availability of big data coupled with the maturity of deep learning and machine learning (ML) technology has enabled businesses to grasp this information's full extent and depth. Credolab, for example, offers an embedded scoring platform that collects and uses behavioural data and insights from one privacy-consented and rich data source. Through the use of smartphone and web behavioural metadata, this approach provides a new way to assess risk and deliver highly predictive risk insights.

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Embedded scoring offers businesses valuable insights into their prospects and allows them to make better-informed judgments about their risk evaluations. Unlike traditional scoring, it uncovers more accurate patterns about borrowers' repayment intentions and early warning indicators that could anticipate problems.

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Embedded scoring offers the following benefits to financial institutions, including non-banks:

• Security and transparency: Adds another layer of security to efficiently and safely assess a borrower's creditworthiness in real-time.
• Process streamlining: Allows companies to streamline their work. Since manual processes are automated and accelerated by technology, lenders and borrowers benefit from more straightforward and user-friendly access to loan products.
• Improved customer experience: Embedded scoring does not add any break or interruption in the customer’s journey. As a result, it maintains a clean and optimised customer experience without using workarounds or shortcuts to assess users’ creditworthiness.
• Improved financial services access: Embedded scoring enhances access to financial services, ensuring the underwriting process is more precise, dependable, and secure. This, in turn, opens doors for those financially excluded.

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How to level up your EmFi business with credolab

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Credolab offers solutions for the top EmFi categories using Machine Learning (ML) algorithms to identify behavioural patterns for early fraud detection. Gathering information derived from behavioural data collected via smartphone and web metadata, Credolab collects unique customer behaviour information to perform checks for their fraud strategy, ensuring an effective verification while detecting possible fraudulent behaviours. Working with businesses such as credolab can offer solutions for risk control, fraud detection and marketing optimisation, as is seen in the four examples below:

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Integrated Banking Services

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In embedded banking, conventional banking products such as checking accounts and debit cards are directly woven into the platforms of non-banking businesses like retail outlets. Using EmFi tools has made it easier to move money online, but it has also made it harder to avoid scams or stop transactions that might be illicit. Credolab helps reduce first as well as third party fraud involving external parties during the initial onboarding process without adding any friction. Credolab’s solution uses ML algorithms to identify behavioural patterns that flag potential scammers. Anonymous data stored in smartphone devices are converted into quantitative figures that assess the person’s probability of defaulting or committing fraud.

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Credolab helps calculate checks on device activity rates, IP address usage frequency, and fraudulent activity scores with the following tools:

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1. An extensive repository of device information and fraud-related data in collaboration with TranUnion’s TruValidate: These fraud scores are based on a database comprising more than six billion distinct consumer devices worldwide and fraud reports.
2. Detecting connections between devices and user accounts with TruValidate: Through credolab’s technology, it is also possible to segment between dubious and genuine devices and find concealed links linking various devices to user accounts. It is possible to identify connected devices to anonymous customer IDs through device metadata, making this method safer than a traditional method.
3. Agile response: Fraud analysts can react immediately to new threats with credolab's robust and adaptable business logic configuration tool.
4. Real-time analysis and high predictability: The analysis is completed within seconds, and a velocity check and fraud score are sent to the client.  

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Clients can also combine credolab’s checks and scores with their internal checks to make an immediate and more accurate decision. For example, the algorithm can detect the device ID of incoming applications and determine whether this ID has been confirmed as a fraud case. Then, whenever a new request comes in, they can instantly reject the ID using the analysed data as part of their blacklist. 

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Embedded Lending

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Embedded lending integrates credit and instalment repayment options within non-financial goods and service offerings. A lender's goal is to maintain approval accuracy, but this is often difficult given the lack of a borrower's credit history. Using credolab's technology, clients can assess any customer, top of the funnel, regardless of credit bureau history, to improve risk assessment.

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The most common example of embedded lending is Buy Now, Pay Later (BNPL). A new study from Juniper Research reports that about 360 million people use BNPL services worldwide as of 2022 and predicts that by 2027, users will exceed 900 million.

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There is no doubt that these services benefit many customers. To ensure the safety of all parties, however, proper security strategies must be implemented. Credolab helps assess customers such as those currently using BNPL by gathering insights, analysing behaviour and detecting any red flags before the customer defaults on a payment.

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For any BNPL provider, the first step in building their underwriting and fraud strategy is setting a rule-based risk assessment in place. Credolab detects information derived from device and online activity data that can shed light on customers’ behaviours and risk profiles. For example, behaviours such as a single device, browser, or IP address being used for repeat loan signups or the frequency with which applicants update critical details such as their address or income can be incredibly useful when determining a borrower’s risk level. Combined with BNPL's provider security strategy, this can help determine whether a customer is legitimate or a fraudster.

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Embedded Payment

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Embedded payments allow users to securely store their favoured payment options, facilitating quick and effortless transactions for future online purchases with just a single click, making the checkout process easier without needing a card. Although this form of payment is extremely convenient for customers, there is some apprehension about its security, which is understandable as the payments industry has always been enticing to fraudsters. In fact, the magnitude of fraud is so great that it is projected that by 2030, total payment card volume will reach $79 trillion, of which an estimated $49.32 billion will be lost to criminal fraud. This loss is burdened by merchants, which spend an average of $3.75 for every $1 lost to fraud.

Chargeback fraud, which occurs when an individual denies buying an item on a credit or debit card to get a refund from the card provider, is an important piece of criminal fraud. This scam, also known as “friendly fraud”, is now reportedly the highest source of fraud attacks that merchants face globally.

Although transactions using cryptocurrencies (crypto) like bitcoin aren't directly subject to chargebacks, they are subject to other types of fraud, such as transaction fraud. Transaction fraud occurs when a stolen payment card or data is used to generate an unauthorised transaction. In crypto, this involves scam tactics such as investment schemes where scammers impersonate businesses or government agencies, convince people to buy cryptocurrency, and then send it to themselves for investment. Another scam tactic, Account Takeover fraud, is when a fraudster uses a stolen account. For example, when users log into a cryptocurrency account in a public location, scammers might steal their private, sensitive information by intercepting Wi-Fi signals on trusted networks if they are in close proximity. In 2022, Kris Marszalek, CEO of cryptocurrency exchange Crypto.com, confirmed that hundreds of user accounts were hacked, resulting in stolen funds.

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According to a Federal Trade Commission report, cryptocurrency scammers have stolen more than $1 billion since 2021. Thankfully, credolab can help detect chargebacks and transaction fraud in real-time. Alternative data enables the real-time distinction between genuine customers and fraudulent behaviour, effectively reducing fraud risks by analysing users’ login behaviours. This applies to all embedded payment options, from credit cards to crypto.

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Embedded Insurance

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Through embedded insurance, customers can buy insurance while making a purchase, offering a more affordable and personalised experience. With the integration of insurance on consumer platforms, third party distributors can offer relevant, customised products resulting in significant revenue streams. Here is where credolab can come in to help. Through digital smartphone profiles and web behavioural metadata, credolab can understand the audience better, anticipate behaviour, and help you make better decisions that improve cross-sell, upsell and retention rates.

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Credolab’s embedded underwriting technology uncovers insights that benefit both insurers and customers:

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• Offers precise, technology-driven underwriting that maintains the capability to evaluate and analyse every application on a case-by-case basis without negatively impacting the customer experience.
• Reduces fraud occurrence using insights to help prevent malicious subscriptions due to their ability to know the type of device and detect anomalous behaviour. Credolab helps reduce the number of delinquent customers approved at the origination/application stage by detecting which are most likely to stop paying the premium before the policy becomes profitable, usually between the 10th and 11th month. This is often referred to as the policy lapse rate.
• Helps reduce the average acquisition cost by increasing applicant acceptance rates.
  Credolab improves lead allocation based on the probability of them accepting insurance offers and reduces data asymmetry by calculating a score for 100% of incoming requests.
• Provides an increase in approval rates without impacting the book’s risk profile.
• Predicts the probability that a new applicant will not make the first premium payment, also known by insurers as the policy persistency ratio.
• Helps transform potential customers into vetted leads, pre-evaluated for buying readiness and risk factors or assess affordability and provide tailored offers to each individual for cross-sell and upsell opportunities.

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What new EmFi market entrants need to consider

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According to a McKinsey report, the EmFi market is still growing. It is expected to double in size over the next three to five years, with long-term winners likely to be those who invest in technology, expertise, and relationships.

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As outlined in [A Beginner’s Guide to EmFi: Part 2 Navigating the Challenges], some roadblocks must be overcome when entering the EmFi market. These cover data protection, identification of customer risk, availability of funding, and opposition from stakeholders to change. Credolab understands that one oversight can pose a huge risk, so here is a list of the following key points for EmFi market entrants to consider:

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• Work with specialist businesses to build up APIs and break barriers. Businesses intending to scale up quickly will need to build a modern developer experience, including the technology to achieve this and work with accredited and fully complying businesses. The importance of externalising their processes for a seamless experience is especially important for those without the infrastructure.
• Work with accredited businesses that fulfil proper risk mitigation standards and accreditations, including ISO 27001. To maintain the protection of personal information, standards must be observed, and compliance with laws is essential.
• For businesses operating at scale, A/B testing is an invaluable tool to evaluate process effectiveness, categorise customer segments, and enhance recovery performance.
• Focus on personalising client interactions within communication channels and payment options to create a steady as well as familiar user experience. This approach allows businesses to distribute resources more effectively and improve repayment performance progressively.
• Build a risk management framework that provides the confidence to work within the businesses’ risk appetite and in a compliant manner.  

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Credolab is an example of a provider that offers "all-in-one" solutions in a secure and compliant way. Using AI and ML, credolab evaluates data from behavioural sources, analyses them and identifies patterns related to marketing, fraud and credit scoring, all provided via a unified API. This solution is accessible to any organisation, beyond lenders and financial firms, aiming to expand their operations while maintaining security and ensuring a positive customer experience.

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Working with the right partners is crucial to new EmFi players’ success. With the right partner, they can navigate the financial services industry's various challenges. As financial workflows evolve increasingly challenging to execute and adhere to, it is imperative to use modern fintech solutions to address these issues.

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