2024 is the year that cash flow underwriting is going mainstream. Banks and other lenders are using this technology for everything from credit card applications to mortgage approvals. Still deciding whether to prioritize cash flow underwriting for your credit decisions?
Here are 5 reasons why cash flow underwriting should be on every lender’s roadmap:
Cash flow underwriting involves going beyond the traditional credit report and evaluating the banking history of applicants and customers. This rich data provides unprecedented visibility into the financial position and trajectory of a consumer. And it often reveals applicants that are more creditworthy - and less risky - than their credit report suggests.
Do you have a strategy for serving younger and thin-file consumers? Cash flow underwriting is also available for the tens of millions of U.S. consumers with banking history but limited or no credit history. Failing to serve this group means leaving a lot of opportunity on the table.
At Prism Data, we’ve seen cash flow underwriting increase loan approval rates by 5 - 30% without increasing risk.
The flip side of the coin is that cash flow underwriting can also enable lenders to reduce their loss rates at a similar rate of approval. Just as some consumers are more creditworthy than their credit scores suggest, some are less creditworthy. In fact, in our experience as many as 20% of consumers with Prime and Super Prime credit scores are actually high risk and would receive a low cash flow rating.
Digging deeper to reach consumer bank account data is also a powerful mitigant against fraud and misrepresentations on a loan application. At Prism Data we’ve designed a score - CashScore FirstDetect - specifically to identify and stop first-party fraud attempts using bank account data.
Traditional credit data takes a while to be collected and reported, and as a result credit reports and scores lag 30 days or more behind what’s actually happening with any given consumer. Bank account data, on the other hand, can be updated in essentially real-time. That allows cash flow underwriting to reference the most recent data available and to detect any sudden changes in the financial position of a consumer.
This can make all the difference in underwriting loan applications. Has there been a change in income or employment? New expenses indicative of risk? Recent indicia of fraud or loan stacking? Cash flow underwriting can reveal these critical insights that traditional processes miss.
Cash flow underwriting is a powerful tool for financial inclusion. Over 60 millions U.S. consumers have thin- or no traditional credit history, but virtually the entire population (over 98%) have access to a basic transactional account containing the data necessary for cash flow underwriting.
Because of this, a tool like cash flow underwriting may be necessary to evaluate the creditworthiness of over 20% of the U.S. population! According to research by the CFPB, black and Hispanic consumers, as well as young people and first- and second-generation immigrants, are significantly more likely to lack traditional credit history.
Regulators have been outspoken about the gaps that exist in credit access and the potential of alternative data generally, and cash flow underwriting specifically, to address this issue. Federal regulators have even convened industry working groups in recent years to work on enabling cash flow underwriting.
Cash flow underwriting can help financial institutions better address the credit needs of low and moderate-income (LMI) populations within their communities, in line with the objectives and requirements of the Community Reinvestment Act (CRA).
Knowing your customers is more than a regulatory requirement. The most successful financial providers understand their customer’s evolving needs over time. Cash flow underwriting enables ongoing use-cases in customer support, servicing, marketing, and collections, helping financial providers understand and proactively respond to changes in their customer’s financial circumstances. This provides a great opportunity for both depository institutions with “on-us” data as well as fintechs that use data aggregation / open banking to better understand and serve their customers.
For these reasons and more, adoption of cash flow underwriting is happening rapidly across the financial services industry. If you don’t yet have a cash flow strategy, now is the time to get up to speed on this exciting new capability. If you’re ready to learn more, our team at Prism Data would be thrilled to hear from you.
