Brian Hughes is a financial services and payments business leader with over 25 years of experience. He previously served as Executive Vice President and Chief Risk Officer for Discover Financial Services, where he led the risk function for one of the largest credit card and loan providers in the U.S. He also served as CEO and Senior Executive Vice President, Card and Retail Services for HSBC.
Today, lenders are facing pressures on all sides. Increased competition from fast-growing fintechs, growing adoption of solutions like BNPL, and the possibility of recession are prompting many lenders to rethink what they want to prioritize over the next year.
The good news? The rising acceptance of consumer-permissioned data and tailwinds from open banking are allowing many lenders to consider new solutions. Before modern credit scores, lenders routinely underwrote consumers using cumbersome, unstructured bank data. Eventually, credit scores surpassed bank data for risk prediction, but not without their own drawbacks.
Today, cash flow underwriting is making a big comeback, often combined with credit bureau data. That's because companies like Nova Credit are making cash flow underwriting possible for nearly all lenders in a standardized format that is easy to integrate digitally and instantaneously.
If you are not already using bank data to improve your credit and pricing decisions, here are six reasons you should consider starting today.
1.) Adds critical information that credit bureaus lack: Even for thick file consumers, the credit bureaus lack vital information, such as whether an applicant is making enough money to pay the new loan along with their other expenses. Bank data provides more detailed information about applicant income and empowers lenders to verify the consumer’s income relative to what they stated on the application.
2.) Helps spot customers who are just getting into financial trouble: Changes in financial behavior become apparent when reviewing bank data, which can give lenders an early warning on new financial difficulties. Credit bureaus can tell lenders how borrowers are doing on loans they already hold, such as flagging late payments. However, these don’t appear until they are 30 days past due. Bank data gives a clearer representation of cash flow issues up to the day the data is pulled.
3.) Provides information on credit excluded customers: Bank data is the most holistic source of information for many thin file or no file consumers. Over 50 million consumers are credit excluded in the U.S. because they don’t use credit in conventional ways. Their lack of a credit score isn’t always a reflection of bad behavior - many of these consumers are just getting started financially, don’t like the idea of borrowing money, or have recently immigrated to the U.S.
Using cash flow underwriting for these 50 million consumers can make lending more inclusive, while allowing lenders to extend their consumer universe. Nova Credit’s Cash Atlas™ can also be used to make lending decisions for the credit excluded, as 88% of consumers in this category have enough bank data to be accurately assessed.
4.) Leverages a highly trusted data source: Consumers review their bank accounts much more often than they do their credit reports. Accessibility of this data is an important driver - consumers can readily access bank statements either online or when it comes in the mail, while they must order a credit report from a credit bureau and are generally limited to one free report per year. Mistakes in checking accounts are usually corrected quickly while mistakes in credit bureau data can persist for years.
5.) Uses a compliant source of data: Lenders who use bank transaction data for underwriting need to ensure transparency and consumer control when providing consumer reports to comply with Fair Credit Reporting Act (FCRA) rules and regulations. Nova Credit’s Cash Atlas™ is a solution that transforms bank transaction data into an FCRA compliant consumer report, which means Nova Credit provides adverse action codes and dispute management resolution, ensuring the consumer is protected and the lender is compliant.
6.) Leverages data to validate business impact: Nova Credit analyzed the benefit of incorporating Cash Atlas™ into conventional scoring strategies on a proprietary data sample of the U.S population. By overlaying credit data with cash flow data, defaulting account capture rates improved by 5% to 20% across subprime to super prime credit bands. Combining Cash Atlas™ with credit data shows opportunities to reduce losses by 3-5% while also increasing originations by 2.5-4.5%.
Lenders interested in cash flow underwriting and wanting more detailed insight on the potential impact to their consumer population can work with Nova Credit to conduct a validation study. The customized analysis provides performance insights and a business impact overview targeted to the lending products and credit band of interest.
Using cash flow data in underwriting is a win-win for consumers and lenders. For lenders this means reduced losses, increased approvals and streamlined income verification. Lenders can also tap a bigger pool of potential borrowers and access more timely information on their finances. For consumers, cash flow underwriting ensures they have the best chance at getting access to mainstream financial services and loans they can afford, using data they trust and understand.
With increasing competition and the economy tipping into recession, lenders can’t continue with business as usual. Cash flow underwriting, combined with credit bureau data, can help lenders stay nimble and inclusive no matter what comes next.
Learn more about how Nova Credit can help you quickly integrate cash flow data into your underwriting process. Email us at firstname.lastname@example.org