Is Plaid an Effective Fraud Detection Tool?

Hello again, if you have been following my series on FinTech topics, I am glad you are back again. Please like or share if you think this could benefit someone in your network of friends. As always, you can always reach me for a deeper discussion.

Before we get into today’s topic, let’s talk about Plaid. Plaid is a tool which you can login to your bank account and unlock your banking transactions and share it with whomever you give permission to. Why would you want to do something like this? Well, for one, most of the lenders require you to log into Plaid as part of their underwriting strategy. Why? Well, they look at your transaction records and see if you are gainfully employed or a habitual overdrafter. Equipped with a that information, lenders can make an informed decision as to whether they will lend to you or not. This set of information never appears on your credit report.

Now that we know what Plaid does, let’s define Fraud.

Fraud takes on so many meanings that it really requires another article to properly give it justice.

For simplicity sake, we can categorize fraud as first party, second party and third party fraud. Oh by the way, about 30–40% of the people logs into Plaid, rest still refuse to do so.

First party fraud is someone that intentionally defraud banks and lenders for financial gains. These folks don’t really care about their credit or persecution. They will get away with anything if you let them. Second party fraud is where the end consumer and the lender are the victim, how? Well, lead generators are selling consumers information all over the world and consumers end up taking on too much debt thinking that they can afford it because multiple lenders make offers to them. Lenders end up holding the bag because of hampered ability to pay by the consumer. I call it unintentional stacking. Now, third party fraud is vile. Sometimes called identity fraud where fraudsters steal people’s identity and use that for their own gains. I think you get the picture.

So, can you use a tool like Plaid as an effective fraud detection tool?

Let’s talk about first party fraud. If you look through Plaid’s banking transactions (that is if the individual is daring enough to log in), you are going to find two things. First, there’s nothing to see. The individual probably opened up a new bank account just to default more lenders. The second thing you will see is a record of transactions where the individual takes out loans, sweep the funds to their other account and a bunch of overdrafts from lenders attempting to collect.

How about second party fraud? That a bit easier, if you see a bunch of loans, repayments from your competition, it’s time to shy away from this person. He or she has found the jackpot with the help of lead generators. Stay away.

Plaid can definitely help you deflect third party fraud. They can steal someone’s identity and get through the first couple of pages of application but the chances of them guessing the person’s bank login name and password would be near impossible. If they knew the victims password, they would bother to take out loans first, they would empty the account.

Plaid also returns name, address, phone numbers and whatnot back to the lender. Lenders can use this information to further triangulate the consumers identity.

There are plenty of shiny identity fraud detection toys out there but if you already have Plaid integrated, you might look at it with a different light moving forward.



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