How Cash Flow Insights Are Building Tomorrow’s Credit Products

The lending landscape is undergoing a system-level shift that promises to benefit both borrowers and lenders.

FinTech innovations, and an evolving mindset within the industry, are combining to usher in a new era of underwriting methods that draw from alternative data sources and advanced analytics to paint a comprehensive picture of an individual’s financial health.

“Where lenders differentiate is how they underwrite the loans, which has traditionally been centered around the credit score,” Michelle Boros, product lead at Plaid, told PYMNTS. “And that flows not just into whether or not a borrower gets a loan, but also what type of offer they get, what pricing they receive, and what the term of the loan is.”

But recognizing the need for a more inclusive approach, the financial industry is embracing novel tactics that go beyond the static snapshot provided by more traditional underwriting frameworks.

As Boros explained, for the tens of millions of Americans labeled with a credit thin file, as well as those without a traditional credit history at all, these emerging underwriting strategies offer not just a loan but increasingly a lifeline.

“Things like cash flow in real time that draws from data outside of the 30-day time period that’s typically looked at from a credit report … can really drive change,” she said, noting that Plaid’s goal and mission from a lending and credit perspective are to “usher in a world where borrowers are viewed on a multi-dimensional level.”

“This is a really interesting time where credit products need to continue to evolve with consumer expectations, while at the same time, credit risk is evolving and bringing with it the need for lenders to view more sources to qualify financial health,” Boros added.

Building Credit Risk Insights Using Permissioned Consumer Data

One of the prominent novel underwriting methods gaining traction is cash flow analysis.

FinTech companies are harnessing real-time data on income and spending patterns, offering a dynamic view of an individual’s financial situation, and allowing lenders to assess an individual’s ability to manage and repay debts based on their ongoing financial behavior.

That’s why Plaid formed a new Consumer Reporting Agency (CRA) entity to build ready-made credit risk insights from consumer-permissioned cash flow data.

“Loan products look totally different today than they did a few years ago,” she said. “Cash flow is really the way of life for today’s consumers, and we are seeing a trend of consumers feeling more comfortable connecting a bank account to things like income and rental payments and wanting that information to be a part of their assessment. The [Consumer Financial Protection Bureau (CFPB)] has been a big proponent of cash flow data and how that can unlock opportunities for people that are overlooked by the current ecosystem.”

Enabling individuals to tell their unique financial stories, incorporating aspects such as cash flow and real-time data, also allows lenders to construct credit products that enhance and support the next chapter of those stories using innovative underwriting strategies.

Plaid’s new CRA entity will provide lenders with out-of-the-box insights based on cash flow data, allowing them to focus on refining their underwriting criteria and driving more informed lending decisions, Boros explained.

Driving Sustainable Change Across the Future of Credit Extension

Boros emphasized that credit scores are “a great measurement, they aren’t going away,” but they can help ground innovative new decisioning strategies, which can in turn complement credit scores.

“Think about somebody who’s been paying their mortgage on time for the last five years,” she said. “Well, that’s represented in their credit score. What about somebody who’s trying to be a first-time home buyer that has paid the rent on time for 10 years? There should be an opportunity for that to come into play.”

Still, usability concerns, resource-intensive processes and the need for expertise in risk and data science pose obstacles to industry adoption of next-generation underwriting and credit scoring methods, all challenges Plaid seeks to address with its CRA entity.

“Cash flow isn’t brand new, it has been around, but there have been challenges for lenders in integrating it into their underwriting processes,” Boros said.

Those challenges, for the most part, are increasingly being solved for — opening the door for lenders to further differentiate themselves with unique and compelling underwriting processes.

“From a credit risk standpoint, once you originate the loan, that’s where it becomes important to understand what’s happening to a borrower after,” explained Boros. “There’s a huge opportunity for lenders to understand what’s going on, and rather than asking the borrower to confirm information, how can they proactively know that.”

That’s why, looking ahead, the concept of continuous underwriting can help enable dynamic adjustments to credit lines and enhance the overall experience across the full lender lifecycle, she said.

“We’re excited for the opportunity that is coming into play in terms of driving key change across the ecosystem,” Boros said.