Cash flow underwriting: 5 ways lenders can drive growth

Lenders have long relied on credit scores alone to make lending decisions. While traditional credit is a useful risk indicator, relying on just credit scores means nearly 49 million US adults with thin or no credit history are unable to finance a car, purchase a home, or build generational wealth. This also leaves lenders blind to potential risks—and opportunities. 

Alternative data, specifically cash flow, is reshaping the lending landscape and changing how borrowers are being evaluated. Traditional credit reports don’t give a full financial picture, which is why cash flow data can be used as a supplement, generating a more complete risk profile for an applicant.

The increasing use of cash flow data in underwriting is making it easier for lenders to make more informed lending decisions, offer new products, and increase credit access in underserved communities. The future of financing will be powered by intelligent analysis of cash flow information.

What is cash flow underwriting?

Cash flow underwriting is the process of using a borrower’s income and expense data to inform the approval or denial decision on a loan. Cash flow data provides real-time information on a borrower’s income, expenses and payments, and bank account balances—giving lenders a better sense of their ability to repay a loan. 

Cash flow underwriting can be used as an alternative to traditional credit scores or used alongside them to provide deeper insights. This additional data also helps lenders fairly evaluate credit invisibles, many of whom are young people and recent immigrants. In fact, 19 million additional US adults could be evaluated for credit by using alternative data instead of credit scores.

Even traditional credit scoring companies like FICO believe a combination of traditional and cash flow data results in better risk models. A survey of 2,000 US loan applicants found that 72% say they are comfortable sharing this data with lenders.

Cash flow underwriting examples

83% of lenders say they’re open to using new types of data to make credit decisions, the majority of which are cash flow related. To understand the versatility of cash flow underwriting, it's helpful to explore real-world examples of the types of loans and situations that can benefit from this type of data: 

• Personal loans: Personal loans are known for quick underwriting processes and disbursing funds quickly. Cash flow underwriting can help lenders quickly and accurately assess borrowers’ ability to repay the loan based on their income, expenses, and repayment ability. This helps lenders make smarter lending decisions while allowing borrowers to access funds quickly. 

• Property management: Property managers can verify an applicant's income with cash flow data instead of paystub uploads or self-reported income, ensuring applicants can afford the rent and other expenses associated with leasing a property. This can expand housing access to consumers with thin credit files while limiting risk for property owners. 

• Mortgage and auto financing: With cash flow data, lenders can gain a more holistic view of an applicant's financial health and stability, helping them to better determine eligibility and loan terms. Cash flow data can also help lenders better evaluate borrowers who don’t have a traditional W2 income, such as freelancers, business owners, and gig workers.  

• Credit cards: By analyzing the income and expenses of credit card applicants, lenders can set more accurate credit limits and interest rates, enabling responsible credit card usage while minimizing the risk of default. 

These examples highlight how cash flow data in underwriting can adapt and improve risk assessments across a variety of industries and lending scenarios. As technology improves, this data will become easier to access, which may expand the use cases of cash flow underwriting.

Watch the video below to see how Plaid can help you say "yes" to more qualified applicants while managing risk by leveraging cash flow underwriting insights.

Cash flow underwriting vs. traditional underwriting

Traditional underwriting relies heavily on credit scores, collateral, and debt repayment history in the application process. In cash flow underwriting, lenders consider a borrower's current bank account data, including income and expenses, to assess their ability to meet financial obligations. 

Cash flow underwriting and traditional underwriting represent two distinct approaches, each with its own strengths and limitations. However, it's important to note that these approaches are not in competition; rather, they should work together to create a comprehensive financial assessment. 

While some lenders may be concerned that consumers won’t want to share cash flow data during the loan application process, our research has shown this is not the case (see below). 

Loan applicant comfort level sharing financial statements and information with lenders by type:

• Proof of primary income 84%

• Utility payment history 74%

• Bank statements 74%

• Rent payment history 71%

• Proof of secondary income streams 65%

• Savings/investment account balance 64%

Lenders may also be concerned that cash flow underwriting adds friction to the application flow. However, because of the high intent from the consumer (who wants to qualify for a loan with the best rate possible) and the ability to make better risk decisions, lenders are seeing profitable growth from implementing cash flow underwriting.

How cash flow underwriting is getting better with technology

Despite the benefits of cash flow data, many lenders and financial institutions have been hesitant to leverage this data due to difficulties accessing and making sense of it. Today, technology is improving the process by making the data more accessible and easier to use.  

Gaining access to comprehensive bank account, cash flow, and income data is the first step, but understanding that data is the key to driving growth and efficiency through the entire lending lifecycle. Plaid's consumer reporting agency (CRA), Plaid Check, enables lenders to easily do both. 

Plaid Check provides a consumer report of a borrower’s bank account and cash flow data along with actionable insights to help lenders make better risk decisions, whether for verifications, loan approvals, second-look financing, or ongoing monitoring.

These solutions help both traditional and online lenders evaluate a borrower’s ability to pay, expand eligibility to serve more customers, and manage risk—while improving financial opportunities for millions of consumers with limited credit history or low traditional credit scores.

Optimizing cash flow underwriting: 5 strategies for success

Despite the benefits, lenders may need help understanding how and when to use this data. The following strategies will help lenders and financial institutions make cash-flow-based lending decisions: 

1. Use cash flow data to enhance data verification  

Cash flow data can aid in verifying borrowers in the lending process. Leveraging this approach helps lenders verify borrower information, reducing the risk of erroneous or misleading data. For example, cash flow data can validate self-reported income and minimize income-related discrepancies. 

2. Determine income and employment stability 

Direct deposit data can confirm the borrower's place of employment, how long they've worked there, and how often they are paid. Additionally, lenders can estimate the regularity of a borrower’s income streams, providing insights into the borrower's overall financial stability.

3. Leverage additional data in second-look underwriting 

A borrower who receives a “pending” or even an initial decline based on traditional credit data may be offered a "second look." Lenders can ask a borrower to provide bank data to determine whether the pending loan might be approved after considering this additional data. 

4. Improve loan terms 

Borrowers of unsecured loans care about things like rates, fees, loan amounts, and loan duration. Offering the best terms is important for financial institutions to grow origination volume in a competitive marketplace. Looking at cash flow data allows lenders to offer competitive terms for all types of loans by evaluating a more robust borrower profile. It may also bolster asset-based loan decisions, such as mortgages, by providing access to additional data points. 

5. Get real-time insights into spending patterns  

Traditional credit data lags by 30 days or more, making it difficult to catch sudden changes in spending patterns. Looking at banking data can help lenders spot changes in spending patterns quickly. 

For example, a change to a borrower's average expenses or an increase in non-sufficient funds fees could suggest a borrower may be under financial duress. Alternatively, a lender could detect a higher paycheck amount based on a promotion or job change and then offer a higher loan amount or credit limit.

Cash flow underwriting is taking lending into the future 

Traditional credit scores only tell lenders part of the story. Cash flow lending is helping reshape the credit industry by empowering lenders to make more informed decisions. Cash flow underwriting is likely to become a cornerstone of responsible and inclusive lending, fueling economic growth and financial well-being for individuals and businesses. 

However, lenders often struggle to use cash flow data due to the complexity of analyzing vast amounts of transactional information, which may require substantial technical resources. Solutions like those offered by Plaid Check are changing the game by making it easier than ever to both access and use cash flow data in lending decisions while still keeping risk management at the forefront. 

How to get started

Cash flow data is a powerful tool that leverages a borrower's income and expense data to inform loan approval decisions. Plaid makes it easy to get started leveraging cash flow data at every stage of the lending lifecycle so that lenders can drive profitable growth of their portfolios:

1. Prequalify & Verify: Set up Plaid Link for a seamless experience

   • Embed our consumer-permissioned account linking experience into the application so borrowers can easily connect their financial accounts or send invitations to borrowers via email or text. Lenders can get the credit data they need in a no-code dashboard to verify a borrower’s assets and income while increasing trust and engagement.

2. Underwrite: Incorporate cash flow data to make more informed decisions

   • Review and analyze categorized cash flow information to complement traditional credit data. Get a better understanding of a borrower’s financial stability and ability to repay so you can stay competitive by offering favorable terms while managing risk.

3. Service: Monitor ongoing financial health to support users and manage risk

   • Ensure a more stable and secure lending relationship with continuous monitoring of your borrowers’ financial health. Proactively identify signs of fraud or potential defaults, and don’t miss out on opportunities to offer borrowers different terms as their financial situations change.

Plaid helps lenders make more informed credit decisions quickly and efficiently, enhancing the overall lending process

Learn more about Consumer Report and how it is helping lenders leverage cash flow data in the underwriting process.