Last week fintech startup Spring Labs announced they are developing the Spring Protocol, a blockchain-based anti-fraud and ID verification system, with 16 consumer and small business lenders as launch partners. The 16 partners include SoFi, OnDeck Capital, Avant, GreenSky, Funding Circle, BlueVine, Fundation, Upgrade, Fundbox, and Better Mortgage. There are six other lenders who were not named in the release.
I have been following the development of Spring Labs with great interest since they announced their initial funding in March of last year. Most of the management team came out of Avant so they were familiar to me and I have spoken to them several times since their launch, most recently, just a few days ago. What they are looking to achieve, I think, is groundbreaking and sorely needed in the online lending space.
Much has been written about the Equifax breach and it is clear that keeping credit and identity data in a centralized database is not the best solution and probably not sustainable long term. Spring Labs provides a real alternative, one that takes advantage of blockchain technology. They have built a peer-to-peer network that allows any member company to query information that may be held at another member company.
It is easiest to understand with the use of an example. Let’s say someone applies for a loan at Avant. In order to do identity verification on this borrower, Avant sends a request to the Spring Protocol to see if any member company can verify the address and phone number of this person. A one-way encrypted hash of this information is sent to the protocol as an API request to determine if any other network participants can verify the information for this borrower. It just so happens that Upgrade has made a loan to the borrower nine months ago so the protocol sends a request back that the information has been verified. Avant has no idea who verified the information only that this borrower is within the network and their identity has been verified. There is no central store of this information, instead, the validation of the request is provided via the protocol without unencrypted or personally identifying data leaving Upgrade’s servers.
This is not ready for prime time yet, it is very much still in development. Spring Labs has started working on the specifications for this system and every one of the 16 companies has committed resources in order to join this working group. Each company will have to do work on its end to be able to handle the API requests from the protocol. Spring Labs expect to have a pilot ready in 6-7 months and by this time next year be in production at all 16 companies.
In the meantime, they are talking to large banks but they will be slower adopters of technology like this. But Spring Labs realizes that for their system to gain serious traction they need to have the involvement of the banks.
In my conversations with Spring Labs, they are quick to point out that what they are creating is complementary to the credit bureaus, it is not designed to replace them. This is an identity verification system that is used primarily for anti-fraud, it is not a credit decisioning system. It is designed to work in real-time to catch both human and automated identity fraud attacks.
My Take
I am convinced that we need a system like the one Spring Labs is creating. Storing credit and identity information in a centralized database has been shown to be fraught with problems. We need something that is decentralized, real-time, and difficult to hack. The effort from Spring Labs checks all these boxes.
It doesn’t take much imagination to see a future where all credit data is stored in this way, not just identity information. While Spring Labs is planting their stake in the ground for identity verification, if they get traction, a logical next step will be to add all credit information to their protocol. But we are some way off from that.
Whether it is Spring Labs or a new company that takes a decentralized blockchain system mainstream, someone will do it. I should point out that Springs Labs is not the only game in town. Bloom, the Decentralized Identity Foundation and The Open Identity Exchange were all announced before Spring Labs and are at various stages of development. The advantage that Spring Labs has is that most of the major online lenders are on board with a pathway to a production system.
I think we will look back in ten years’ time and wonder what we were thinking about keeping such sensitive information in a centralized database.
Peter Renton is the chairman and co-founder of LendIt Fintech, the world’s first and largest digital media and events company focused on fintech. Peter has been writing about fintech since 2010 and he is the author and creator of the Fintech One-on-One Podcast, the first and longest-running fintech interview series. Peter has been interviewed by the Wall Street Journal, Bloomberg, The New York Times, CNBC, CNN, Fortune, NPR, Fox Business News, the Financial Times, and dozens of other publications.