Nova Credit’s Data Science Consultant, Nikki Cross, hosted a webinar with Mission Lane’s Head of Data Science, Jason Capehart, to dive into how cash flow underwriting is quickly maturing from early pioneers building custom in-house builds to mainstream adoption from lenders purchasing highly configurable, off the shelf solutions.
The entire webinar can be viewed here, and below we’ve summarized the top takeaways from the conversation.
#1. You don’t need to reinvent the wheel to adopt cash flow underwriting.
Early adopters of cash flow underwriting have had to run into a multitude of challenges that come along with being first to market on turning bank transaction data into actionable, FCRA compliant insights. Bank transaction data isn’t inherently designed to be shareable or easily translatable. There is no central repository when it comes to consumer-permissioned bank data, so lenders often have to start off from scratch to collect and standardize enough data to test. Once that is complete, they'll have to engineer features that reliably predict risk while adhering to fair lending practices. This trial and error process could take up to two years before the lender is even ready to scale the new underwriting model.
Pairing this “cold start problem” with the heavy upfront investment, high resource requirements, and general uncertainty of ROI, Jason believes purchasing a solution is the wiser approach with the options available today.
“Having built [cash flow underwriting solutions] in the past and done this at Mission Lane, we built it because we didn’t really feel like there was another good option out there for us. With the benefit of hindsight, it takes a lot of work to build these things. Unless you think this is a fad, I would certainly start with an existing solution.” Jason Capehart, Head of Data Science, Mission Lane
#2. Investing in a cash flow underwriting solution benefits both big and small lenders.
Over the past few years, solution providers have pushed the bounds of innovation to create new ways to responsibly expand consumer growth while fitting within the current paradigms of underwriting. With these solutions now in the market, the need is for lenders to move away from legacy underwriting models and adopt more viable, off the shelf solutions like Cash Atlas™ to both improve the scale to reach more underserved consumers and increase the depth of insight for thick file consumers.
As a large lender, these solutions can help get a proven solution to market 1-2 years faster, and save the effort from reinventing the wheel. For small lenders and fintechs, this provides a critical differentiating factor in an increasingly crowded industry.
“Those resource commitments and diversity of expertise that’s required, it’s even more daunting as a small business. When we think about what something like Cash Atlas™ can do for smaller lenders, it puts you at a minimum at a level playing field with some of those other folks that have a lot more resources than you do. If you take this off the shelf solution where you’ve got this minimum capability, you can move faster than larger lenders - I think it creates a strategic advantage.“ Nikki Cross, Data Science Consultant, Nova Credit
#3. Studies show cash flow underwriting has impact on increasing approval rates and reducing risk
Conceptually, it’s accepted that cash flow underwriting has useful applications for calculating consumer affordability and incorporating into underwriting while complying with FCRA rules. With the current maturity level of cash flow underwriting, solution providers have a responsibility to prove that the solution provides positive return on investment for lenders looking to achieve differentiation through underwriting.
In a series of validations studies, Nikki has worked with lenders to outline a path that connects business objectives with implementation options and provided analyses on the projected performance lift of incorporating Cash Atlas™ with their traditional underwriting strategies.
One lender learned that they were able to approve approximately 33% of their declines by incorporating cash flow data. Another lender was able to communicate to their executive team that Cash Atlas™ would help them improve their risk differentiation and reduce losses by 5% within their target credit segment. These different studies show that cash flow underwriting has broad applicability to a variety of credit products and traditional credit segments that lenders target.
“I do think that [cash flow underwriting] is the next major change we’re likely to see in consumer lending…It absolutely works, and anytime you have the ability to make credit more inclusive and expand access…is good for businesses, and it should work out for consumers too.” Jason Capehart, Head of Data Science, Mission Lane
Click here to view the full webinar, and email email@example.com to get a free demo or validation study of Cash Atlas™ on your consumer population. If interested in connecting with Mission Lane, please contact firstname.lastname@example.org.