3 Key Takeaways from the Inaugural Cash Flow Underwriting Summit

Last week, we hosted the inaugural Cash Flow Underwriting Summit in New York City, welcoming over 200 of the brightest minds in consumer credit. The day was packed with informative sessions and stimulating discussions on the current state of cash flow underwriting and how we pave the way for cash flow adoption in the future.

Our in-depth sessions covered everything from how to address gaps in the current credit system to the impact of 1033 on open banking and more. If you were unable to attend the summit or want to revisit the insights, you can access the sessions on-demand., In the meantime, explore three key takeaways from these sessions below:

Key Takeaway # 1: Consumers and lenders alike need help navigating a complex financial landscape.

Consumers, particularly young people, are under more financial stress despite seemingly stable credit balances.

Pandemic era savings have evaporated, leaving little buffer for consumers as credit card debt continues to rise.

Credit is getting expensive for all consumers, but especially non-prime.

Subprime borrowers spent 13% of their household income on fees and interest, compared to 2% for prime borrowers.

An average subprime household with an annual income of $39K is spending approximately $5k on fees, whereas an average prime household with an annual income of $100K is spending approximately $2K on fees.

• See: Spend report cited by Jennifer Tescher at Financial Health Network

The state of affairs has improved dramatically in the last 20 years, with improved consumer access to credit products and better data types and increased data usage for lenders.

There has been a  40% YoY growth in credit builder products, even amongst near prime/prime segments.

For example, BNPL leader Affirm has made $30B in loans, while 6 of the 8 top banks offer competitive payday loan products.

Lenders are increasingly incorporating rental data and 1st-party cash flow data into their underwriting processes.

Lenders see a day where they are “pricing per person” as opposed to credit cohort.

With more robust financial data, lenders can help consumers leave their credit bureau-determined cohorts behind for better pricing and product matching. A FICO of 600 gets coupled with a 35% APR for example, despite someone with that score potentially being a AAA borrower.

Consumer credit is not like the supermarket where the consumer can pick out whatever product they want: the consumer must select a product, but the product must also select the consumer.

Key Takeaway #2: Cash flow underwriting is a step-function move forward for consumer lending.

When you help a customer in distress, you earn their loyalty; cash flow data is a key resource to help customers in credit distress.

Risk is our business so it’s never a bad time to invest in risk separation and today, it’s never been more difficult to understand the consumer.

Technology and cash flow underwriting leads to financial inclusion by helping lenders accurately assess “a vast sea of credit invisibles”, bringing those people into the mainstream financial system.

To stay ahead in the arms race, lenders need to use cash flow data or they’ll be left behind.

Early adopters of cash flow underwriting are seeing promising results, lowering both losses and CAC, and boosting conversion, with a 90% consumer opt-in rate for data permissioning.

Think about the best use cases, define a happy path, consider underwriting across the consumer lifecycle, and focus on delivering value to build trust and accomplish outcomes, rather than early metrics.

Banks and third parties are coming together to manage complexity, costs, and positive consumer outcomes.

The CFPB’s 1033 rule, set for October, will make open banking a fundamentally good thing to explore with greater maturity in bank data and technical standards than ever before.

However, with more complexity comes more opportunity for bad actors to take advantage of the system. It will take cross-collaboration from banks, fintechs, and regulators to prevent misuse of AI, deter and detect fraud, and limit bad actors.

Key Takeaway #3: Learn from peers how to best overcome initial challenges to adoption

Start small, don’t think small; Don’t try to hit a homerun on day one.

Bringing consensus about a new and different approach into a large, established prudent organization makes change management one of the largest obstacles to tackle.

Make sure to involve internal stakeholders (credit, regulatory, marketing, etc) and regulators early and often.

Make a case on operational needs in addition to the credit story.

Test and learn to overcome the ‘cold start problem’

In order to build buy-in, you need to find a way to bring real data and performance to the table despite the lack of a true retro.

Find a strategic use case, start small, and build a proxy/pilot to test and learn before trying to scale.

Rely on expert partners who have implemented cash flow underwriting before and can advise on pilot plans.

Fintech partners are the key to efficiency and reducing cost

Overcome the cost hurdle by making crystal clear what you will build vs buy. You may be able to build it, but can you afford to maintain it?

Fintechs are able to provide infrastructure that is more efficient, smarter, and more innovative, such as multi-aggregation, FCRA-compliant attributes, and other tools.

Make your organization a ‘learning organization’ and find partners where you’re able to leverage their expertise to learn and grow.

Explore all the helpful tips, insights, and best practices Summit panelists shared in each session recording, available on-demand att https://events.novacredit.com/2024-cfuw-summit-on-demand