Blockchain startup Spring Labs is partnering with 16 lenders and financial firms to test a system to eliminate centralized entities like Equifax from their role in granting loans to individuals and companies.
The traditional loan process
Let’s say if Bank ABC knows that its customer is seeking a new loan from Bank DEF, Bank ABC would likely try to convince its customer to do business with it instead. This is why third parties like Equifax are used.
The second issue is that regulations limit banks’ ability to release personally identifiable information.
Lastly, in the current system, banks give credit bureaus their customer information for free and then have to buy it back in the form of credit reports. Spring Labs is trying to eliminate the middle man to solve all these problems.
Adam Jiwan, chief executive officer of Spring Labs said, “That’s the reason they don’t like sharing with the bureaus, because they give it away for free,” Jiwan said in an interview. He said the lenders he’s spoken to are all interested in using a peer-to-peer system that cuts out the middleman as long as they can solve the competitive and regulatory issues. The firm is advised by former Federal Deposit Insurance Corp. Chair Shelia Bair and former Goldman Sachs president and Trump administration chief economic advisor Gary Cohn.
To get away from the current model, Spring Labs and their partnered firms including SoFi, OnDeck Capital, Avant, GreenSky, Funding Circle and others are set to test the new technology Spring Labs has developed. It uses a “triple blind” method of information sharing where the identities of neither the lenders nor customers is known, nor does Spring Labs know what information is being shared on its network. The company has combined elements of cryptography, blockchain and privacy enabling technology to pull this off.
The blockchain aspect of the project allows for the network to be decentralized to improve security and for a chain of ownership to be established. Additionally, the blockchain component will allow for a digital asset to be issued that will incentivize lenders to share their customer information. While still in development, in no small way due to current regulatory uncertainty the goal is to pay lenders for sharing their information with the native digital asset.
Spring Labs is also hoping to reduce fraud with its new model. With a system more akin to crowdsourcing rather than a bi-lateral exchange between a bank and credit bureau, Jiwan said more granular profiles of identity can be created. That could help root out a type of fraud where fake identities make their way into credit reporting databases and appear legitimate, allowing loans to be granted, Jiwan said.
Spring Labs is based out of California with offices in downtown LA.