Hashching creates virtual ID system for first fully-digital loan approvals
23 Nov 2016
Hashching, a website for home buyers to choose mortgage brokers, has built the first fully-digital process for home loan verification in Australia, which would allow banks to comply with strict regulations for identifying clients without having to send them to a branch.
This weekend, Hashching, which has processed $2.6 billion of mortgages since launching 15 months ago, will begin the pilot for a biometric identity verification service allowing brokers on its platform to satisfy strict “know your client” (KYC) banking regulations by asking a customer on a video call to hold up a proof of identity to the camera on their computer or mobile phone.
Across the banking industry, KYC verification for mortgages – designed to prevent money laundering by criminals – is still conducted with in-person meetings; customers either have to travel into a branch or receive a visit from a bank or broker representative. This delays the process and can be intrusive.
Hashching co-founder Mandeep Sodhi said he will soon begin discussions with major banks to attempt to change their bureaucratic internal processes that have created a tick-a-box compliance mentality and made banks resistant to change.
“We want lenders to try it, we will be promoting it to them, we want to collaborate with banks,” he said. “We want to take the risk and then present the results to them.”
Brokers, who facilitate around half of all mortgages in Australia and are responsible for the KYC checks on those loans, could use the platform to reduce the costs of establishing identity and to improve customer service.
Banks could also be interested in fully-digitising their own mortgage application processes in their proprietary channels. This could help retaining customers who start an application process but could be lost to alternative financing options during the delay between loan inquiry and settlement.
Yet banks may be hesitant to move to a fully-digital process, given any reduction in foot traffic to their branches could reduce the potential for customers to be cross-sold other products like insurance or financial planning services.
This month, iSelect launched a digital conditional home loan approval process. However, it does not use video to do the KYC check.
Designed with technology consulting firm e4, the application taps Microsoft Cognitive Service’s Face API, which makes facial recognition software available to the public.
Using a Skype-like video call, the app scans the applicant’s face along with the picture on their driver’s license or passport. An algorithm read both faces before the broker is provided with a prediction of correct identity, based on a percentage confidence level. It is ultimately up to the broker to determine whether they are comfortable that identity has been properly established.
The system also plugs into the Attorney-General’s department’s Documentation Verification Service (DVS), which checks the presented ID against government databases and provides a confirmation of authenticity in seconds.
Atul Narang, the fintech’s other co-founder, said the innovation was developed because some of the 1700 brokers who have been admitted to the platform have reported that many customers are delaying visits to the bank branch for weeks or cancelling scheduled appointments.
Delays in applications are also being created by the paper-based process of mailing contracts, he added. Hashching, based in the Tyro fintech hub in Sydney, has created a digital process using electronic signatures that allows property contracts to be executed on a screen.
“If customers are provided with a choice, they will take it,” Mr Narang said.
The system also maintains a record of the interview on Hashching’s servers for seven years, allowing brokers to present a digital file to the Australian Securities and Investments Commission should there be an audit or a case of fraud.
e4 was founded in South Africa in 2000 and has built a technology advisory practice around identity and e-conveyancing for banks, law firms and governments.
Its managing director in Australia, Stuart Hosford, a former strategy consultant at Commonwealth Bank of Australia, said e4’s fees for use of the service are around one-third of what banks and brokers currently pay for KYC verification checks in person, which are often sub-contracted to companies like ZipID.
Reaching ‘safe harbour’
Around 150 brokers will pilot the technology starting this weekend. Brokers struggle with KYC, which is a continuous obligation on them and banks and a highly complex area given it is an amalgam of international and local rules.
International “know your client” rules – which incorporate anti-money laundering (AML) and counter-terrorism financing (CTF) requirements and have been tightened since the war in Syria began – are formed by the Financial Action Task Force, which was set up in 1989 by the G7 to counter money laundering. These international rules are interpreted by Austrac.
The Australian Registrars’ National Electronic Conveyancing Council (ARNECC) then creates “model participation rules” for mortgages, which include sections on digital signatures and ID verification.
The ARNECC rules say banks can reach “safe harbour” – which provides a defence in the case of some fraud on the account – if they conduct meetings with prospective customers “face-to-face” or “in person”.
The suggestion that interviews be conducted in person “makes Australian banks hesitant”, e4’s Mr Hosford said. “We will ask ARNECC to go back and revisit the rule on the basis it is outdated.”
Banks in jurisdictions abroad, including Canada, Britain and the United States, are moving faster than Australian banks on thinking about digital identity, Mr Hosford said. e4 is working with a South African bank on a project to integrate video biometrics on its own home loan applications.
“There is a growing awareness that if banks don’t get on board, they will end up getting left behind,” he said.