Cash Flow-Based Underwriting Adds Real-Time Context to FICO Score

The FICO score — what we might think of as the general “shorthand” for lending — was created back in 1989.

In the decades since, and now as we’re on the cusp of the middle of the 2020s, relying on the triple-digit number to crystallize creditworthiness has some competition.

While credit reporting has traditionally been a backward-looking activity, the wealth of data, specifically, real-time and ongoing account-level activity, can give lenders a more accurate picture of how consumers and businesses are using and bringing in cash and how they might satisfy the obligations of taking on new credit.

Cash flow-based underwriting, which uses a dynamic rather than static approach, can broaden lenders’ horizons, and broaden financial inclusion, too.

The issue is a pressing one, given the fact that, as PYMNTS Intelligence has found, as many as 6 in 10 smaller firms have not been able to get access to the credit they need. Separate research showed that only about 69% of consumers are “credit secure.” That means a significant percentage of individuals either cannot get access to desired credit conduits or simply don’t try. And 46% of credit “insecure” consumers have been unable to tap into traditional lines of credit due to their credit scores.

Consumer Permissioned Data

The rise of open banking here in the states, we note, lets FinTechs, financial institutions (FIs) and other firms access consumer-permissioned data, down to the account level. The insight lets would-be lenders assess the consistency with which firms and individuals manage their cash flow.

The Consumer Financial Protection Bureau (CFPB) weighed in on the limitations of credit scores — and the advantages of using cash flow data.

“Our analysis suggests that people who self-report positive cashflow perform considerably better than people who self-report less positive cashflow, even when holding credit scores constant. Consumers with positive self-reported cashflow outperform by 20 percent or more depending on the cashflow proxy used,” the Bureau said in a report last summer.

Growing List of Providers

Late last year, Plaid debuted its Consumer Reporting Agency to build ready-made credit risk insights from consumer-permissioned cash flow data.

In March, TomoCredit announced it is offering TomoScore to businesses — where the underwriting model utilizes real-time, cash flow-based performance data as an alternative to traditional credit scores.

More recently, Nova Credit introduced its Nova Credit Platform, leveraging additional data to improve consumers’ financial access. The capabilities include multi-source data onboarding and embedded analytics.

And just this week, VantageScore unveiled a new credit-scoring model that uses both traditional credit data and alternative open banking data. The combination gives lenders a predictive lift of up to 10% compared to the VantageScore 4.0 credit score, which itself gives an 8% lift over conventional scoring models, the company said.