Name: RiskSeal, Inc.
Price range: $$

Table of contents

What is flagging? In the context of credit scoring or financial analysis, it is the process of flagging certain transactions, applications, or accounts for additional review.

This usually occurs when the system detects something unusual or suspicious. Something that could indicate potential risks – fraud or errors.

If a credit application looks out of the normal scope or contains anomalies, the system may “flag” it for a more detailed review. Flagging helps mitigate risks and improve controls, especially with large volumes of data.

At RiskSeal, we check the digital footprint of potential borrowers and identify anomalous activity. Subsequently, the accounts of such users will be flagged as suspicious.

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How does flagging work?

In credit risk assessment, flagging uses set rules to evaluate a borrower's digital footprint. The system compares their online activity against these standards.

Based on the comparison, suspicious user activity is identified, and as a result, the user's account will be flagged for review.

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Common flags in the assessment of applicants

In the context of lending, common flags include:

1. Missed payments. This is not just about loan payments. If the credit organization uses alternative data, late payments on subscriptions or paid services are taken into account.

2. Discrepancies in identity verification. A borrower whose photos do not match several social networks may be considered suspicious. The lender should also be wary of different names in profiles or difficulties in confirming the geolocation specified by the applicant.

3. Use of a VPN or proxy. Fraudsters often use anonymizes to hide their true IP address. According to IPQualityScore, proxy servers, VPNs, and other similar services are used in 95% of internet fraud cases.

4. Applying for credit with disposable phone numbers (DPN). These numbers, along with burner phones, are typically used by criminals who want to remain incognito.

A study of the DPN ecosystem found that millions of fake accounts are created using these numbers.

5. Location of the borrower. Even if the borrower's specified location is confirmed, the application can still be flagged as suspicious. The fact is that the probability of loan default differs by region.

For example, in the US, the credit card delinquency rate is different in each state. While in Iowa it is less than 13%, in Mississippi it exceeds 39%.

Share of credit card tradelines delinquent

6. No online accounts are hooked up to a phone number or email. According to statistics, one internet user has an average of seven social media profiles.

The lack of registrations may indicate that the phone or email is disposable. And the applicant is a scammer.

All these potential indicators of fraud should be taken into account by credit organizations in the credit decision-making process.

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The role of flagging in credit risk management

Flagging helps credit organizations manage credit risk more efficiently by providing a range of useful tools and options.

Early detection of risks

Flagging helps to detect signs of possible default due to the financial instability of the borrower at the stage of the loan application.

Such signs can be overdue payments on paid services or a certain geographical location of the applicant.

Fraud prevention

Flagging is very effective in combating fraud. This is possible due to:

Increased scrutiny of flagged accounts.
Making informed credit decisions based on the data.
Adapting flagging to the needs of the credit organization.

It's also worth noting that this technology is not only used in the process of evaluating an applicant. It is also useful in the long term.

It is used to track new patterns of fraudulent behavior. For example, it identifies regions with high default rates, suspicious IP addresses, etc.

Detect credit risks early

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Improving credit decisions

Flagging provides the lender with a wide range of data to make informed decisions on credit applications:

The flagged account can be a reason for credit denial.
Higher requirements may be imposed on such a borrower. For example, to hand over a collateral property or to involve a guarantor in the transaction.
The lender may offer the suspicious applicant less favorable terms on the loan. For example, a stronger interest rate or a shorter loan term.